The good news is:
• The market is oversold going into a seasonally strong period.
The negatives
New highs declined a bit last week and new lows expanded, not surprising for a down week, but not comforting.
The chart below covers the past 6 months 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) in blue. 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.
At 20% OTC HL Ratio is uncomfortably low.
The chart below 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 is little stronger than OTC_HL_Ratio, but not much.
The positives
The positives are the lack of negatives.
The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.
Last week the OTC was down 4%, but OTC NH fell only slightly.
The next chart is similar to the one above except it shows the SPX in red and NY NH has been calculated from NYSE data.
The SPX was also down nearly 4% last week and NY NH, like OTC NH held up pretty well.
The picture I see is not of a surging market, but not a market on the verge of collapse either.
Seasonality
Next week is the week of Thanksgiving during the 3rd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the week of Thanksgiving 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.
The week of Thanksgiving has been, on average, positive by all measures, but a little weaker during the 3rd year of the Presidential Cycle than other years.
Report for the 3 days before Thanksgiving and 1 day after. Day1 = the day after
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 | Totals | |
| 1963-3 | -1.20% 5 | -1.48% 2 | 0.97% 3 | 0.09% 5 | -1.62% |
| 1967-3 | -1.99% 1 | 1.11% 2 | 1.62% 3 | 1.02% 5 | 1.76% |
| 1971-3 | -1.13% 1 | -1.45% 2 | 0.09% 3 | 1.24% 5 | -1.26% |
| 1975-3 | 0.23% 1 | 0.33% 2 | 0.49% 3 | 0.31% 5 | 1.36% |
| 1979-3 | 0.65% 1 | -0.34% 2 | -0.44% 3 | 0.70% 5 | 0.57% |
| 1983-3 | 0.63% 1 | 0.53% 2 | 0.05% 3 | 0.28% 5 | 1.49% |
| 1987-3 | 0.20% 1 | 1.13% 2 | 0.35% 3 | -0.41% 5 | 1.27% |
| Avg | 0.12% | 0.04% | 0.11% | 0.42% | 0.69% |
| 1991-3 | -0.68% 1 | -0.12% 2 | 0.11% 3 | 0.21% 5 | -0.48% |
| 1995-3 | -1.48% 1 | -0.44% 2 | -0.37% 3 | 0.88% 5 | -1.41% |
| 1999-3 | 0.69% 1 | -1.46% 2 | 2.32% 3 | 0.80% 5 | 2.35% |
| 2003-3 | 2.81% 1 | -0.21% 2 | 0.53% 3 | 0.36% 5 | 3.49% |
| 2007-3 | -1.66% 1 | 0.13% 2 | -1.33% 3 | 1.34% 5 | -1.52% |
| Avg | -0.06% | -0.42% | 0.25% | 0.72% | 0.48% |
| OTC summary for Presidential Year 3 1963 - 2007 | |||||
| Averages | -0.24% | -0.19% | 0.36% | 0.57% | 0.50% |
| %Winners | 50% | 42% | 75% | 92% | 58% |
| MDD 11/21/2007 2.85% -- 11/26/1963 2.67% -- 11/23/1971 2.56% | |||||
| OTC summary for all years 1963 - 2010 | |||||
| Averages | -0.07% | -0.21% | 0.40% | 0.48% | 0.60% |
| % Winners | 48% | 51% | 77% | 81% | 65% |
| SPX Presidential Year 3 | |||||
| Day4 | Day3 | Day2 | Day1 | Totals | |
| 1955-3 | -0.70% 1 | 0.97% 2 | 0.13% 3 | -0.09% 5 | 0.31% |
| 1959-3 | 0.19% 1 | 0.47% 2 | 0.16% 3 | 0.45% 5 | 1.28% |
| 1963-3 | -2.81% 5 | 3.98% 2 | -0.18% 3 | 1.36% 5 | 2.35% |
| 1967-3 | -1.26% 1 | 1.58% 2 | 0.59% 3 | 0.27% 5 | 1.18% |
| 1971-3 | -0.90% 1 | -0.69% 2 | 0.19% 3 | 1.78% 5 | 0.38% |
| 1975-3 | 0.19% 1 | 1.13% 2 | 0.25% 3 | 0.33% 5 | 1.90% |
| 1979-3 | 0.42% 1 | -0.52% 2 | 0.19% 3 | 0.75% 5 | 0.85% |
| 1983-3 | 0.58% 1 | 0.48% 2 | 0.07% 3 | 0.13% 5 | 1.26% |
| 1987-3 | 0.41% 1 | 1.40% 2 | -0.93% 3 | -1.54% 5 | -0.66% |
| Avg | 0.14% | 0.36% | -0.04% | 0.29% | 0.75% |
| 1991-3 | -0.21% 1 | 0.70% 2 | -0.37% 3 | -0.35% 5 | -0.24% |
| 1995-3 | -0.54% 1 | 0.57% 2 | -0.31% 3 | 0.26% 5 | -0.01% |
| 1999-3 | -0.08% 1 | -1.14% 2 | 0.88% 3 | -0.04% 5 | -0.37% |
| 2003-3 | 1.62% 1 | 0.17% 2 | 0.43% 3 | -0.02% 5 | 2.20% |
| 2007-3 | -1.75% 1 | 0.45% 2 | -1.59% 3 | 1.69% 5 | -1.20% |
| Avg | -0.19% | 0.15% | -0.19% | 0.31% | 0.08% |
| SPX summary for Presidential Year 3 1955 - 2007 | |||||
| Averages | -0.34% | 0.68% | -0.03% | 0.36% | 0.66% |
| %Winners | 43% | 79% | 64% | 64% | 64% |
| MDD 11/21/2007 2.88% -- 11/22/1963 2.81% -- 11/27/1987 2.46% | |||||
| SPX summary for all years 1952 - 2010 | |||||
| Averages | -0.12% | 0.10% | 0.40% | 0.37% | 0.75% |
| % Winners | 44% | 59% | 80% | 76% | 68% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth increased a little last week. That has been the recent pattern during down periods in the equity market.
Conclusion
The past 2 weeks have followed the seasonal pattern with a negative bias leaving the market oversold as we enter a seasonally strong period for the next 2 weeks.
I expect the major averages to be higher on Friday November 25 than they were on Friday November 18.
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Thank you,
