The good news is:
• The market is oversold going into a seasonally strong period.
The negatives
There were 51 new lows on the NYSE on Friday and 115 on the NASDAQ. These numbers are the largest since early June and large enough to be worthy of concern.
The chart below covers the past year showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level. Dashed vertical lines have been drawn on the 1st trading day of each month.
OTC HL Ratio headed south again last week after turning positive for a brief period.
The next chart is similar to the one above except it covers the past 6 months, shows the S&P 500 (SPX) in red and NY HL Ratio in black has been calculated from NYSE data.
NY HL Ratio is a little stronger than OTC HL Ratio, but still negative and heading downward.
The positives
Last weeks sell off was on declining volume.
The chart below covers the past 6months showing the SPX in red and a 5% trend (39 day EMA) of NYSE downside volume (NY DV) in brown. NY DV has been plotted on an inverted Y axis so increasing NY DV moves the indicator downward (up is good).
NY DV did not increase significantly while prices tumbled last week.
The chart below is similar to the one above except it shows the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. Like NY DV above OTC NL has been plotted on an inverted Y axis.
Although falling OTC NL is quite a bit higher than it was earlier in the month.
The next chart covers the past 6 months showing the NASDAQ 100 (NDX) in red and the percentage of the component issues of the NDX that are above their 21 day EMA in olive drab. Dashed horizontal lines have been drawn at 25% levels of the indicator.
The NDX was down every day last week, but, on Friday, the indicator turned slightly upward (71% of the component issues were up). I see this as a short term positive. Similar indicators for other indices were also up on Friday, but, all of those indices were also up so the contrast was not as dramatic.
Seasonality
Next week includes the last 3 trading days of June and the 1st 2 trading days of July during the 2nd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the last 3 trading days of June and the 1st 2 trading days of July during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1928 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined.
Average returns for the coming week have diminished since 1950. Average returns have been positive by all measures except the OTC during the 2nd year of the Presidential Cycle. 2nd year returns for the OTC were held down by some very bad years in the early 1970's.
Last 3 days of June and first 2 days of July.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
| OTC Presidential Year 2 | ||||||
| Day3 | Day2 | Day1 | Day1 | Day2 | Totals | |
| 1966-2 | -0.49% 2 | -1.21% 3 | -0.96% 4 | -0.10% 5 | 0.30% 2 | -2.47% |
| 1970-2 | -1.10% 5 | -1.27% 1 | -1.15% 2 | -1.30% 3 | -0.74% 4 | -5.57% |
| 1974-2 | -1.36% 3 | -1.84% 4 | -1.13% 5 | -0.75% 1 | -2.10% 2 | -7.18% |
| 1978-2 | 0.29% 3 | 0.38% 4 | 0.27% 5 | -0.12% 1 | -0.77% 3 | 0.04% |
| 1982-2 | 0.35% 1 | -0.32% 2 | 0.45% 3 | -0.41% 4 | -0.32% 5 | -0.25% |
| 1986-2 | 0.16% 4 | 0.16% 5 | 0.49% 1 | 0.52% 2 | 0.46% 3 | 1.79% |
| Avg | -0.33% | -0.58% | -0.22% | -0.41% | -0.70% | -2.23% |
| 1990-2 | 0.33% 3 | 0.76% 4 | 0.41% 5 | -0.05% 1 | -0.06% 2 | 1.40% |
| 1994-2 | -0.09% 2 | 0.28% 3 | 0.28% 4 | 0.13% 5 | -0.46% 2 | 0.13% |
| 1998-2 | 0.33% 5 | 1.16% 1 | 0.19% 2 | 1.05% 3 | -1.07% 4 | 1.65% |
| 2002-2 | 0.38% 3 | 2.09% 4 | 0.27% 5 | -4.06% 1 | -3.28% 2 | -4.60% |
| 2006-2 | 0.55% 3 | 2.96% 4 | -0.11% 5 | 0.84% 1 | -1.69% 3 | 2.56% |
| Avg | 0.30% | 1.45% | 0.21% | -0.42% | -1.31% | 0.23% |
| OTC summary for Presidential Year 2 1966 - 2006 | ||||||
| Averages | -0.06% | 0.29% | -0.09% | -0.39% | -0.89% | -1.14% |
| % Winners | 64% | 64% | 64% | 36% | 18% | 55% |
| MDD 7/2/2002 7.20% -- 7/2/1974 6.98% -- 7/2/1970 5.45% | ||||||
| OTC summary for all years 1963 - 2009 | ||||||
| Averages | 0.03% | 0.20% | 0.21% | 0.07% | -0.25% | 0.25% |
| % Winners | 55% | 64% | 62% | 60% | 51% | 66% |
| MDD 7/2/2002 7.20% -- 7/2/1974 6.98% -- 7/2/2008 6.24% | ||||||
| SPX Presidential Year 2 | ||||||
| Day3 | Day2 | Day1 | Day1 | Day2 | Totals | |
| 1930-2 | -0.95% 5 | 0.45% 6 | 2.81% 1 | -1.08% 2 | 1.09% 3 | 2.33% |
| 1934-2 | 0.50% 4 | -1.70% 5 | 0.00% 6 | -1.22% 1 | -0.31% 2 | -2.73% |
| 1938-2 | -0.09% 2 | 4.18% 3 | -1.37% 4 | 3.03% 5 | 1.93% 6 | 7.68% |
| 1942-2 | 0.24% 6 | 0.36% 1 | 0.24% 2 | -0.84% 3 | 1.58% 4 | 1.58% |
| 1946-2 | -0.17% 3 | 1.55% 4 | 0.22% 5 | 0.60% 1 | -0.05% 2 | 2.14% |
| Avg | -0.09% | 0.97% | 0.38% | 0.10% | 0.85% | 2.20% |
| 1950-2 | 1.12% 3 | -3.70% 4 | 1.43% 5 | -0.28% 1 | 0.96% 3 | -0.47% |
| 1954-2 | 0.27% 1 | 0.51% 2 | -0.75% 3 | 0.00% 4 | 1.30% 5 | 1.34% |
| 1958-2 | 0.47% 4 | 0.13% 5 | 0.76% 1 | 0.09% 2 | 0.09% 3 | 1.54% |
| 1962-2 | 0.54% 3 | 3.44% 4 | 0.62% 5 | 2.03% 1 | 1.13% 2 | 7.76% |
| 1966-2 | -0.48% 2 | -0.95% 3 | -0.14% 4 | 1.03% 5 | 0.25% 2 | -0.29% |
| Avg | 0.38% | -0.11% | 0.39% | 0.57% | 0.75% | 1.97% |
| 1970-2 | -0.74% 5 | -0.79% 1 | -0.23% 2 | 0.44% 3 | -0.16% 4 | -1.49% |
| 1974-2 | -1.47% 3 | -1.55% 4 | -0.36% 5 | 0.02% 1 | -2.00% 2 | -5.36% |
| 1978-2 | 0.44% 3 | 0.18% 4 | -0.04% 5 | -0.46% 1 | -0.86% 3 | -0.74% |
| 1982-2 | 1.03% 1 | -0.05% 2 | -0.54% 3 | -0.82% 4 | -0.98% 5 | -1.36% |
| 1986-2 | -0.08% 4 | 0.35% 5 | 0.50% 1 | 0.48% 2 | 0.26% 3 | 1.51% |
| Avg | -0.16% | -0.37% | -0.14% | -0.07% | -0.75% | -1.49% |
| 1990-2 | 0.87% 3 | 0.70% 4 | 0.11% 5 | 0.42% 1 | 0.17% 2 | 2.28% |
| 1994-2 | -0.28% 2 | 0.35% 3 | -0.75% 4 | 0.43% 5 | 0.04% 2 | -0.21% |
| 1998-2 | 0.35% 5 | 0.47% 1 | -0.41% 2 | 1.31% 3 | -0.19% 4 | 1.51% |
| 2002-2 | -0.27% 3 | 1.76% 4 | 0.00% 5 | -2.22% 1 | -2.12% 2 | -2.85% |
| 2006-2 | 0.55% 3 | 2.16% 4 | -0.21% 5 | 0.79% 1 | -0.72% 3 | 2.56% |
| Avg | 0.24% | 1.09% | -0.25% | 0.15% | -0.57% | 0.66% |
| SPX summary for Presidential Year 2 1930 - 2006 | ||||||
| Averages | 0.09% | 0.39% | 0.09% | 0.19% | 0.07% | 0.84% |
| % Winners | 55% | 70% | 40% | 60% | 55% | 55% |
| MDD 7/2/1974 5.26% -- 7/2/2002 4.30% -- 6/29/1950 3.70% | ||||||
| SPX summary for all years 1928 - 2009 | ||||||
| Averages | -0.10% | 0.16% | 0.12% | 0.31% | 0.19% | 0.67% |
| % Winners | 51% | 58% | 57% | 70% | 60% | 62% |
| MDD 7/2/1974 5.26% -- 7/2/2008 4.57% -- 6/29/1939 4.43% | ||||||
July
Since 1963, over all years the OTC in July has been up 51% of the time with an average return of 0.0%. However, during the 2nd year of the Presidential Cycle July has been has been up only 27% time with an average loss of -2.1% (the last up July during the 2nd year of the Presidential Cycle was 1994).
The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.
The blue line shows the average of the OTC over all years since 1963 while the green line shows the average during the 2nd year of the Presidential Cycle.
Since 1928 the SPX has been up 52% of the time in July with an average gain of 1.1%. However, during the 2nd year of the Presidential Cycle the SPX has been up 50% of the time with an average gain of 0.1%.
The chart below is similar to the one above except it shows the daily performance over all years for the SPX in July in red and the performance during the 2nd year of the Presidential Cycle in cyan.
Since 1979 the Russell 2000 (R2K) has been up 48% of the time in July with an average loss of 0.6%. During the 2nd year of the Presidential Cycle the R2K has only been up once in July (1994) or 14% of the time with an average loss of 5.6% making it the worst month of the worst year.
The chart below is similar to those above except it shows the daily performance over all years of the R2K in July in green and the performance during the 2nd year of the Presidential Cycle in cyan.
Conclusion
The market went from overbought to oversold last week. Seasonally the last 3 days of June are strong while the first 2 days of July are weak so we should see a bounce early next week.
I expect the major averages to be higher on Friday July 2 than they were on Friday June 25.
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Thank you,
