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Technical Market Report

The good news is:
• All of the major indices closed at recovery highs last Thursday.

The negatives

The only negatives I can find are very short term.

The chart below covers the past 6 months showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

The SPX hit a recovery high on Monday along with NY NH. The SPX fell on Tuesday then rose to another new high on Thursday, but NY NH did not hit a new high on Thursday. The weak period that began with Tuesday's decline will not be over until NY NH begins to head up again. On the other hand NY NH's confirmation of Monday's SPX high suggests more price highs ahead.

The chart below is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC NH calculated from NASDAQ data in green. The pattern is similar.

The Positives

Nearly every indicator confirmed Monday's high.

The chart below covers the past 2 months showing the SPX in red and the NYSE advance - decline line (NYSE ADL) in blue. Advance - decline lines are running totals of daily declining issues subtracted from advancing issues.

NYSE ADL confirmed the SPX high on Thursday.

The NYSE ADL used to have a slightly negative bias, but in the past 10 years or so that bias has become extremely positive. You can see that bias in the chart below that covers the past 5 years. Dashed vertical lines have been drawn on the 1st. trading day of each year.

For contrast, the chart below covers the past 6 months showing the OTC in blue and OTC ADL calculated from NASDAQ data in green. OTC ADL hit its recent high last October. In the very short term (the past month) OTC ADL has been very strong.

The next chart covers the past 5 years showing the OTC and OTC ADL.

You can see the negative bias in OTC ADL.

When OTC ADL is showing strength the market is very strong.

A reason for the sharp contrast in these two indicators is the makeup of their component issues. About half of the issues traded on the NYSE are fixed income and accumulate value daily until they go ex dividend. AD lines calculated from fixed income issues are wildly positive.

Seasonality

Next week includes the 4 trading days prior to the 3rd Friday (trading Friday) of January during the 2nd year of the Presidential Cycle. Monday is the Martin Luther King holiday and the market has been closed in observance that holiday since 1998.

The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of January during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2008 and SPX data from 1953 - 2008. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.

Average returns for the period have been modestly positive; however, for the past two Presidential Cycles they have been very negative.

Report for the week before the 3rd Friday of January.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 0.56% 0.31% -0.03% 0.41% 0.41% 1.65%
1970-2 0.01% 0.65% 0.30% -0.27% -0.02% 0.67%
1974-2 0.18% 0.73% 1.53% 1.55% -0.66% 3.32%
1978-2 -0.41% 0.62% 0.44% 0.16% 0.05% 0.86%
1982-2 0.00% -0.62% -0.24% 0.37% -0.31% -0.80%
1986-2 0.02% 0.19% 1.05% 0.58% 0.19% 2.02%
1990-2 -0.70% 0.81% -0.34% -0.26% 0.77% 0.27%
1994-2 -0.02% 0.11% -0.47% 0.48% 0.16% 0.25%
1998-2 0.29% 2.26% 0.43% -0.07% 1.02% 3.93%
2002-2 -1.57% 0.51% -2.82% 2.13% -2.79% -4.55%
2006-2 0.00% -0.62% -1.00% 0.97% -2.35% -3.00%
 
OTC summary for Presidential Year 2 1966 - 2006
Avg -0.18% 0.45% -0.11% 0.55% -0.32% 0.42%
Win% 56% 82% 45% 73% 55% 73%
 
OTC summary for all years 1963 - 2009
Avg 0.03% 0.20% 0.05% 0.29% 0.06% 0.63%
Win% 63% 60% 60% 68% 62% 70%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1954-2 0.00% 0.98% 0.27% 0.16% 0.23% 1.64%
1958-2 0.30% 0.44% 0.79% 0.17% 0.10% 1.80%
1962-2 -0.20% -0.58% -1.09% 0.10% 0.53% -1.23%
1966-2 0.29% 0.19% -0.28% -0.35% 0.12% -0.03%
1970-2 -0.76% 0.10% -0.15% 0.03% -0.83% -1.61%
1974-2 -0.26% 0.87% 1.53% 1.70% -1.79% 2.05%
1978-2 -0.29% 0.50% 0.76% -0.52% -0.22% 0.23%
1982-2 1.64% -1.07% -0.60% 0.42% -0.32% 0.07%
1986-2 0.37% -0.04% 0.78% 0.44% -0.35% 1.20%
1990-2 -0.86% 1.11% -0.98% 0.23% 0.28% -0.21%
1994-2 -0.34% 0.20% 0.01% 0.14% -0.05% -0.04%
1998-2 1.24% 1.38% 0.61% -0.75% 1.13% 3.61%
2002-2 -0.63% 0.68% -1.62% 1.00% -0.99% -1.56%
2006-2 0.00% -0.36% -0.39% 0.56% -1.83% -2.03%
 
SPX summary for Presidential Year 2 1954 - 2006
Avg 0.04% 0.32% -0.03% 0.24% -0.29% 0.28%
Win% 42% 71% 50% 79% 43% 50%
 
SPX summary for all years 1953 - 2009
Avg -0.05% 0.08% -0.04% 0.08% -0.09% -0.01%
Win% 46% 58% 54% 61% 53% 51%

Money supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth continues to fall.

Conclusion

The market is overdue for some kind of correction and the deterioration in new highs suggest that may have begun. The preponderance of recent breadth indicator confirmations suggest any correction will be shallow and brief. I expect the major averages to be lower on Friday January 22 than they were on Friday January 15.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.

What would happen if you invested in the Dow only when Congress was out of session, about 34% of the time? To find out the surprising answer see Jerry Minton's latest newsletter at: http://www.alphaim.net.

Thank you,

 

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