The good news is:
• All of the major indices closed at multi month highs on Friday.
The negatives
Since late August the major indices have rallied 11% - 16% depending on the index, unfortunately most of the breadth indicators have not demonstrated the appropriate exuberance.
The chart below covers the period since the rally began in March 2009 showing the (OTC) in blue and the NASDAQ ADL in green. AD Lines are a running total of the number of declining issues subtracted from advancing issues. Dashed vertical lines have been drawn on the 1st trading day of each month. The line is red on the first trading day of the year.
The OTC ADL is lower now than it was in early August while the index is higher that it was at that time.
The next chart 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.
NY NH has all but flat lined over the past 5 weeks while the indices have shot upward.
The next chart covers the past 6 months showing the OTC in blue and a 5% trend of NASDAQ upside volume (OTC UV) in green.
You would think a 13% gain in 5 weeks would bring out the buyers, but there is no sign of them here.
The positives
There has been no perceptible enthusiasm for selling.
The chart below is an update of one I have been showing, it covers the past 6 months showing the 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.
There are some trading systems that impose a "No Sell Filter" when a variation of this indicator is above 80% as it is now.
The chart below is similar to the one above except it shows the SPX in red and NY HL Ratio has been calculated from NYSE data.
The indicator is above 97%, extraordinarily high.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of October 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 3rd Friday of October 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 by all measures has had a positive bias.
Report for the week before the 3rd Friday of October.
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 | -0.02% | 0.77% | 1.80% | -1.12% | -0.21% | 1.22% |
| 1970-2 | -0.66% | -0.85% | -0.56% | 0.19% | 0.39% | -1.50% |
| 1974-2 | 2.17% | -0.53% | -0.34% | 1.39% | 1.14% | 3.83% |
| 1978-2 | -1.21% | -2.22% | -1.56% | -1.32% | -2.67% | -8.98% |
| 1982-2 | 1.72% | -0.07% | 1.49% | -0.16% | -0.19% | 2.79% |
| 1986-2 | 0.15% | -0.08% | 0.53% | 0.20% | -0.18% | 0.62% |
| Avg | 0.43% | -0.75% | -0.09% | 0.06% | -0.30% | -0.65% |
| 1990-2 | 0.61% | -1.24% | 0.41% | 2.22% | 1.00% | 2.99% |
| 1994-2 | -0.17% | -0.13% | 0.76% | -0.31% | -0.37% | -0.22% |
| 1998-2 | 3.59% | -2.37% | 2.11% | 4.52% | 0.62% | 8.47% |
| 2002-2 | 0.83% | 5.07% | -3.90% | 3.24% | 1.22% | 6.46% |
| 2006-2 | 0.28% | -0.80% | -0.33% | 0.16% | 0.06% | -0.63% |
| Avg | 1.03% | 0.11% | -0.19% | 1.97% | 0.51% | 3.41% |
| OTC summary for Presidential Year 2 1966 - 2006 | ||||||
| Avg | 0.66% | -0.22% | 0.04% | 0.82% | 0.07% | 1.37% |
| Win% | 64% | 18% | 55% | 64% | 55% | 64% |
| OTC summary for all years 1963 - 2009 | ||||||
| Avg | 0.44% | -0.09% | -0.26% | 0.51% | -0.20% | 0.40% |
| Win% | 61% | 51% | 48% | 68% | 53% | 53% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | -0.80% | -0.40% | -0.03% | -1.21% | -0.53% | -2.97% |
| 1958-2 | 0.45% | -0.70% | -1.33% | 0.71% | 1.02% | 0.16% |
| 1962-2 | 0.56% | -0.33% | -0.33% | -0.97% | -1.33% | -2.40% |
| 1966-2 | 1.14% | 1.56% | -0.80% | -0.27% | 0.45% | 2.08% |
| 1970-2 | -1.07% | -0.13% | 0.15% | 0.55% | -0.44% | -0.94% |
| 1974-2 | 2.25% | -1.79% | -1.55% | 1.19% | 1.56% | 1.66% |
| 1978-2 | -1.96% | -1.32% | -0.76% | -1.15% | -1.39% | -6.58% |
| 1982-2 | 2.61% | -0.02% | 1.69% | -1.57% | -0.74% | 1.97% |
| 1986-2 | 0.18% | -0.23% | 1.46% | 0.31% | -0.29% | 1.43% |
| Avg | 0.40% | -0.70% | 0.20% | -0.13% | -0.26% | -0.49% |
| 1990-2 | 1.07% | -1.42% | -0.05% | 2.34% | 2.20% | 4.13% |
| 1994-2 | -0.03% | -0.28% | 0.56% | -0.73% | -0.42% | -0.90% |
| 1998-2 | 1.36% | -0.29% | 1.08% | 4.18% | 0.85% | 7.17% |
| 2002-2 | 0.73% | 4.73% | -2.41% | 2.23% | 0.59% | 5.88% |
| 2006-2 | 0.25% | -0.37% | 0.14% | 0.07% | 0.12% | 0.22% |
| Avg | 0.68% | 0.48% | -0.14% | 1.62% | 0.67% | 3.30% |
| SPX summary for Presidential Year 2 1954 - 2006 | ||||||
| Avg | 0.48% | -0.07% | -0.16% | 0.41% | 0.12% | 0.78% |
| Win% | 71% | 14% | 43% | 57% | 50% | 64% |
| SPX summary for all years 1953 - 2009 | ||||||
| Avg | 0.47% | -0.05% | -0.29% | 0.27% | -0.22% | 0.18% |
| Win% | 64% | 35% | 46% | 60% | 46% | 58% |
Donald Luskin
Donald Luskin wrote an article that appeared on the Wall Street Journal editorial page October 4 where he pointed out similarities between the behavior of the Dow Jones Industrial Average (DJIA) in 1937 and the current period. He also pointed out political similarities between then and now. You can read the article at: http://online.wsj.com/article/SB10001424052748704116004575521822940983434.html
Luskin points out, if the pattern holds up, we are at the precipice of a 50% decline.
I have produced some charts showing some breadth indicators then and now. There are problems with how the data was calculated and composition of the issues traded, but generally the indicators currently look a lot like they did in 1937.
The first chart shows the current period from the March 2009 low. The DJIA is shown in magenta, a 10% trend of NYSE new highs (NY NH) is shown in green and a 10% trend of NYSE new lows (NY NL) is shown in blue. NY NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).
The next chart is similar to the one above except it covers the same time frame in 1935 - 1937. Prior to 1978 new highs and new lows were calculated differently. In the middle of March they began calculating new highs and new lows from the beginning of the year and continued until the middle of March the following year. The period of the calculation varied daily and varied between 2.5 months and 14.5 months. The data was susceptible to bulges for a few months following the mid March change over.
The current problem with NYSE data is about half of the issues traded on the exchange are fixed income related and are behaving differently from equities.
The next chart covers the period since the March 2009 lows showing the DJIA in magenta and the NYSE ADL calculated from published data in blue.
The next chart is similar to the one above except is shows the NYSE composite average (!NYA) in red and an NYSE AD line calculated from equity issues only. The difference is profound.
The next chart shows the 1937 rally and unconfirmed high prior to the collapse in late 1937. The NYSE ADL is shown in blue.
Following the 1937 high the market collapsed nearly 50%. The chart below shows that collapse along with NY NH and NY NL.
Not only are there similarities in the price patterns, but also patterns in the breadth indicators.
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth remained slightly elevated.
Conclusion
The 4th quarter during the 2nd year of the Presidential Cycle is one of the strongest, but, seasonality has bee turned upside down for the 3rd quarter so that pattern is in doubt. The breadth indicators are not great, but they are not negative.
I expect the major averages to be higher on Friday October 15 than they were on Friday October 8.
Gordon Harms produces a power point for our local timing group meeting. You can get a copy of that at: http://www.stockmarket-ta.com/
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In his latest newsletter, Jerry Minton looks at the S&P 400 MidCap Index and its robust performance during the annual "power zone". To read about this investment strategy and to subscribe to Jerry's free newsletter, go to www.alphaim.net.
Thank you,
