The good news is:
• All of the major indices closed at multi year highs on Friday.
The negatives
The market is overbought.
The major indices are up 30% -40% from their late August lows.
A sharp pull back could occur, but, there is nothing to suggest it. If it should occur the market is likely to recover quickly.
The positives
Everything that matters confirmed Friday's high implying that any pull back is likely to be brief.
Advance decline lines (ADL) are running totals of declining issues subtracted from advancing issues. The bias of AD lines varies a lot. An ADL constructed from NASDAQ data has had a consistently negative bias while an ADL constructed from NYSE data used to have a slightly negative bias, but that changed to an extremely positive one about 10 years ago when the Fed began aggressively lowering interest rates.
The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and an ADL constructed from NASDAQ data (OTC ADL) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.
The OTC ADL hit a 9 month high last Friday.
That high is important because the OTC ADL has a very negative bias that you can see on the chart below which covers the past 5 years. Dashed vertical lines have been drawn on the 1st trading day of each year.
Seasonality
Next week includes the 5 trading days prior to the 4th Friday in February during the 3rd year of the Presidential Cycle.
The tables below show the return on a percentage basis for 5 trading days prior to the 4th Friday of February during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and S&P 500 (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.
I was off by a week in my anticipation of Presidents Day last week, it is next Monday.
Average returns for the coming week have been nearly flat. Interestingly the SPX has been up only 23% of the time during the 3rd year of the Presidential Cycle while the OTC has been up 73% of the time.
Report for the week before the 4th Friday of February
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1967-3 | -0.05% | 0.19% | 0.00% | 0.50% | 0.76% | 1.40% |
| 1971-3 | -1.01% | 0.04% | 0.92% | 0.59% | 0.11% | 0.64% |
| 1975-3 | -0.88% | -1.46% | 0.24% | 0.40% | 0.65% | -1.06% |
| 1979-3 | 0.00% | 0.21% | -0.26% | -0.04% | -0.33% | -0.42% |
| 1983-3 | 0.00% | -0.81% | 0.31% | 0.89% | 0.05% | 0.45% |
| 1987-3 | -0.48% | 0.52% | 0.87% | 0.24% | 0.70% | 1.84% |
| Avg | -0.79% | -0.30% | 0.42% | 0.42% | 0.24% | 0.29% |
| 1991-3 | 0.00% | 0.36% | -0.95% | 0.08% | 0.58% | 0.06% |
| 1995-3 | 0.00% | -0.30% | 0.42% | 0.43% | -0.03% | 0.52% |
| 1999-3 | 2.56% | 1.43% | -1.52% | -0.54% | -1.67% | 0.26% |
| 2003-3 | -1.97% | 0.50% | -1.90% | 1.55% | 1.03% | -0.80% |
| 2007-3 | 0.00% | 0.67% | 0.21% | 0.26% | -0.39% | 0.75% |
| Avg | 0.29% | 0.53% | -0.75% | 0.36% | -0.10% | 0.16% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | -0.31% | 0.12% | -0.17% | 0.40% | 0.13% | 0.33% |
| Win% | 17% | 73% | 60% | 82% | 64% | 73% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | -0.28% | -0.26% | 0.26% | 0.02% | 0.06% | -0.04% |
| Win% | 40% | 39% | 68% | 61% | 53% | 58% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | -0.11% | 0.00% | -0.08% | -0.54% | -0.14% | -0.87% |
| 1959-3 | 0.00% | -0.07% | -0.43% | 0.18% | 0.13% | -0.20% |
| 1963-3 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1967-3 | -0.56% | -0.07% | 0.00% | 0.13% | -0.05% | -0.55% |
| 1971-3 | -1.05% | 0.39% | 0.67% | 0.20% | -0.18% | 0.02% |
| 1975-3 | -1.43% | -2.35% | 1.06% | 0.50% | 1.02% | -1.20% |
| 1979-3 | 0.00% | 0.76% | -0.35% | -0.75% | -0.56% | -0.90% |
| 1983-3 | 0.00% | -1.70% | 0.90% | 1.91% | 0.09% | 1.21% |
| 1987-3 | -1.09% | 0.18% | 0.40% | -0.37% | 0.44% | -0.44% |
| Avg | -1.19% | -0.54% | 0.53% | 0.30% | 0.16% | -0.26% |
| 1991-3 | 0.00% | 0.09% | -1.15% | -0.05% | 0.19% | -0.92% |
| 1995-3 | 0.00% | 0.16% | 0.49% | 0.38% | 0.28% | 1.30% |
| 1999-3 | 2.65% | -0.07% | -1.40% | -0.67% | -0.54% | -0.02% |
| 2003-3 | -1.84% | 0.72% | -1.31% | 1.17% | 0.46% | -0.79% |
| 2007-3 | 0.00% | 0.28% | -0.14% | -0.09% | -0.36% | -0.30% |
| Avg | 0.41% | 0.24% | -0.70% | 0.15% | 0.01% | -0.15% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | -0.49% | -0.14% | -0.11% | 0.15% | 0.06% | -0.28% |
| Win% | 14% | 58% | 42% | 54% | 54% | 23% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | -0.24% | -0.15% | 0.20% | -0.09% | 0.07% | -0.08% |
| Win% | 36% | 41% | 54% | 46% | 59% | 46% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 moved flattened off a little last week.
Conclusion
The market is overbought and could have a sharp pull back at any time, but, everything that matters confirmed Friday's highs implying higher prices ahead.
I expect the major averages to be higher on Friday February 25 than they were on Friday February 18.
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Thank you,
