The good news is:
• The NASDAQ composite (OTC) and S&P 500 (SPX) closed at multi year highs Thursday.
The negatives
The secondaries and new highs have been deteriorating, by every breadth measure (except the NYSE ADL), the market has been weakening.
The chart below shows the major indices from the end of January through last Friday plotted on log scales to show their relative performance. Dashed vertical lines have been drawn on the 1st trading day of each week.
The legend shows the date range and 2 lines for each symbol. The first line beginning with the symbol shows percentage change of the index over the period shown, followed by the lowest low from the starting point and the highest high from the starting point. The second line begins with the Maximum Draw Down (MDD), the date it occurred and the annualized return over the period shown (CAR).
The OTC is up 5.77% for the period while the Russell 2000 (R2K) was up 4.83%, but is now up only 1.21%. The secondaries are leading the way downward.
The chart below covers the past year showing the R2K in red and a 10% trend (19 day EMA) of new lows (NL) of the component issues of the R2K in blue. NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good). New lows, for this chart, were calculated over the previous 15 trading days rather than 52 weeks as reported by the exchanges. Dashed vertical lines have been drawn on the 1st trading day of each month.
NL has been deteriorating since early February and this period of weakness will not be over until its decline is arrested.
The next chart is similar to the one above except it shows the NASDAQ 100 (NDX) in red and NL has been calculated from the component issues of the NDX.
The NDX has been the stellar performer of the past 2 months, but short term new lows have been accumulating during the past month among the components of this index.
The positives
There has been no significant build up of 52 week new lows. Unless and until there is a build up of 52 week new lows there will be little price deterioration.
The chart below covers the past 6 months showing the 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 has fallen to 78%, still very strong, but below the 80% level where many trading systems impose a NO SELL filter.
The chart below is similar to the one above except it shows the SPX in red and NY HL Ratio has been calculated from NYSE data.
This indicator has fallen to 92%, but still very strong.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of March 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 March during the 4th year of the Presidential Cycle.
OTC data covers the period from 1963 - 2011 and SPX data covers the period from 1953 - 2011. 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.
Returns for the coming week have been modestly positive over all years, but modestly negative during the 4th year of the Presidential Cycle. The SPX has not been up for this week since 1992.
Report for the week before the 2nd Friday of March.
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 | 0.61% | -0.05% | 0.32% | -0.24% | 0.24% | 0.88% |
| 1968-4 | -0.63% | 0.59% | -3.92% | 1.27% | -0.15% | -2.84% |
| 1972-4 | 0.54% | -0.04% | 0.45% | 0.35% | -0.23% | 1.07% |
| 1976-4 | 0.56% | 0.01% | 0.24% | 1.12% | -0.24% | 1.69% |
| 1980-4 | -1.67% | 0.56% | 0.05% | 0.24% | -0.37% | -1.19% |
| 1984-4 | -0.66% | -0.64% | -1.22% | 0.20% | -0.26% | -2.58% |
| 1988-4 | 0.32% | 0.64% | 0.89% | -0.93% | -0.34% | 0.58% |
| Avg | -0.18% | 0.11% | 0.08% | 0.20% | -0.29% | -0.09% |
| 1992-4 | -0.02% | 1.24% | -1.01% | -0.20% | 0.44% | 0.45% |
| 1996-4 | -0.11% | 1.10% | -0.46% | 0.12% | -2.69% | -2.04% |
| 2000-4 | -0.20% | -1.16% | 1.02% | 3.06% | 0.03% | 2.74% |
| 2004-4 | -1.90% | -0.68% | -1.55% | -1.03% | 2.10% | -3.06% |
| 2008-4 | -1.95% | 3.98% | -0.53% | 0.88% | -2.26% | 0.13% |
| Avg | -0.84% | 0.90% | -0.51% | 0.57% | -0.47% | -0.36% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | -0.43% | 0.46% | -0.48% | 0.40% | -0.31% | -0.35% |
| Win% | 33% | 58% | 50% | 67% | 33% | 58% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | -0.05% | 0.43% | 0.01% | 0.32% | -0.09% | 0.61% |
| Win% | 47% | 60% | 61% | 65% | 51% | 69% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.55% | -0.04% | -0.07% | 0.24% | 1.26% | 1.93% |
| 1960-4 | -1.01% | -1.02% | 1.07% | -0.39% | 0.76% | -0.59% |
| 1964-4 | 0.03% | 0.33% | 0.46% | 0.16% | 0.08% | 1.06% |
| 1968-4 | -1.34% | -0.23% | 1.76% | -0.18% | -0.08% | -0.07% |
| 1972-4 | 0.77% | 0.09% | 0.08% | -0.02% | -0.52% | 0.40% |
| 1976-4 | 1.09% | 0.39% | 0.36% | 0.94% | -1.01% | 1.77% |
| 1980-4 | -0.36% | 1.19% | -0.84% | -1.17% | -0.18% | -1.37% |
| 1984-4 | -0.85% | -1.04% | -1.08% | 0.40% | -0.54% | -3.10% |
| 1988-4 | 0.03% | 0.77% | -0.14% | -1.94% | 0.42% | -0.86% |
| Avg | 0.14% | 0.28% | -0.32% | -0.36% | -0.37% | -0.63% |
| 1992-4 | 0.19% | 0.41% | -0.70% | -0.03% | 0.48% | 0.35% |
| 1996-4 | 1.00% | 0.77% | -0.58% | 0.25% | -3.08% | -1.64% |
| 2000-4 | -1.27% | -2.57% | 0.82% | 2.56% | -0.47% | -0.93% |
| 2004-4 | -0.84% | -0.58% | -1.46% | -1.52% | 1.25% | -3.15% |
| 2008-4 | -1.55% | 3.71% | -0.90% | 0.51% | -2.08% | -0.30% |
| Avg | -0.49% | 0.35% | -0.56% | 0.35% | -0.78% | -1.13% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.25% | 0.16% | -0.09% | -0.01% | -0.27% | -0.46% |
| Win% | 50% | 57% | 43% | 50% | 43% | 36% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | -0.05% | 0.27% | 0.05% | 0.17% | -0.06% | 0.38% |
| Win% | 52% | 58% | 54% | 60% | 45% | 59% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth turned has leveled off at its elevated trend.
A great indicator gone bad
The first market indicators were price averages published by Charles Dow beginning around 1885. In his book "Market Breadth Indicators" Gregory Morris credits Colonel Leonard P. Ayres with developing the concept of breadth indicators in 1926 in "Making the count of the market". Later in his book Morris says "If there is one breadth indicator that has been analyzed, modified, adjusted, and discussed more than any other, the Advance Decline Line is probably the winner." A little later Morris reveals "The Advance Decline Line has an inherent downward bias, especially compared to price indices." That inherent downward bias has disappeared.
The chart below covers the past 50 years showing the SPX in red and the NYSE ADL in blue. Dashed vertical lines have been drawn on the 1st trading day of each year.
As of 2000 the ADL was lower than it had been in late 1961. Early in the 1st decade of this century the bias changed from modestly down to sharply up.
The next chart is similar to the one above except it only covers the past 15 years. You can see how, as prices declined from 2000 to 2002 the ADL actually rose. This shift coincided with the Fed's extraordinarily aggressive stance on interest rates. Fixed income issues increase in value daily until they pay their monthly or quarterly dividend when their value drops by the amount of the dividend. This characteristic gives an AD line constructed from fixed income issues a sharp upward bias. Justin Mamis identified this as an impending problem in 1993.
The NYSE AD line hit a new all time high last Thursday.
Conclusion
The secondaries and most of the breadth indicators have been falling for nearly a month. So far there has been only a minimal increase in the number of 52 week new lows. If new lows remain insignificant, we should have a period of consolidation without much price damage. If new lows begin to accumulate, price damage could be significant.
I expect the major averages to be lower on Friday March 9 than they were on Friday March 2.
Last week the SPX was up a little and everything else was down a little so I am calling last weeks positive forecast a tie.
This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.
In his latest newsletter Jerry Minton looks at how the stock market's performance is January foretells the rest of the year. To read about it and sign up for his free newsletter go to www.alphaim.net.
Good Luck,
YTD W 3 /L 3 /T 3
