The good news is:
• Since the beginning of this month new lows have disappeared.
The negatives
The S&P 500 (SPX) closed Friday up 12.6% since its low at the beginning of the month. Typically a rally of this magnitude would be accompanied by a sharp increase in new highs. So far new highs have been missing.
The chart below covers the past 6 months showing the 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 turned up a little last week, but not much considering the magnitude of the rally.
The positives
Monday and Wednesday were rough days for the indices, but failed to generate many new lows. Wednesday was a down day for the indices that generated fewer new lows than Tuesday on both the NASDAQ and NYSE.
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 98 so it would require more than 98 new lows to turn the NY NL downward. Last Friday there were 9 new lows.
The next chart is similar to the one above except is shows the NASDAQ composite (OTC) in blue and OTC NL, in red, has been calculated from NASDAQ data.
The value, last Friday, of OTC NL was 100 so it will require more than 100 new lows to turn OTC NL downward. There were 26 new lows on the NASDAQ on Friday.
The next chart is similar to the first chart (in the negative group) except it shows the OTC in blue and OTC NH, in green, has been calculated from NASDAQ data.
OTC NH has also been relatively dormant considering the magnitude of the rally. However, last week, OTC NH rose steadily while the index declined.
Seasonality
Next week includes the 5 trading days prior to the 4th 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 4th 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.
Next Monday is the anniversary of the 1987 crash so the numbers are negatively skewed. However, even without the crash, the week by all measures, has had negative average returns.
Report for the week before the 4th Friday of October.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | 0.49% | -0.06% | -0.14% | 0.37% | 0.60% | 1.25% |
| 1967-3 | -0.22% | -0.38% | -0.40% | -0.62% | 0.62% | -0.99% |
| 1971-3 | -0.49% | -0.98% | -1.31% | 0.03% | 0.18% | -2.57% |
| 1975-3 | 0.64% | 0.38% | 0.61% | 0.19% | -0.56% | 1.27% |
| 1979-3 | -2.51% | -0.41% | 0.31% | -0.22% | 0.77% | -2.06% |
| 1983-3 | -0.96% | 0.65% | -0.27% | -0.13% | -0.49% | -1.20% |
| 1987-3 | -11.35% | -9.00% | 7.34% | -4.47% | -2.28% | -19.76% |
| Avg | -2.93% | -1.87% | 1.34% | -0.92% | -0.48% | -4.86% |
| 1991-3 | -0.36% | 0.03% | -0.37% | -1.20% | -0.68% | -2.58% |
| 1995-3 | -0.25% | 0.22% | -1.22% | -0.87% | 0.79% | -1.33% |
| 1999-3 | -1.56% | -0.03% | 3.72% | 0.49% | 0.52% | 3.14% |
| 2003-3 | 0.67% | 0.82% | -2.21% | -0.66% | -1.06% | -2.44% |
| 2007-3 | 1.06% | 1.65% | -0.88% | -0.86% | 1.94% | 2.90% |
| Avg | -0.09% | 0.54% | -0.19% | -0.62% | 0.30% | -0.06% |
| OTC summary for Presidential Year 3 1963 - 2007 | ||||||
| Avg | -1.24% | -0.59% | 0.43% | -0.66% | 0.03% | -2.03% |
| Win% | 33% | 50% | 33% | 33% | 58% | 33% |
| OTC summary for all years 1963 - 2010 | ||||||
| Avg | 0.00% | -0.48% | 0.15% | -0.15% | -0.13% | -0.61% |
| Win% | 48% | 38% | 57% | 48% | 52% | 48% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 0.75% | -0.65% | -0.80% | -0.35% | 0.55% | -0.51% |
| 1959-3 | -0.56% | -0.61% | -0.19% | -0.97% | 1.00% | -1.34% |
| 1963-3 | 0.08% | -0.57% | 0.05% | 0.38% | 1.00% | 0.94% |
| 1967-3 | -0.44% | -0.57% | 0.11% | 0.44% | 0.02% | -0.44% |
| 1971-3 | -0.45% | -0.36% | -1.39% | -0.05% | -0.09% | -2.35% |
| 1975-3 | 1.08% | 0.82% | 0.17% | 0.58% | -1.55% | 1.11% |
| 1979-3 | -0.88% | -0.43% | 0.16% | -0.44% | 0.57% | -1.01% |
| 1983-3 | 0.02% | 0.29% | -0.65% | -0.33% | -0.89% | -1.56% |
| 1987-3 | -20.47% | 5.33% | 9.10% | -3.92% | -0.01% | -9.97% |
| Avg | -4.14% | 1.13% | 1.48% | -0.83% | -0.39% | -2.76% |
| 1991-3 | -0.63% | -0.56% | 0.03% | -0.74% | -0.23% | -2.13% |
| 1995-3 | -0.41% | 0.26% | -0.70% | -0.99% | 0.52% | -1.32% |
| 1999-3 | 0.55% | 0.57% | 2.24% | -0.46% | 1.41% | 4.30% |
| 2003-3 | 0.52% | 0.13% | -1.50% | 0.33% | -0.47% | -0.99% |
| 2007-3 | 0.38% | 0.88% | -0.24% | -0.10% | 1.38% | 2.30% |
| Avg | 0.08% | 0.25% | -0.04% | -0.39% | 0.52% | 0.43% |
| SPX summary for Presidential Year 3 1955 - 2007 | ||||||
| Avg | -1.46% | 0.32% | 0.46% | -0.47% | 0.23% | -0.93% |
| Win% | 50% | 50% | 50% | 29% | 57% | 29% |
| SPX summary for all years 1953 - 2010 | ||||||
| Avg | -0.17% | -0.09% | 0.20% | -0.25% | -0.06% | -0.38% |
| Win% | 55% | 44% | 60% | 36% | 46% | 45% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has leveled off a bit, is well above its trend.
Conclusion
The bottom for this cycle appears to have occurred at the beginning of the month. Last week the secondaries were weaker than the blue chips and seasonally next week has been, on average, very weak so a pull back is likely next week.
I expect the major averages to be lower on Friday October 29 than they were on Friday October 21.
Last week the blue chips were up and the secondaries were down so I am calling last weeks negative forecast a tie.
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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,
