The good news is:
• In the past 2 weeks the market, depending on the index is up 10% -16%.
The negatives
New highs usually expand quickly when the market rallies and, so far, that has not happened.
The chart below covers the past 6 months showing the S&P500 (SPX) in red and a 10% trend (19 day EMA) NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.
NY NH has continued to hit new lows over the past 2 weeks.
The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC NH has been calculated from NASDAQ data.
OTC NH rose a little in the past week, but, has remained pretty lifeless considering the 14% gain in the index over the past 2 weeks.
The positives
New lows have disappeared since the beginning of the month
The chart below covers the past 6 months showing the SPX in red and a 10% trend 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).
As of Friday's close the value of the indicator is 155 so it would require more than 155 new lows to turn the indicator downward. Last Friday there were 11 new lows, the high for the week.
The next chart is similar to the one above except is shows the OTC in blue and OTC NL, in red, has been calculated from NASDAQ data.
The value, last Friday, of OTC NL was 144 so it will require more than 144 new lows to turn OTC NL downward. Last week new lows on the NASDAQ fell steadily from 70 on Monday to 23 on Friday.
The extreme numbers of new lows at the beginning of this month make a retest likely, but, there is unlikely to be a significantly lower low.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of October 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 3rd Friday of October during the 3rd year of the Presidential Cycle.
OTC data covers the period from 1963 - 2010 and S&P 500 (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 have been modestly positive over all years and negative during the 3rd year of the Presidential Cycle.
Report for the week before the 3rd Friday of October.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | 0.26% | -0.03% | 0.14% | 0.90% | 0.26% | 1.53% |
| 1967-3 | -0.29% | -0.91% | -0.45% | 0.24% | 0.04% | -1.38% |
| 1971-3 | -0.03% | 0.18% | -0.20% | -0.74% | -0.25% | -1.03% |
| 1975-3 | 0.96% | 0.63% | 0.01% | 0.03% | -0.75% | 0.88% |
| 1979-3 | -1.65% | -0.04% | 0.51% | 0.30% | -2.06% | -2.93% |
| 1983-3 | -0.12% | -2.10% | -1.33% | 0.50% | -0.63% | -3.67% |
| 1987-3 | -1.23% | 0.41% | -1.50% | -1.35% | -3.83% | -7.50% |
| Avg | -0.41% | -0.18% | -0.50% | -0.25% | -1.50% | -2.85% |
| 1991-3 | 1.27% | 1.61% | 1.28% | -0.86% | 0.49% | 3.79% |
| 1995-3 | -0.03% | 1.70% | 0.97% | 0.15% | -0.72% | 2.07% |
| 1999-3 | 1.02% | -1.50% | -2.48% | 0.20% | -2.67% | -5.43% |
| 2003-3 | 0.95% | 0.50% | -0.21% | 0.57% | -1.94% | -0.13% |
| 2007-3 | -0.91% | -0.58% | 1.04% | 0.24% | -2.65% | -2.86% |
| Avg | 0.46% | 0.35% | 0.12% | 0.06% | -1.50% | -0.51% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | 0.02% | -0.01% | -0.18% | 0.01% | -1.23% | -1.39% |
| Win% | 42% | 50% | 50% | 75% | 25% | 33% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | 0.43% | -0.07% | -0.23% | 0.50% | -0.17% | 0.45% |
| Win% | 62% | 52% | 49% | 67% | 54% | 54% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 0.32% | 0.73% | 1.01% | 1.24% | 0.00% | 3.29% |
| 1959-3 | 0.56% | -0.28% | -0.79% | 0.28% | 0.81% | 0.59% |
| 1963-3 | 0.04% | 0.14% | 0.79% | 0.40% | 0.08% | 1.45% |
| 1967-3 | -0.78% | -0.26% | 0.26% | 0.19% | -0.05% | -0.64% |
| 1971-3 | -0.20% | 0.41% | -0.54% | -0.91% | -0.35% | -1.59% |
| 1975-3 | 1.42% | -0.20% | -0.06% | 0.16% | -0.57% | 0.75% |
| 1979-3 | -1.08% | -0.16% | 0.19% | 0.21% | -1.94% | -2.78% |
| 1983-3 | 0.34% | -1.54% | -0.64% | 0.15% | -0.62% | -2.31% |
| 1987-3 | -0.54% | 1.66% | -2.95% | -2.34% | -5.16% | -9.34% |
| Avg | -0.01% | 0.03% | -0.80% | -0.55% | -1.73% | -3.05% |
| 1991-3 | 1.32% | 1.17% | 0.46% | -0.22% | 0.15% | 2.87% |
| 1995-3 | -0.25% | 0.64% | 0.11% | 0.55% | -0.54% | 0.51% |
| 1999-3 | -0.06% | -1.66% | -2.09% | -0.17% | -2.81% | -6.79% |
| 2003-3 | 0.70% | 0.40% | -0.26% | 0.32% | -1.02% | 0.13% |
| 2007-3 | -0.84% | -0.66% | 0.18% | -0.08% | -2.56% | -3.96% |
| Avg | 0.17% | -0.02% | -0.32% | 0.08% | -1.36% | -1.45% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | 0.07% | 0.03% | -0.31% | -0.02% | -1.12% | -1.27% |
| Win% | 50% | 50% | 50% | 64% | 23% | 50% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | 0.46% | -0.04% | -0.28% | 0.25% | -0.21% | 0.19% |
| Win% | 65% | 36% | 47% | 59% | 47% | 59% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 resumed its climb last week after falling sharply.
Conclusion
The market is overbought going into a seasonally weak period.
I expect the major averages to be lower on Friday October 21 than they were on Friday October 14.
Last weeks negative forecast was a miss.
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In his latest newsletter, titled "Foot-Shooting", Jerry Minton takes a look the performance persistence of mutual funds. To read about it and to sign up for his free newsletter, go to www.alphaim.net.
Thank you,
