The good news is:
• The blue chip indices closed at multi year highs on Friday.
The negatives
The rally of the last 3 months has lifted the major indices between 12% and 21%, but failed to generate a commensurate number of new highs. Short term the market is overbought; the major indices are up 4% - 5% over the past week and a half.
The chart covers the past year 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 hit a multi month high last Friday, but is well below its earlier highs when the OTC was considerably lower.
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.
Usually NYSE breadth indicators are considerably stronger than those calculated from NASDAQ data, but NYSE NH has been deteriorating recently while the SPX has been hitting multi year highs.
The next chart covers the past 5 years showing the SPX in red, the Dollar index in green and a 20 day moving correlation of the two in black. Dashed vertical lines have been drawn on the 1st trading day of each year. Data is from FastTrack (FastTrack.net).
Correlation of these 2 indices used to bounce around between about 35% and 85%. Recently they have become negatively correlated and remained that way. The symptoms of the currency race to the bottom.
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 recovered to 86% Friday. 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 it shows the SPX in red and NY HL Ratio has been calculated from NYSE data.
At 92% NY HL Ratio is very strong.
Seasonality
Next week includes the 5 trading days prior to the 4th 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 4th 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 mixed.
Report for the week before the 4th Friday of March.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1968-4 | 1.08% | -0.05% | -0.36% | 0.46% | -0.40% | 0.73% |
| 1972-4 | -0.37% | -1.41% | 0.50% | 0.81% | 0.13% | -0.34% |
| 1976-4 | 0.17% | 0.75% | 0.63% | -0.29% | 0.24% | 1.50% |
| 1980-4 | -3.02% | -1.55% | -0.23% | -6.15% | 4.16% | -6.79% |
| 1984-4 | -0.68% | 0.43% | -0.10% | -0.68% | -0.32% | -1.34% |
| 1988-4 | -0.79% | 0.31% | 0.09% | -1.18% | -0.81% | -2.38% |
| Avg | -0.94% | -0.29% | 0.18% | -1.50% | 0.68% | -1.87% |
| 1992-4 | -0.39% | -0.51% | 0.13% | -0.66% | -1.74% | -3.17% |
| 1996-4 | 1.35% | -0.17% | -0.96% | -0.18% | 0.22% | 0.25% |
| 2000-4 | -3.92% | 2.21% | 3.25% | 1.56% | 0.45% | 3.55% |
| 2004-4 | -1.58% | -0.42% | 0.40% | 3.02% | -0.36% | 1.06% |
| 2008-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Avg | -1.14% | 0.28% | 0.71% | 0.93% | -0.36% | 0.42% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | -0.82% | -0.04% | 0.34% | -0.33% | 0.16% | -0.69% |
| Win% | 30% | 40% | 60% | 40% | 50% | 50% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | 0.03% | -0.21% | 0.16% | 0.24% | 0.01% | 0.23% |
| Win% | 52% | 43% | 52% | 60% | 50% | 60% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.93% | 0.58% | -1.31% | 1.02% | 0.23% | 1.44% |
| 1960-4 | 0.11% | 0.40% | 0.81% | 0.43% | 0.00% | 1.75% |
| 1964-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1968-4 | 0.55% | -0.67% | -0.01% | -0.73% | 0.10% | -0.76% |
| 1972-4 | -0.31% | -0.84% | 0.14% | 0.85% | -0.21% | -0.36% |
| 1976-4 | 0.13% | 1.52% | 1.15% | -0.55% | 0.00% | 2.25% |
| 1980-4 | -2.96% | -0.09% | -0.51% | -0.47% | 2.50% | -1.53% |
| 1984-4 | -0.94% | 0.68% | -0.13% | -1.24% | 0.11% | -1.51% |
| 1988-4 | -0.88% | 0.04% | 0.03% | -2.07% | -1.84% | -4.72% |
| Avg | -0.99% | 0.26% | 0.14% | -0.69% | 0.14% | -1.17% |
| 1992-4 | -0.34% | -0.25% | -0.33% | 0.08% | -1.07% | -1.91% |
| 1996-4 | 1.75% | -0.15% | -0.26% | -0.12% | 0.22% | 1.44% |
| 2000-4 | -0.54% | 2.56% | 0.45% | 1.79% | 0.01% | 4.26% |
| 2004-4 | -1.30% | -0.13% | -0.24% | 1.64% | -0.10% | -0.13% |
| 2008-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Avg | -0.11% | 0.51% | -0.10% | 0.85% | -0.24% | 0.92% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.32% | 0.30% | -0.02% | 0.05% | -0.01% | 0.02% |
| Win% | 42% | 50% | 42% | 50% | 60% | 42% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | 0.09% | -0.12% | 0.10% | 0.02% | -0.11% | -0.02% |
| Win% | 43% | 47% | 45% | 43% | 51% | 41% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has leveled off at its elevated trend.
Conclusion
The market is overbought and leadership is narrowing, but there has been no increase in the number of 52 week new lows. Seasonality is not a factor for the coming week.
I expect the major averages to be lower on Friday March 23 than they were on Friday March 16.
Last weeks negative forecast was a miss.
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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 4 /T 4
