The good news is:
• The market recovered most of its losses of the past 2 months last week.
The negatives
Every major index was up every day last week. From a technical perspective that gives us little to work with. It was either a liftoff or a blowoff.
When QE2 began last November the market initially declined for 2 weeks following the seasonal pattern. QE2 ended last Thursday, and a 2 week rally would be consistent with the seasonal pattern for July.
The positives
The next chart below covers the past year showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by (new highs + new lows) (OTC HL Ratio). Dashed vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral, 50% level.
OTC HL Ratio rose to a comfortable level of 76% on Friday.
The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and NY HL Ratio, in black, has been calculated from NYSE data.
NY HL Ratio closed at a comfortable 86% Friday.
Seasonality
Next week includes the last 4 trading days prior to the 2nd Friday of July during the 3rd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 4 trading days prior to the 2nd Friday of July during the 3rd year of the Presidential Cycle. OTC data covers the period from 1963 - 2010 and SPX data covers the period 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 over all periods have been positive.
Report for the week before the 2nd Friday of July.
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 | 0.21% | -0.27% | 0.30% | 0.29% | 0.12% | 0.65% |
| 1967-3 | 0.71% | 0.23% | 0.70% | -0.18% | 0.25% | 1.72% |
| 1971-3 | 0.00% | 0.42% | 0.71% | 0.37% | 0.44% | 1.95% |
| 1975-3 | 0.44% | 0.48% | -0.69% | -0.30% | -0.13% | -0.20% |
| 1979-3 | 0.37% | -0.13% | -0.09% | -0.12% | -0.12% | -0.09% |
| 1983-3 | 0.00% | -1.38% | 0.63% | -0.04% | 0.18% | -0.62% |
| 1987-3 | 0.12% | 1.08% | 0.02% | 0.46% | 0.20% | 1.89% |
| Avg | 0.31% | 0.10% | 0.12% | 0.07% | 0.12% | 0.59% |
| 1991-3 | 1.15% | 0.86% | 0.73% | 0.25% | 0.89% | 3.88% |
| 1995-3 | 0.71% | -0.66% | 1.90% | 0.56% | 0.52% | 3.03% |
| 1999-3 | 0.00% | -0.15% | 0.23% | 1.05% | 0.76% | 1.89% |
| 2003-3 | 1.20% | -0.09% | -0.30% | -2.86% | 0.62% | -1.43% |
| 2007-3 | 0.13% | -1.16% | 0.48% | 1.88% | 0.20% | 1.53% |
| Avg | 0.80% | -0.24% | 0.61% | 0.18% | 0.60% | 1.78% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | 0.56% | -0.06% | 0.38% | 0.11% | 0.33% | 1.18% |
| Win% | 100% | 42% | 75% | 58% | 83% | 67% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | 0.04% | -0.12% | 0.37% | 0.29% | 0.37% | 0.94% |
| Win% | 68% | 50% | 60% | 67% | 75% | 67% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 0.00% | 1.21% | 3.57% | -1.39% | 0.14% | 3.54% |
| 1959-3 | -0.83% | 0.24% | 0.07% | -0.30% | -0.37% | -1.20% |
| 1963-3 | -0.68% | 0.43% | -0.21% | -0.19% | -0.17% | -0.83% |
| 1967-3 | 0.39% | 0.47% | -0.09% | 0.02% | 0.35% | 1.14% |
| 1971-3 | 0.00% | -0.02% | 0.28% | 0.30% | 0.35% | 0.91% |
| 1975-3 | 0.56% | 0.44% | -1.05% | -1.04% | -0.46% | -1.54% |
| 1979-3 | 0.82% | -0.26% | -0.54% | -0.92% | -0.36% | -1.25% |
| 1983-3 | 0.00% | -1.37% | 1.13% | -0.55% | -0.29% | -1.07% |
| 1987-3 | -0.24% | 0.99% | -0.08% | 0.73% | 0.60% | 2.01% |
| Avg | 0.38% | -0.04% | -0.05% | -0.29% | -0.03% | -0.19% |
| 1991-3 | 1.03% | -0.48% | -0.10% | 0.33% | 0.87% | 1.65% |
| 1995-3 | 0.15% | -0.43% | 1.10% | 0.02% | -0.20% | 0.64% |
| 1999-3 | 0.00% | -0.22% | 0.56% | -0.11% | 0.64% | 0.87% |
| 2003-3 | 0.57% | -0.34% | -0.64% | -1.23% | 1.18% | -0.47% |
| 2007-3 | 0.09% | -1.42% | 0.57% | 1.91% | 0.31% | 1.46% |
| Avg | 0.46% | -0.58% | 0.30% | 0.18% | 0.56% | 0.83% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | 0.19% | -0.05% | 0.33% | -0.17% | 0.19% | 0.42% |
| Win% | 70% | 43% | 50% | 43% | 57% | 57% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | 0.01% | -0.02% | 0.28% | 0.16% | 0.27% | 0.68% |
| Win% | 59% | 47% | 58% | 61% | 67% | 66% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has been accelerating.
July
Since 1963, over all years the OTC in July has been up 52% of the time with an average gain of 0.1%. During the 3rd year of the Presidential Cycle July has been up 58% time with an average gain of 0.8%. The worst July ever, 1986 (-8.9%), the best 1997 (+10.8%)
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 July 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 58% of the time in July with an average gain of 1.2%. During the 3rd year of the Presidential Cycle the SPX has been up 65% of the time with an average gain of 0.7%. The best ever July for the SPX was 1932 (+32.6%) the worst 1933 (-11.1%).
The chart below is similar to the one above except it shows the daily performance over all years for the SPX in July in red and the performance during the 3rd year of the Presidential Cycle in green.
Since 1979 the Russell 2000 (R2K) has been up 50% of the time in July with an average loss of -0.3%. During the 3rd year of the Presidential Cycle the R2K has been up 63% of the time with an average gain of 0.9%. The best ever July for the R2K, 1980 (+10.5%), the worst 2002 (-12.4%)
The chart below is similar to those above except it shows the daily performance over all years of the R2K in July 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 59% of the time in July with an average gain of 1.0%. During the 3rd year of the Presidential Cycle the DJIA has been up 55% of the time with an average gain of 0.3%. The best July ever for the DJIA 1932 (+22.2%), the worst 1893 (-16.1%)
The chart below is similar to those above except it shows the daily performance over all years of the DJIA in July in Magenta and the performance during the 3rd year of the Presidential Cycle in green.
Conclusion
Last weeks strong gains have left the market over bought, but strong seasonality should help it for the next 2 weeks.
I expect the major averages to be higher on Friday July 8 that they were on Friday July 1.
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