The good news is:
• Friday new highs were at their highest level since March 3.
The negatives
Between mid February and the March 16 low the major indices fell between 5% and 8%, a relatively minor correction. New highs over the same period fell more than 90%, a significant correction.
Successive new highs in the indices have been accompanied by fewer new highs. This is not a short term problem, but it indicates a narrowing of leadership which, in the longer term, is not good.
The chart below covers the past year 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.
In mid February the OTC was about 12% higher than it was at its high last April while OTC NH failed to reach its previous high.
The next chart is similar to the one above except is shows the S&P 500 (SPX) in red and NY NH has been calculated from NYSE data. The pattern is similar.
The positives
At market lows new lows and down side volume disappear and in the past week and a half that has happened.
The chart below covers the past 6 months showing the OTC in blue and a 10% trend of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).
OTC NL moved up sharply all week.
The next chart is similar to the one above except it shows the SPX in red and NY NL has been calculated from NYSE data. Recent problems with the fixed income issues on the NYSE have made NY NL more volatile, but, right now the indicator is moving sharply upward.
Down side volume, like new lows, also decreases sharply at bottoms.
The chart below covers the past 6 months showing the OTC in blue and a 5% trend (39 day EMA) of NASDAQ downside volume (OTC DV) in brown. Like OTC NL, OTC DV has been plotted on an inverted Y axis so decreasing down side volume moves the indicator upward (up is good).
OTC DV has been moving sharply upward since the mid March low.
The next chart is similar to the one above except is shows the SPX in red and NY DV has been calculated using NYSE data. The pattern is similar.
Seasonality
Next week includes the last 4 trading days of March and the 1st trading day of April during the 3rd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the last 4 trading days of March and the 1st trading day of April during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data from 1928 - 2010. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Average returns over all years have been modestly negative. During the 3rd year of the Presidential Cycle average returns for the OTC have been positive while average returns for the SPX have been negative. In the sub groupings of 5 Presidential Cycles (20 years), none of the SPX sub groupings, since 1931 shows a positive return.
Last 4 days of March and first day of April.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
| OTC Presidential Year 3 | ||||||
| Day4 | Day3 | Day2 | Day1 | Day1 | Totals | |
| 1963-3 | 0.54% 2 | 0.38% 3 | 0.76% 4 | 0.00% 5 | 0.13% 1 | 1.81% |
| 1967-3 | 0.16% 2 | 0.69% 3 | 0.20% 4 | 0.32% 5 | 0.36% 1 | 1.73% |
| 1971-3 | 0.45% 5 | 0.12% 1 | 0.23% 2 | 0.50% 3 | 0.35% 4 | 1.65% |
| 1975-3 | -0.12% 2 | 1.65% 3 | 0.82% 4 | -0.68% 1 | -0.32% 2 | 1.35% |
| 1979-3 | 0.51% 2 | 0.07% 3 | 0.32% 4 | 0.36% 5 | -0.30% 1 | 0.96% |
| 1983-3 | -0.64% 1 | -0.14% 2 | 0.75% 3 | 0.01% 4 | -0.76% 1 | -0.79% |
| 1987-3 | 0.28% 4 | -0.42% 5 | -2.24% 1 | 0.70% 2 | -0.40% 3 | -2.08% |
| Avg | 0.10% | 0.26% | -0.02% | 0.18% | -0.29% | 0.22% |
| 1991-3 | 0.94% 1 | 2.15% 2 | 0.79% 3 | -0.01% 4 | -0.30% 1 | 3.57% |
| 1995-3 | 0.43% 2 | -0.84% 3 | -0.28% 4 | 0.04% 5 | 0.10% 1 | -0.55% |
| 1999-3 | -0.64% 5 | 3.04% 1 | -0.50% 2 | -0.76% 3 | 1.30% 4 | 2.43% |
| 2003-3 | -0.26% 3 | -0.23% 4 | -1.06% 5 | -2.08% 1 | 0.53% 2 | -3.09% |
| 2007-3 | -0.74% 2 | -0.83% 3 | 0.03% 4 | 0.16% 5 | 0.03% 1 | -1.36% |
| Avg | -0.06% | 0.66% | -0.20% | -0.53% | 0.33% | 0.20% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Averages | 0.08% | 0.47% | -0.01% | -0.12% | 0.06% | 0.47% |
| % Winners | 58% | 58% | 67% | 58% | 58% | 58% |
| MDD 3/31/2003 3.58% -- 3/30/1987 2.65% -- 3/28/2007 1.57% | ||||||
| OTC summary for all years 1963 - 2010 | ||||||
| Averages | 0.03% | -0.22% | -0.10% | 0.15% | -0.03% | -0.17% |
| % Winners | 50% | 56% | 56% | 64% | 52% | 63% |
| MDD 4/3/2000 14.82% -- 4/2/2001 9.60% -- 4/4/1994 7.15% | ||||||
| SPX Presdential Year 3 | ||||||
| Day4 | Day3 | Day2 | Day1 | Day1 | Totals | |
| 1931-3 | -1.88% 5 | -2.15% 6 | -1.07% 1 | 0.18% 2 | -1.02% 3 | -5.94% |
| 1935-3 | 1.08% 3 | 0.12% 4 | 0.00% 5 | 0.24% 6 | 0.83% 1 | 2.26% |
| 1939-3 | -1.33% 2 | 0.76% 3 | -3.44% 4 | -4.60% 5 | 2.28% 6 | -6.34% |
| 1943-3 | 0.27% 6 | 1.41% 1 | 0.87% 2 | -0.09% 3 | 0.09% 4 | 2.55% |
| 1947-3 | 1.12% 4 | -0.45% 5 | -0.13% 6 | -0.91% 1 | 0.40% 2 | 0.01% |
| Avg | -0.15% | -0.06% | -0.75% | -1.04% | 0.51% | -1.49% |
| 1951-3 | -1.16% 3 | 0.33% 4 | 0.70% 5 | -0.37% 6 | -0.37% 1 | -0.88% |
| 1955-3 | -0.35% 1 | 0.05% 2 | -0.90% 3 | 0.16% 4 | 1.01% 5 | -0.02% |
| 1959-3 | -0.14% 3 | -0.21% 4 | -0.56% 1 | -0.02% 2 | 0.45% 3 | -0.48% |
| 1963-3 | 0.29% 2 | 0.42% 3 | -0.15% 4 | -0.02% 5 | 0.42% 1 | 0.96% |
| 1967-3 | 0.04% 2 | -0.20% 3 | -0.03% 4 | -0.55% 5 | -1.06% 1 | -1.80% |
| Avg | -0.27% | 0.08% | -0.19% | -0.16% | 0.09% | -0.44% |
| 1971-3 | 0.34% 5 | 0.08% 1 | 0.23% 2 | 0.05% 3 | 0.08% 4 | 0.78% |
| 1975-3 | 0.79% 2 | 1.86% 3 | 0.31% 4 | -0.58% 1 | -0.86% 2 | 1.51% |
| 1979-3 | 1.43% 2 | -0.35% 3 | -0.09% 4 | -0.43% 5 | -0.68% 1 | -0.12% |
| 1983-3 | -0.54% 1 | -0.17% 2 | 1.19% 3 | -0.28% 4 | 0.04% 1 | 0.24% |
| 1987-3 | 0.18% 4 | -1.60% 5 | -2.34% 1 | 0.86% 2 | 0.24% 3 | -2.65% |
| Avg | 0.44% | -0.03% | -0.14% | -0.08% | -0.24% | -0.05% |
| 1991-3 | 0.64% 1 | 1.75% 2 | -0.25% 3 | -0.03% 4 | -1.04% 1 | 1.06% |
| 1995-3 | 0.14% 2 | -0.15% 3 | -0.18% 4 | -0.30% 5 | 0.23% 1 | -0.27% |
| 1999-3 | -0.56% 5 | 2.14% 1 | -0.72% 2 | -1.11% 3 | 0.57% 4 | 0.32% |
| 2003-3 | -0.55% 3 | -0.16% 4 | -0.58% 5 | -1.77% 1 | 1.21% 2 | -1.85% |
| 2007-3 | -0.62% 2 | -0.80% 3 | 0.37% 4 | -0.12% 5 | 0.26% 1 | -0.90% |
| Avg | -0.19% | 0.55% | -0.27% | -0.67% | 0.24% | -0.33% |
| SPX summary for Presidential Year 3 1931 - 2007 | ||||||
| Averages | -0.04% | 0.13% | -0.34% | -0.48% | 0.15% | -0.58% |
| % Winners | 55% | 50% | 30% | 25% | 70% | 45% |
| MDD 3/31/1939 8.42% -- 4/1/1931 5.82% -- 3/30/1987 3.90% | ||||||
| SPX summary for all years 1928 - 2010 | ||||||
| Averages | -0.01% | -0.07% | -0.05% | -0.15% | 0.16% | -0.11% |
| % Winners | 49% | 52% | 44% | 43% | 63% | 51% |
| MDD 3/31/1939 8.42% -- 3/31/1938 8.31% -- 4/1/1932 7.24% | ||||||
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 fell last week.
April
Since 1963, over all years the OTC in April has been up 71% of the time with an average gain of 1.7%. During the 3rd year of the Presidential Cycle April has been up 92% time with an average gain of 3.8%. The worst April ever, 2002 (-9.4%), the best 2009 (+10.7%)
The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.
In the chart below the blue line shows the average of the OTC in April over all years since 1963 while the green line shows the average during the 3rd year of the Presidential Cycle.
Since 1928 the SPX has been up 60% of the time in April with an average gain of 1.2%. During the 3rd year of the Presidential Cycle the SPX has been up 79% of the time with an average gain of 2.5%. The best ever April for the SPX was 1933 (+41.5%) the worst 1932 (-18.8%).
The chart below is similar to the one above except it shows the daily performance over all years for the SPX in April in red and the performance during the 3rd year of the Presidential Cycle in green.
Since 1979 the Russell 2000 (R2K) has been up 69% of the time in April with an average gain of 2.0%. During the 3rd year of the Presidential Cycle the R2K has been up 88% of the time with an average gain of 3.5%. The best ever April for the R2K, 2009 (+13.6%), the worst 2004 (-6.0%)
The chart below is similar to those above except it shows the daily performance over all years of the R2K in April in black and the performance during the 3rd year of the Presidential Cycle in green.
Since 1885 the Dow Jones Industrial Average (DJIA) has been up 60% of the time in April with an average gain of 1.1%. During the 3rd year of the Presidential Cycle the DJIA has been up 77% of the time with an average gain of 2.9%. The best April ever for the DJIA 1933 up 39.5%, the worst 1932 (-22.3%)
The chart below is similar to those above except it shows the daily performance over all years of the DJIA in April in Magenta and the performance during the 3rd year of the Presidential Cycle in green.
Conclusion
The March low is clearly defined now. Seasonally next week leaves something to be desired, but given we are so close to a clearly defined low the damage should be minimal.
I expect the major averages to be higher on Friday April 1 than they were on Friday March 25.
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In his latest newsletter, Jerry Minton looks at the long-term behavior of U.S. equity sectors and how difficult it is to be confident that trends will continue. Not surprisingly, he offers a solution to the shifting tides of investment performance in the U.S equity market.
Thank you,
