The good news is:
• For the past 2 weeks the market has been consolidating with very little damage to the breadth indicators.
The negatives
Negatives are hard to find. About the most I can say is some of the indicators could be a little better. In really strong markets new highs often lead prices upward and for the past 2 weeks that has not been happening.
The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.
OTC NH did not respond well to Thursday's rally, but, remains at a relatively high level.
The next chart shows the S&P 500 (SPX) in red and NY NH calculated from NYSE data in green. The pattern is similar.
The positives
Any serious decline will be accompanied by an increase in the number of new lows. Worrisome levels of new lows are 70 for the NASDAQ and 40 for the NYSE. New lows have remained well below those levels.
The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by (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.
The sharp fall in OTC HL Ratio was arrested last week and it is holding at a comfortable level.
The chart below 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. This indicator climbed back above the 90% level last week, very strong.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of March during the 3rd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of March during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data from 1953 - 2010. Prior to 1953 the market traded 6 days a week so that data has been ignored. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Average returns for the coming week have been strong by all measures and especially strong during the 3rd year of the Presidential Cycle. The OTC has never had down year for this week during the 3rd year of the Presidential Cycle.
Report for the week before the 2nd Friday of March.
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 | -0.23% | 0.33% | 0.07% | 0.29% | 0.52% | 0.98% |
| 1967-3 | 0.44% | 0.00% | 0.49% | 0.33% | 1.16% | 2.42% |
| 1971-3 | 1.15% | 0.17% | -0.26% | 0.12% | 0.23% | 1.41% |
| 1975-3 | 0.65% | 0.21% | -1.21% | 0.74% | 1.86% | 2.25% |
| 1979-3 | 0.85% | -0.23% | 0.95% | 1.15% | 0.16% | 2.87% |
| 1983-3 | -0.21% | -0.84% | 0.72% | 0.38% | 0.04% | 0.10% |
| 1987-3 | -0.62% | 0.61% | 0.48% | 0.24% | -0.12% | 0.59% |
| Avg | 0.36% | -0.02% | 0.13% | 0.53% | 0.43% | 1.44% |
| 1991-3 | 0.96% | 2.00% | 0.16% | 0.41% | -0.13% | 3.40% |
| 1995-3 | -0.13% | -0.81% | 0.57% | 0.05% | 0.75% | 0.44% |
| 1999-3 | 2.00% | -0.20% | 0.55% | 0.26% | -1.28% | 1.34% |
| 2003-3 | -2.00% | -0.54% | 0.61% | 2.00% | -0.03% | 0.04% |
| 2007-3 | -1.15% | 1.90% | -0.44% | 0.55% | -0.01% | 0.85% |
| Avg | -0.06% | 0.47% | 0.29% | 0.66% | -0.14% | 1.21% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | 0.14% | 0.24% | 0.22% | 0.54% | 0.26% | 1.39% |
| Win% | 50% | 55% | 75% | 100% | 58% | 100% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | -0.06% | 0.24% | 0.06% | 0.25% | -0.03% | 0.46% |
| Win% | 48% | 60% | 63% | 67% | 50% | 71% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | -0.64% | -1.88% | -0.98% | 0.64% | -1.73% | -4.59% |
| 1959-3 | -0.11% | 0.28% | 0.07% | 0.44% | 0.12% | 0.82% |
| 1963-3 | 0.97% | 0.03% | 0.17% | 0.63% | 0.11% | 1.91% |
| 1967-3 | -0.22% | 0.07% | 0.12% | 0.29% | 0.41% | 0.68% |
| 1971-3 | 0.42% | 0.08% | -0.16% | 0.09% | 0.18% | 0.62% |
| 1975-3 | 0.77% | -0.69% | -0.91% | 0.18% | 1.22% | 0.56% |
| 1979-3 | 1.12% | -0.19% | 0.58% | 1.16% | -0.04% | 2.63% |
| 1983-3 | 0.00% | -1.57% | 1.06% | -0.70% | -0.37% | -1.57% |
| 1987-3 | -0.81% | 0.89% | -0.19% | 0.31% | -0.46% | -0.26% |
| Avg | 0.38% | -0.30% | 0.08% | 0.21% | 0.11% | 0.40% |
| 1991-3 | -0.31% | 2.00% | -0.15% | -0.07% | -0.26% | 1.22% |
| 1995-3 | 0.04% | -0.72% | 0.21% | 0.00% | 1.33% | 0.86% |
| 1999-3 | 0.56% | -0.23% | 0.55% | 0.85% | -0.24% | 1.49% |
| 2003-3 | -2.00% | -0.84% | 0.43% | 2.00% | 0.16% | -0.24% |
| 2007-3 | 0.00% | 0.59% | -0.25% | 0.71% | 0.07% | 1.13% |
| Avg | -0.42% | 0.16% | 0.16% | 0.70% | 0.21% | 0.89% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | -0.02% | -0.16% | 0.04% | 0.47% | 0.04% | 0.38% |
| Win% | 50% | 50% | 57% | 86% | 57% | 71% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | -0.02% | 0.16% | 0.05% | 0.13% | -0.04% | 0.27% |
| Win% | 53% | 57% | 55% | 61% | 44% | 60% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 continued to expand at its elevated trend.
Conclusion
I am occasionally accused of being a permabull. Those accusations have increased noticeably in the past month. The 1st half of the 3rd year of the Presidential Cycle accounts for a significant portion of the average gain of the entire 4 year cycle and none of us has ever seen the Federal Reserve as aggressive as they are now. QE2 ends in June. Until then it will be imprudent to bet against this market.
I expect the major averages to be higher on Friday March 11 than they were on Friday March 4.
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