The good news is:
• Most of the major indices closed within 1% of their multi year highs on Friday.
Last week, after tumbling Monday and Tuesday, the market rallied for 3 consecutive days taking most of the major indices to within 1% of their previous highs. The breadth indicators followed the indices upward, but, in most cases, finished well short of their previous highs. The question to be answered is: are we seeing a developing top, was last Tuesday's low a bottom or is this volatility just a consolidation of the gains from the lows of last December.
The negatives
New highs have been deteriorating since early February.
The chart covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each week.
OTC NH turned up last week which is good, but it is lagging the index by a clear margin which is bad.
The chart below is similar to the one above except it shows the S&P 500 (SPX) in red and NY NH has been calculated from NYSE data.
The pattern of NY NH is similar to OTC NH above.
The next chart shows the OTC in blue and an Advance - Decline Line (OTC ADL) calculated from NASDAQ data in green. The OTC ADL usually shows a significant negative bias and has been deteriorating since early February, but, the recovery at the end of last week was remarkable.
The positives
There still 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.
OTC HL Ratio fell sharply early last week, but recovered nicely at the end of the week before dropping below the neutral level.
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.
The pattern of NY HL Ratio is similar to OTC HL Ratio, but a little stronger.
Seasonality
Next week includes the 5 trading days prior to the 3rd 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 3rd 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, by all measures, have been modestly negative for the OTC and modestly positive for the SPX.
Report for the week before the 3rd Friday of March.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.05% | -0.03% | 0.08% | -0.40% | -0.24% | -0.53% |
| 1968-4 | -0.06% | 0.92% | 0.47% | 0.18% | -2.16% | -0.65% |
| 1972-4 | -0.94% | 0.31% | 0.32% | -0.29% | 0.19% | -0.41% |
| 1976-4 | -1.40% | 0.16% | 0.28% | -0.62% | -0.01% | -1.59% |
| 1980-4 | -3.28% | -0.56% | 0.76% | -0.24% | -0.60% | -3.92% |
| 1984-4 | 0.29% | 0.37% | -0.17% | 0.32% | 0.92% | 1.74% |
| 1988-4 | 0.32% | -0.03% | 0.52% | 0.57% | 0.23% | 1.62% |
| Avg | -1.00% | 0.05% | 0.34% | -0.05% | 0.15% | -0.51% |
| 1992-4 | -0.11% | 0.86% | 0.27% | 0.16% | -0.27% | 0.92% |
| 1996-4 | 1.58% | -0.68% | 1.44% | 0.23% | 0.78% | 3.35% |
| 2000-4 | -2.80% | -4.09% | -2.63% | 2.94% | 1.71% | -4.87% |
| 2004-4 | -2.29% | 0.20% | 1.73% | -0.72% | -1.12% | -2.20% |
| 2008-4 | 3.04% | 0.61% | -0.71% | -1.87% | -0.86% | 0.21% |
| Avg | -0.12% | -0.62% | 0.02% | 0.15% | 0.05% | -0.52% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | -0.47% | -0.16% | 0.20% | 0.02% | -0.12% | -0.53% |
| Win% | 42% | 58% | 75% | 50% | 42% | 42% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | -0.19% | 0.04% | 0.00% | 0.16% | -0.10% | -0.09% |
| Win% | 49% | 55% | 63% | 71% | 51% | 55% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.92% | -0.15% | 1.00% | 0.97% | 0.31% | 3.05% |
| 1960-4 | 0.15% | 0.77% | 0.55% | -0.15% | 0.09% | 1.41% |
| 1964-4 | 0.00% | 0.23% | 0.08% | -0.10% | -0.48% | -0.28% |
| 1968-4 | 1.24% | 0.11% | -0.22% | -1.90% | 0.88% | 0.11% |
| 1972-4 | -0.96% | 0.26% | 0.13% | -0.23% | 0.39% | -0.41% |
| 1976-4 | -1.05% | 1.12% | -0.06% | -0.41% | 0.13% | -0.27% |
| 1980-4 | -3.01% | 1.80% | 0.20% | -1.14% | -0.79% | -2.93% |
| 1984-4 | 1.29% | 0.28% | -0.01% | 0.41% | 1.18% | 3.15% |
| 1988-4 | 0.54% | -0.09% | 0.95% | 0.96% | -0.04% | 2.32% |
| Avg | -0.64% | 0.67% | 0.24% | -0.08% | 0.18% | 0.37% |
| 1992-4 | 0.14% | 0.78% | -0.10% | 0.16% | 0.37% | 1.34% |
| 1996-4 | 1.03% | -0.46% | 0.23% | 0.36% | 0.09% | 1.25% |
| 2000-4 | -0.82% | -1.76% | 2.42% | 4.77% | 0.41% | 5.01% |
| 2004-4 | -1.43% | 0.56% | 1.17% | -0.13% | -1.12% | -0.94% |
| 2008-4 | 1.29% | 0.23% | -0.88% | -1.15% | -0.80% | -1.30% |
| Avg | 0.04% | -0.13% | 0.57% | 0.80% | -0.21% | 1.07% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.05% | 0.26% | 0.39% | 0.17% | 0.05% | 0.82% |
| Win% | 62% | 71% | 64% | 43% | 64% | 57% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | 0.01% | 0.19% | 0.13% | 0.20% | 0.00% | 0.52% |
| Win% | 62% | 58% | 59% | 58% | 58% | 61% |
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
Last week I lamented the demise of the NYSE advance decline line as one of the premier breadth indicators.
Those lamentations prompted some interesting responses.
The first from Greg Morris author of "Market Breadth Indicators" which I quoted:
Mike,
I have looked at this a lot as I get numerous emails along the lines of your piece today. (AD Line)
I think the decimalization of pricing has caused the bulk of this change, while it was probably evident 7 years ago when I wrote the book, it is clearly evident now. I can't remember exactly but we went from eights to sixteenths then to 1 cent from about 1997 to 2001-2. This has clearly affected all breadth measurements, but probably none more than the AD Line.
Keep up the good work.
Ratio adjusted breadth still does a great job of showing topping (distribution) action.
Greg Morris
Chairman, Investment Committee
Chief Technical Analyst
Stadion Money Management
The second from Bob Carver at http://marketclues.blogspot.com/:
Mike,
The advance-decline line of NYSE Composite stocks has rolled over already:
Note that the NYSE Composite Index does not contain anything but real operating company stocks (about 1865 stocks).
And the R2K is even worse:
Conclusion
The rally at the end of last week was led by the secondaries which is good and leaves the market a little overbought which is bad. The breadth indicators rallied nicely along with prices, which is good, but are well below their early February levels, which is bad. Most importantly, Tuesday's decline failed to generate many new lows. So far, the weakness we are seeing looks like a consolidation of the run up from the mid December low. Seasonal weakness continues to the end of this month.
I expect the major averages to be lower on Friday March 16 than they were on Friday March 9.
Last week the DJIA was down a little and everything else was up so I am calling last weeks negative forecast a tie.
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Good Luck,
YTD W 3 /L 3 /T 4
