The good news is:
• A bottoming pattern may be developing. Making some assumptions that may turn out to be reckless, Thursday's low looks like a successful retest of the August lows. Successful because, although most of the major indices fell to within 1% of their August lows, there were substantially fewer new lows than there were in early August. The problem is, although there were fewer new lows last Thursday than there were on August 8, there were enough to suggest a high likelihood of another retest.
The negatives
The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows (OTC HL Ratio) in red. 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 OTC HL Ratio and the line is solid at the neutral 50% level.
OTC HL Ratio has remained below the neutral level since late July and has been deteriorating all month.
The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and NY HL Ratio has been calculated from NYSE data.
NYSE data has a more positive bias than NASDAQ data, but, this chart shows no signs of recovery.
The positives
On August 8 there were 1292 new lows on the NYSE and 725 on the NASDAQ. Last Thursday, when most of the major indices were within 1% of their August lows, there were 787 new lows on the NYSE and 598 on the NASDAQ. Last Thursday's new low numbers could be exceeded next week which will make this an exercise in wishful thinking. Even if they hold, Last Thursday's numbers were large enough to suggest another retest.
The chart below covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new lows (NY NL) in blue. NY NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).
The SPX was within 1% of its August low last Thursday while NY NL did not confirm the retest.
Multiple retests are unusual.
In 1990 there was a multiple retest that occurred at about this time of the year.
The chart below is similar to the one above except it covers the period from late May 1990 to late November 1990.
On August 23 there were 711 new lows on the NYSE and 831 on the NASDAQ. On the September 24 retest there were 444 new lows on both the NYSE and NASDAQ. The final low occurred October 11 with 375 new lows on the NYSE and 437 on the NASDAQ.
Seasonality
Next week includes the last 5 trading days of September during the 3rd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the last 5 trading days of September during the 3rd year of the Presidential Cycle.
OTC data covers the period from 1963 - 2010 and SPX data covers the period from 1928 - 2010. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Average returns have been negative over all periods.
Report for the last 5 days of September.
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 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1963-3 | -0.37% 2 | -0.34% 3 | -0.71% 4 | -0.49% 5 | -0.23% 1 | -2.13% |
| 1967-3 | 0.19% 1 | 0.18% 2 | -0.32% 3 | 0.18% 4 | 0.08% 5 | 0.31% |
| 1971-3 | 0.07% 5 | -0.64% 1 | 0.18% 2 | 0.20% 3 | 0.40% 4 | 0.21% |
| 1975-3 | 0.65% 3 | -0.43% 4 | 0.05% 5 | -1.01% 1 | -1.38% 2 | -2.13% |
| 1979-3 | -0.35% 1 | -0.57% 2 | 0.41% 3 | 0.33% 4 | -0.26% 5 | -0.44% |
| 1983-3 | 0.05% 1 | -0.98% 2 | -0.34% 3 | -0.16% 4 | -0.88% 5 | -2.31% |
| 1987-3 | 0.12% 4 | 0.15% 5 | 0.09% 1 | -0.10% 2 | 0.55% 3 | 0.81% |
| Avg | 0.11% | -0.50% | 0.08% | -0.15% | -0.32% | -0.77% |
| 1991-3 | 0.34% 2 | 0.26% 3 | -0.17% 4 | -0.47% 5 | 0.46% 1 | 0.42% |
| 1995-3 | -0.68% 1 | -0.77% 2 | -1.12% 3 | 2.01% 4 | -0.34% 5 | -0.91% |
| 1999-3 | -0.34% 5 | 0.78% 1 | -0.20% 2 | -0.94% 3 | 0.58% 4 | -0.12% |
| 2003-3 | -3.05% 3 | -1.44% 4 | -1.39% 5 | 1.81% 1 | -2.06% 2 | -6.12% |
| 2007-3 | -0.12% 1 | 0.58% 2 | 0.58% 3 | 0.39% 4 | -0.30% 5 | 1.13% |
| Avg | -0.77% | -0.12% | -0.46% | 0.56% | -0.33% | -1.12% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Averages | -0.29% | -0.27% | -0.24% | 0.15% | -0.28% | -0.94% |
| % Winners | 50% | 42% | 42% | 50% | 42% | 42% |
| MDD 9/30/2003 6.04% -- 9/30/1975 2.75% -- 9/27/1995 2.55% | ||||||
| OTC summary for all years 1963 - 2010 | ||||||
| Averages | -0.05% | -0.03% | -0.13% | -0.17% | -0.02% | -0.39% |
| % Winners | 56% | 51% | 48% | 47% | 48% | 48% |
| MDD 9/29/2008 9.28% -- 9/30/1974 6.69% -- 9/30/2003 6.04% | ||||||
| SPX Presidential Year 3 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1931-3 | 2.25% 5 | -1.74% 6 | -2.14% 1 | -4.19% 2 | -3.48% 3 | -9.31% |
| 1935-3 | 0.43% 3 | 0.00% 4 | -0.26% 5 | 0.09% 6 | 0.17% 1 | 0.43% |
| 1939-3 | 1.24% 2 | 0.00% 3 | -1.91% 4 | -0.54% 5 | 1.80% 6 | 0.58% |
| 1943-3 | -0.08% 6 | -0.74% 1 | -0.17% 2 | 0.25% 3 | 0.58% 4 | -0.16% |
| 1947-3 | 0.40% 3 | -0.60% 4 | -0.34% 5 | 0.61% 1 | 1.14% 2 | 1.21% |
| Avg | 0.85% | -0.62% | -0.96% | -0.76% | 0.04% | -1.45% |
| 1951-3 | -0.43% 1 | 0.34% 2 | 0.09% 3 | -0.56% 4 | -0.04% 5 | -0.60% |
| 1955-3 | -6.62% 1 | 2.28% 2 | 1.68% 3 | -0.63% 4 | -0.82% 5 | -4.12% |
| 1959-3 | 1.72% 4 | -0.09% 5 | 0.74% 1 | 0.63% 2 | -1.10% 3 | 1.91% |
| 1963-3 | 0.47% 2 | -0.56% 3 | -0.85% 4 | -0.19% 5 | -0.60% 1 | -1.73% |
| 1967-3 | 0.61% 1 | -0.85% 2 | 0.03% 3 | 0.00% 4 | -0.08% 5 | -0.29% |
| Avg | -0.85% | 0.22% | 0.34% | -0.15% | -0.53% | -0.97% |
| 1971-3 | -0.23% 5 | -0.54% 1 | 0.27% 2 | 0.02% 3 | 0.45% 4 | -0.04% |
| 1975-3 | 0.94% 3 | -0.12% 4 | 0.64% 5 | -1.35% 1 | -1.36% 2 | -1.24% |
| 1979-3 | -0.78% 1 | 0.06% 2 | 0.26% 3 | 0.23% 4 | -0.81% 5 | -1.04% |
| 1983-3 | 0.33% 1 | -0.96% 2 | -0.25% 3 | -0.46% 4 | -0.69% 5 | -2.04% |
| 1987-3 | -0.46% 4 | 0.14% 5 | 0.95% 1 | -0.47% 2 | 0.04% 3 | 0.21% |
| Avg | -0.04% | -0.28% | 0.37% | -0.41% | -0.47% | -0.83% |
| 1991-3 | 0.46% 2 | -0.21% 3 | -0.10% 4 | -0.15% 5 | 0.51% 1 | 0.50% |
| 1995-3 | 0.01% 1 | -0.07% 2 | -0.06% 3 | 0.83% 4 | -0.25% 5 | 0.46% |
| 1999-3 | -0.27% 5 | 0.46% 1 | -0.09% 2 | -1.08% 3 | 1.13% 4 | 0.16% |
| 2003-3 | -1.91% 3 | -0.61% 4 | -0.64% 5 | 0.98% 1 | -1.05% 2 | -3.23% |
| 2007-3 | -0.53% 1 | -0.03% 2 | 0.54% 3 | 0.39% 4 | -0.30% 5 | 0.07% |
| Avg | -0.44% | -0.09% | -0.07% | 0.19% | 0.01% | -0.41% |
| SPX summary for Presidential Year 3 1931 - 2007 | ||||||
| Averages | -0.12% | -0.19% | -0.08% | -0.28% | -0.24% | -0.91% |
| % Winners | 55% | 25% | 45% | 45% | 40% | 45% |
| MDD 9/30/1931 11.08% -- 9/26/1955 6.62% -- 9/30/2003 3.21% | ||||||
| SPX summary for all years 1928 - 2010 | ||||||
| Averages | -0.20% | -0.10% | 0.11% | -0.24% | 0.00% | -0.42% |
| % Winners | 48% | 46% | 58% | 52% | 46% | 52% |
| MDD 9/30/1931 11.08% -- 9/29/2008 8.79% -- 9/30/1974 8.47% | ||||||
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2's spectacular assent of the past 3 months continues.
Conclusion
The market has been closely following the average seasonal pattern for the 3rd year of the Presidential Cycle with a negative bias. That pattern suggests a final bottom in late October. There were fewer new lows last week than we saw in August, but enough to make a retest likely which fits the seasonal pattern.
I expect the major averages to be lower on Friday September 30 than they were on Friday September 23.
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Thank you,
