The good news is:
• All of the major indices closed at multi month highs on Friday.
The negatives
The market is overbought.
The chart below covers the period from the end of last year showing the major indices on log scales for a relative comparison. The second line of the legend shows the Maximum Drawdown (MDD), the date it occurred and the annualized rate of return (CAR). Dashed vertical lines have been drawn on the 1st trading day of each week.
Since the beginning of the year the Russell 2000 (R2K) has been rising at an annualized rate of 253% while the Dow Jones Industrial Average (DJIA), the laggard, has bee rising at an annualized rate of 76%. These rates are unsustainable. It is a positive that the secondaries are leading the way upward.
The positives
We are seeing multi month index highs, expanding new highs, secondaries leading the blue chips and increasing volume. These are characteristics bull markets are made of.
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 red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level.
The value of OTC HL Ratio is 91%. There are trading systems that impose a NO SELL filter when variations of this indicator are above 80%.
The chart below is similar to the one above except is shows the S&P 500 (SPX) in red and NY HL Ratio has been calculated from NYSE data.
At 96% this indicator is very strong.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of February during the 4th year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of February during the 4th 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 4th 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.
In the coming week the OTC has been modestly positive while the SPX has been up a little more than 50% of the time with negative average returns.
Report for the week before the 2nd Friday of February.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.08% | 0.05% | 0.16% | 0.24% | -0.16% | 0.38% |
| 1968-4 | -0.20% | -0.26% | 0.10% | 0.21% | -1.40% | -1.55% |
| 1972-4 | -0.08% | 0.17% | 0.67% | 0.45% | 0.12% | 1.33% |
| 1976-4 | 0.66% | 0.14% | 0.84% | 0.21% | 0.09% | 1.95% |
| 1980-4 | -0.17% | 0.11% | 0.49% | 0.48% | 0.90% | 1.81% |
| 1984-4 | -2.03% | -0.32% | -1.49% | -0.89% | 0.93% | -3.81% |
| 1988-4 | -0.36% | 0.13% | 1.26% | 0.49% | 0.64% | 2.16% |
| Avg | -0.40% | 0.05% | 0.35% | 0.15% | 0.54% | 0.69% |
| 1992-4 | -0.13% | -0.12% | 1.82% | -0.90% | -0.42% | 0.25% |
| 1996-4 | 1.04% | 0.54% | -0.39% | 0.77% | 0.13% | 2.09% |
| 2000-4 | 1.83% | 2.45% | -1.46% | 2.81% | -2.01% | 3.62% |
| 2004-4 | -0.17% | 0.72% | 0.69% | -0.77% | -0.97% | -0.49% |
| 2008-4 | -1.26% | -3.08% | -1.33% | 0.63% | 0.52% | -4.53% |
| Avg | 0.26% | 0.10% | -0.13% | 0.51% | -0.55% | 0.19% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | -0.07% | 0.04% | 0.11% | 0.31% | -0.14% | 0.27% |
| Win% | 33% | 67% | 67% | 75% | 58% | 67% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | -0.08% | -0.09% | 0.07% | 0.26% | -0.05% | 0.11% |
| Win% | 40% | 53% | 55% | 69% | 56% | 57% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.07% | -0.47% | -0.99% | -1.13% | -0.05% | -2.57% |
| 1960-4 | -1.18% | 0.94% | -0.63% | -0.56% | 0.51% | -0.92% |
| 1964-4 | -0.17% | 0.36% | 0.31% | -0.06% | -0.05% | 0.39% |
| 0.43% | 0.03% | 0.17% | -1.26% | -1.14% | -2.63% | |
| 1972-4 | -0.31% | 0.19% | 0.77% | 0.04% | -0.48% | 0.21% |
| 1976-4 | 0.16% | 0.85% | 0.30% | -0.52% | -0.58% | 0.22% |
| 1980-4 | -0.65% | 0.25% | 0.92% | 0.48% | 1.44% | 2.45% |
| 1984-4 | -1.76% | 0.42% | -1.82% | -0.28% | 0.57% | -2.87% |
| 1988-4 | -0.74% | 1.05% | 1.96% | -0.28% | 0.66% | 2.65% |
| Avg | -0.66% | 0.55% | 0.43% | -0.11% | 0.32% | 0.53% |
| 1992-4 | 0.65% | 0.00% | 0.81% | -0.82% | -0.29% | 0.35% |
| 1996-4 | 0.88% | 0.76% | 0.56% | 0.94% | 0.05% | 3.19% |
| 2000-4 | -0.10% | 1.32% | -2.09% | 0.36% | -2.10% | -2.60% |
| 2004-4 | -0.26% | 0.50% | 1.07% | -0.49% | -0.55% | 0.28% |
| 2008-4 | -1.05% | -3.20% | -0.76% | 0.79% | -0.42% | -4.64% |
| Avg | 0.03% | -0.12% | -0.08% | 0.16% | -0.66% | -0.69% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.35% | 0.22% | 0.04% | -0.20% | -0.17% | -0.46% |
| Win% | 29% | 79% | 64% | 36% | 36% | 57% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | -0.23% | -0.14% | 0.12% | 0.01% | 0.01% | -0.21% |
| Win% | 39% | 47% | 59% | 43% | 50% | 56% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth continued at its elevated trend.
Conclusion
So far this year the market has been rising at an unsustainable pace, but, there have been no signs of weakness.
I expect the major averages to be higher on Friday February 10 than they were on Friday February 3.
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Good Luck,
YTD W 3 /L 1 /T 1
