The good news is:
• All of the major averages closed multi year highs Friday.
The negatives
From their late August lows the major indices have gained 20% - 35%.
In the past 2 months the major indices have gained 10% - 15%.
The market is overbought.
There was a substantial increase in the number of new lows on the NYSE on Thursday and Friday. Some comfort may be taken from the fact that the increase was made up entirely of Muni Bond funds.
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 lows (NY NL) in blue. NY NL has been drawn on an inverted Y axis so decreasing new lows move the indicator upward (up is good). Dashed vertical lines have been drawn on the 1st trading day of each month.
NY NL moved sharply lower last week. NY NL also fell sharply in mid December with no effect on equities, but that pattern (new lows increasing sharply while equities rise) is unusual.
The next chart covers the past 6 months showing the SPX in red and 40% trend (4 day EMA) of the ratio of NYSE new highs to new highs + new lows (NY HL Ratio) in black. There are dashed horizontal lines drawn at 10% levels for the indicator. The line is solid at the neutral 50% level.
NY HL Ratio dropped sharply last week, an event usually associated with a decline in equity prices.
The positives
With its large population of small companies, problems usually show up on the NASDAQ first. Uninfested with Muni Bond funds, indicators derived from NASDAQ data are looking good.
The chart below covers the past 6 months showing the NASDAQ composite (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.
OTC HL Ratio held in the mid 90's all week. There are trading systems that impose a no sell filter when variations of this indicator are above 80%.
Advance - Decline lines (ADL) are a running total of declining issues subtracted form advancing issues.
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 a multi month high on Friday.
The multi month high in OTC ADL is significant because this indicator has a decidedly negative bias. The chart below is similar to the one above except it covers the last 3 years to give you a longer term perspective on this indicator.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of January during the 3rd year of the Presidential Cycle. It is also the week following the Martin Luther King holiday.
The tables below show the return on a percentage basis for the 5 trading days prior to the 3rd Friday of January during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data from 1953 - 2010. 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.
Average returns for the coming week have been modestly positive, but, neither the OTC or SPX has had an up year during the 3rd year of the Presidential Cycle since 1991.
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 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | 0.13% | -0.23% | 0.26% | 0.68% | 0.65% | 1.49% |
| 1967-3 | 1.01% | -0.25% | 0.75% | 0.08% | 0.96% | 2.55% |
| 1971-3 | 0.07% | 0.44% | 0.20% | 1.26% | 2.13% | 4.11% |
| 1975-3 | -0.55% | -0.36% | 1.20% | 1.46% | -1.08% | 0.67% |
| 1979-3 | 0.59% | -0.59% | -0.12% | 0.58% | 0.27% | 0.74% |
| 1983-3 | 0.61% | -0.20% | -0.59% | 0.32% | -0.82% | -0.67% |
| 1987-3 | 1.26% | 0.24% | 0.92% | 0.67% | -0.69% | 2.41% |
| Avg | 0.40% | -0.09% | 0.32% | 0.86% | -0.04% | 1.45% |
| 1991-3 | -1.67% | 0.44% | 2.21% | 2.91% | 0.31% | 4.19% |
| 1995-3 | 0.79% | 0.52% | 0.03% | -0.50% | -0.85% | -0.01% |
| 1999-3 | 0.00% | 2.53% | 0.32% | -2.93% | -0.25% | -0.32% |
| 2003-3 | -0.12% | 1.03% | -1.52% | -1.05% | -3.34% | -4.99% |
| 2007-3 | 0.00% | -0.20% | -0.74% | -1.46% | 0.33% | -2.07% |
| Avg | -0.33% | 0.86% | 0.06% | -0.60% | -0.76% | -0.64% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | 0.21% | 0.28% | 0.24% | 0.17% | -0.20% | 0.68% |
| Win% | 70% | 50% | 67% | 67% | 50% | 58% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | 0.03% | 0.23% | 0.03% | 0.26% | 0.00% | 0.54% |
| Win% | 63% | 60% | 58% | 67% | 60% | 69% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | -1.98% | 0.64% | 0.46% | 0.49% | 0.88% | 0.48% |
| 1959-3 | 0.02% | -0.56% | 0.27% | 0.38% | -0.04% | 0.07% |
| 1963-3 | 0.54% | -0.14% | -0.68% | 0.71% | 0.08% | 0.51% |
| 1967-3 | -0.26% | 1.10% | 0.65% | 0.03% | 0.29% | 1.81% |
| 1971-3 | 0.41% | 0.37% | 0.02% | 0.44% | 0.73% | 1.97% |
| 1975-3 | -0.41% | -0.87% | 0.64% | -0.12% | -1.51% | -2.28% |
| 1979-3 | 0.76% | -1.22% | 0.02% | 0.24% | 0.03% | -0.17% |
| 1983-3 | 0.04% | -0.21% | -0.77% | 0.70% | -1.67% | -1.91% |
| 1987-3 | 0.61% | -0.13% | 1.03% | 1.09% | 0.30% | 2.89% |
| Avg | 0.28% | -0.41% | 0.19% | 0.47% | -0.42% | 0.10% |
| 1991-3 | -0.87% | 0.40% | 0.78% | 3.73% | 1.30% | 5.34% |
| 1995-3 | 0.73% | 0.14% | -0.07% | -0.59% | -0.46% | -0.25% |
| 1999-3 | 0.00% | 0.61% | 0.46% | -1.70% | -0.81% | -1.45% |
| 2003-3 | -0.14% | 0.58% | -1.44% | -0.39% | -1.40% | -2.80% |
| 2007-3 | 0.00% | 0.08% | -0.09% | -0.30% | 0.29% | -0.02% |
| Avg | -0.09% | 0.36% | -0.07% | 0.15% | -0.22% | 0.17% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | -0.05% | 0.06% | 0.09% | 0.34% | -0.14% | 0.30% |
| Win% | 58% | 57% | 64% | 64% | 57% | 50% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | -0.05% | 0.10% | -0.06% | 0.05% | -0.12% | -0.08% |
| Win% | 46% | 59% | 53% | 60% | 52% | 50% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 fell last week.
Conclusion
The market is overbought, there is trouble in the Muni Bond market, money supply is falling and seasonality for the coming week is weak.
I expect the major averages to be lower on Friday January 21 than they were on Friday January 14.
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.
In his latest newsletter, Jerry Minton takes a look at the underlying cause for the long-term "skewing" of market returns into the November-May period. Titled "Experts and Human Nature" Jerry takes a jab at "expert opinion". To read about it and sign up for the free newsletter, go to www.alphaim.net. All of Alpha's programs had a good year last year.
Client composite returns net of fees and expenses:
E-System 17.04%
Seasonal 10.18%
Bonds Plus 10.02%
Mid cap 20.20%
The Formula 18.51%
Thank you,
