The good news is:
• All of the major averages hit multi year highs last week.
The negatives
The market has gained about 10% in the past 6 weeks and is overbought.
The secondaries have been underperforming the blue chips and new highs have not been expanding.
The chart below covers the past 6 months showing the 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.
NY NH has been trending lower while the SPX is about 8% above its late November low.
The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC NH has been calculated from NASDAQ data.
OTC NH was slightly down last week while the index hit a multi year high on Thursday.
The positives
New lows remained in single digits last week.
The chart below covers the past 6 months showing the OTC in blue and 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows (OTC HL Ratio) in red. There are dashed horizontal lines drawn at 10% levels for the indicator. The line is solid at the neutral 50% level.
The value of the indicator on Friday was 95%. There are trading systems that impose a no sell filter when variations of this indicator are above 80%.
The next chart is similar to the one above except is shows the SPX in red and NY HL Ratio, in black, has been calculated from NYSE data.
NY HL Ratio closed on Friday at 95%.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of January during the 3rd year of the Presidential Cycle. It is also the week prior to the Martin Luther King holiday.
The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of January during the 3rd 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 3rd 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.
Returns during the 3rd year of the Presidential Cycle have been extraordinarily positive. Returns prior to the Martin Luther King holiday have been similarly positive.
Report for the week before the 2nd Friday of January.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | -0.42% | -0.03% | -0.03% | 0.42% | -0.93% | -1.00% |
| 1967-3 | 0.76% | 0.50% | -0.24% | 1.72% | 0.61% | 3.35% |
| 1971-3 | 0.59% | 0.36% | 1.40% | 0.13% | 1.07% | 3.55% |
| 1975-3 | 0.83% | 0.24% | -0.63% | 1.41% | 2.12% | 3.98% |
| 1979-3 | -0.11% | 0.61% | -0.31% | 0.39% | 0.80% | 1.38% |
| 1983-3 | 3.10% | -2.09% | 0.86% | 0.23% | 0.88% | 2.98% |
| 1987-3 | 2.24% | 1.34% | 1.77% | 1.36% | 0.82% | 7.53% |
| Avg | 1.33% | 0.09% | 0.62% | 0.71% | 1.14% | 3.88% |
| 1991-3 | -1.91% | -0.34% | -0.43% | 1.25% | -0.03% | -1.46% |
| 1995-3 | 0.32% | 0.59% | -0.10% | -0.01% | 0.86% | 1.66% |
| 1999-3 | 1.72% | -2.68% | -0.17% | -1.73% | 3.14% | 0.28% |
| 2003-3 | 2.47% | 0.72% | -2.13% | 2.67% | 0.64% | 4.37% |
| 2007-3 | 0.16% | 0.23% | 0.63% | 1.04% | 0.72% | 2.79% |
| Avg | 0.55% | -0.30% | -0.44% | 0.64% | 1.07% | 1.53% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | 0.81% | -0.05% | 0.05% | 0.74% | 0.89% | 2.45% |
| Win% | 75% | 67% | 33% | 83% | 83% | 83% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | 0.39% | -0.12% | -0.07% | 0.49% | 0.19% | 0.89% |
| Win% | 67% | 52% | 48% | 75% | 69% | 63% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 1.30% | -0.31% | -0.28% | -0.42% | -0.42% | -0.13% |
| 1959-3 | 0.40% | -0.13% | -1.26% | 0.93% | 0.67% | 0.61% |
| 1963-3 | -0.02% | 0.97% | -0.23% | 0.19% | 0.22% | 1.12% |
| 1967-3 | 0.77% | 0.00% | 0.80% | 0.53% | 0.74% | 2.83% |
| 1971-3 | -0.23% | 0.80% | -0.17% | 0.26% | 0.25% | 0.91% |
| 1975-3 | 0.51% | -0.07% | -1.38% | 1.61% | 2.02% | 2.70% |
| 1979-3 | -0.33% | 0.54% | -0.56% | 0.33% | 0.84% | 0.81% |
| 1983-3 | 1.10% | -0.68% | 0.62% | -0.65% | 0.63% | 1.02% |
| 1987-3 | 2.33% | 0.23% | 1.01% | 0.76% | 0.56% | 4.90% |
| Avg | 0.68% | 0.16% | -0.10% | 0.46% | 0.86% | 2.07% |
| 1991-3 | -1.73% | -0.17% | -1.08% | 0.98% | 0.22% | -1.79% |
| 1995-3 | 0.03% | 0.18% | 0.00% | -0.01% | 0.94% | 1.15% |
| 1999-3 | -0.88% | -1.93% | -0.41% | -1.80% | 2.57% | -2.45% |
| 2003-3 | 2.25% | -0.65% | -1.41% | 1.94% | 0.00% | 2.12% |
| 2007-3 | 0.22% | -0.05% | 0.19% | 0.63% | 0.49% | 1.48% |
| Avg | -0.02% | -0.52% | -0.54% | 0.35% | 0.84% | 0.10% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | 0.41% | -0.10% | -0.30% | 0.38% | 0.69% | 1.09% |
| Win% | 64% | 38% | 29% | 71% | 86% | 79% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | 0.13% | -0.21% | -0.27% | 0.25% | 0.04% | -0.05% |
| Win% | 59% | 39% | 41% | 72% | 53% | 50% |
Conclusion
The market is overbought and due for a correction, but seasonality is likely to dominate again next week.
I expect the major averages to be higher on Friday January 14 than they were on Friday January 7.
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