The good news is:
• All of the major indices closed at new recovery highs last week.
The negatives
For the first time since the most recent leg of this rally began 6 weeks ago the secondaries underperformed the blue chips. The performance of the major indices last week was:
Russell 2000 (R2K) -0.40%,
S&P mid cap (MID) +0.16%
NASDAQ composite (OTC) +0.29%
S&P 500 (SPX) +0.86%
Dow Jones Industrials (DJIA) +1.10%
Everything hit a new highs on Wednesday, but, it would have been better if the R2K had led the way up.
The chart below covers the past 6 months showing the R2K in red and an indicator calculated by subtracting momentum of new lows from momentum of new highs of the component issues of the R2K. For this indicator, new highs and lows have been calculated over the trailing 3 weeks rather than the trailing 52 weeks as reported by the exchanges. Dashed vertical lines have been drawn on the 1st trading day of each month.
The indicator dropped from its high to below the neutral line in the past week. The last time that happened was in early January, about a week before the market tumbled.
The Positives
Nearly every indicator that matters confirmed the highs last week.
Advance decline lines (ADL) are a running total of declining issues subtracted from advancing issues.
The chart below covers the past year showing the OTC in blue and the NASDAQ ADL in green.
The NASDAQ ADL hit a new recovery high on Wednesday. This is significant because this indicator has a very negative bias.
There were 19 new lows on the NASDAQ Friday, not a lot, but the most since February 9. NASDAQ new highs declined from 280 on Wednesday to 160 on Friday.
The chart below covers the past year showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by new highs + new lows in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.
The value of the indicator is over 90% so more new highs are to be expected.
The chart below shows how the indicator behaved during the late 2007 top.
Seasonality
Next week includes the 5 trading days prior to the 4th Friday of March during the 2nd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 5 trading days prior to the 4th Friday of March during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1953 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.
Next week has not been very good by any measure and the past 20 years have been the worst.
Report for the week before the 4th Friday of March.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | 0.56% | 0.56% | 0.60% | -0.03% | 0.53% | 2.22% |
| 1970-2 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1974-2 | -1.20% | -0.65% | 0.21% | 0.43% | 0.09% | -1.11% |
| 1978-2 | -0.09% | 0.36% | 0.38% | 0.09% | 0.02% | 0.77% |
| 1982-2 | 1.21% | 0.64% | -0.06% | 0.57% | -0.36% | 1.99% |
| 1986-2 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Avg | -0.03% | 0.12% | 0.18% | 0.36% | -0.08% | 0.55% |
| 1990-2 | 0.17% | -0.64% | -0.18% | -1.09% | 0.63% | -1.11% |
| 1994-2 | -0.82% | -0.12% | 0.15% | -1.36% | -0.41% | -2.57% |
| 1998-2 | 0.18% | 1.12% | 0.63% | 0.25% | -0.27% | 1.91% |
| 2002-2 | 0.47% | 0.20% | -2.55% | 1.96% | -0.93% | -0.85% |
| 2006-2 | 0.33% | -0.86% | 0.40% | -0.14% | 0.55% | 0.28% |
| Avg | 0.07% | -0.06% | -0.31% | -0.08% | -0.09% | -0.47% |
| OTC summary for Presidential Year 2 1966 - 2006 | ||||||
| Avg | 0.09% | 0.07% | -0.05% | 0.08% | -0.02% | 0.17% |
| Win% | 67% | 56% | 67% | 56% | 56% | 56% |
| OTC summary for all years 1963 - 2009 | ||||||
| Avg | -0.04% | -0.23% | 0.17% | 0.21% | 0.01% | 0.12% |
| Win% | 50% | 43% | 53% | 60% | 50% | 58% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | -0.07% | -0.71% | -0.49% | -0.19% | 0.53% | -0.93% |
| 1958-2 | 0.38% | -0.33% | -0.33% | -0.31% | 0.07% | -0.52% |
| 1962-2 | -0.13% | -0.27% | -0.21% | -0.16% | 0.07% | -0.69% |
| 1966-2 | 0.76% | 0.29% | -0.37% | 0.18% | 0.28% | 1.14% |
| 1970-2 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1974-2 | -1.24% | -0.84% | 0.35% | -0.24% | -0.07% | -2.03% |
| 1978-2 | -0.55% | 0.71% | 0.16% | -0.26% | -0.22% | -0.16% |
| 1982-2 | 1.95% | 0.69% | -0.51% | 0.21% | -1.12% | 1.22% |
| 1986-2 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Avg | 0.06% | 0.19% | 0.00% | -0.09% | -0.47% | -0.32% |
| 1990-2 | 0.47% | -0.57% | -0.54% | -1.19% | 0.46% | -1.37% |
| 1994-2 | -0.53% | 0.06% | -0.06% | -0.89% | -0.81% | -2.24% |
| 1998-2 | -0.34% | 0.92% | -0.33% | -0.10% | -0.49% | -0.34% |
| 2002-2 | -0.05% | 0.41% | -1.58% | 0.15% | -0.42% | -1.49% |
| 2006-2 | -0.17% | -0.60% | 0.60% | -0.26% | 0.10% | -0.33% |
| Avg | -0.12% | 0.04% | -0.38% | -0.46% | -0.23% | -1.15% |
| SPX summary for Presidential Year 2 1954 - 2006 | ||||||
| Avg | 0.04% | -0.02% | -0.28% | -0.25% | -0.14% | -0.65% |
| Win% | 33% | 50% | 25% | 25% | 50% | 17% |
| SPX summary for all years 1953 - 2009 | ||||||
| Avg | 0.05% | -0.13% | 0.11% | 0.00% | -0.12% | -0.09% |
| Win% | 41% | 47% | 45% | 43% | 49% | 39% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth is falling off again.
Conclusion
All of the major indices hit new highs last Wednesday and Thursday, but the pattern could have been better. The secondaries were weaker than the blue chips, new highs fell sharply on Thursday and Friday and new lows increased a little. Perhaps the market is relaxing after its thrust to new highs across the board or, possibly, this is the beginning of a topping pattern that will unfold over the next 4 - 6 weeks.
I expect the major averages to be lower on Friday March 26 than they were on Friday March 19.
Last week all of the major indices were up except the R2K so I am calling last weeks positive forecast a tie.
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In this week's newsletter, Jerry Minton looks at the implications of John Hussman's belief that the CPI will double over the next ten years. Sign up for a free subscription at: http://www.alphaim.net
Thank you,
