The good news is:
• The market is oversold going into a seasonally strong week.
The negatives
As expected, new highs declined sharply last week. We will not see a sustainable rally until new highs begin to accumulate.
The chart below covers the past 6 months showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.
NY NH has fallen to the level it was at last December.
The chart below is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC NH has been calculated from NASDAQ data.
OTC NH also fell sharply last week to 74 so it will require more than 74 NASDAQ new highs to turn this indicator upward.
The positives
Last week I mentioned hard numbers of new lows that indicate elevated risk. Those numbers were breached on Monday and Tuesday. It is important that we do not see more than 40 new lows on the NYSE or 70 on the NASDAQ in the next few days.
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 dropped below the neutral level last week, but recovered on Friday. It is important that the value remains on the positive side of neutral.
The chart below is similar to the one above except it shows the SPX in red and NY HL Ratio, in black, has been calculated from NYSE data.
These charts are nearly identical.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday in April 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 in April 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.
Last weeks decline was consistent with the seasonal pattern. This week the seasonal pattern is quite positive by all measures.
Report for the week before the 3rd Friday of April
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 | 0.00% | 0.23% | 0.26% | 0.31% | 0.39% | 1.19% |
| 1968-4 | 0.13% | -0.17% | 0.25% | 0.95% | 1.87% | 3.05% |
| 1972-4 | -0.10% | 0.27% | -1.06% | 0.14% | 0.11% | -0.65% |
| 1976-4 | 0.47% | 1.14% | 0.18% | 0.21% | -0.40% | 1.60% |
| 1980-4 | -1.17% | 1.98% | 0.89% | 1.29% | -0.56% | 2.43% |
| 1984-4 | -0.64% | 0.05% | -0.07% | 0.83% | 0.39% | 0.57% |
| 1988-4 | 0.32% | 0.47% | -0.70% | -0.28% | 0.23% | 0.04% |
| Avg | -0.23% | 0.78% | -0.15% | 0.44% | -0.04% | 0.80% |
| 1992-4 | -2.47% | -0.37% | 0.55% | -0.38% | -0.55% | -3.21% |
| 1996-4 | 1.30% | 1.15% | 0.86% | 0.63% | 0.23% | 4.17% |
| 2000-4 | -4.43% | 6.57% | -2.19% | 3.96% | 2.30% | 6.21% |
| 2004-4 | 1.24% | -2.07% | 0.86% | 1.87% | 0.83% | 2.72% |
| 2008-4 | -0.63% | 0.45% | 2.80% | -0.35% | 2.61% | 4.88% |
| Avg | -1.00% | 1.15% | 0.58% | 1.15% | 1.08% | 2.95% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | -0.54% | 0.81% | 0.22% | 0.77% | 0.62% | 1.92% |
| Win% | 45% | 75% | 67% | 75% | 75% | 83% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | -0.39% | 0.28% | 0.27% | 0.27% | 0.15% | 0.58% |
| Win% | 46% | 56% | 71% | 63% | 63% | 69% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.02% | -0.06% | -0.40% | -0.36% | 0.40% | -0.39% |
| 1960-4 | 0.28% | -0.81% | -1.23% | 0.27% | -0.31% | -1.79% |
| 1964-4 | -0.10% | 0.28% | 0.13% | 0.14% | 0.44% | 0.87% |
| 1968-4 | -0.55% | 1.22% | 0.15% | 0.31% | 0.30% | 1.42% |
| 1972-4 | -0.30% | 0.24% | -0.52% | -0.15% | -0.14% | -0.87% |
| 1976-4 | 0.76% | 1.41% | 0.44% | -0.33% | -0.67% | 1.61% |
| 1980-4 | -0.75% | 3.64% | 0.29% | 0.65% | 0.73% | 4.56% |
| 1984-4 | -0.77% | 0.81% | 0.37% | 1.04% | -0.26% | 1.19% |
| 1988-4 | -0.22% | -0.50% | -0.69% | 0.11% | 1.45% | 0.16% |
| Avg | -0.25% | 1.12% | -0.02% | 0.26% | 0.22% | 1.33% |
| 1992-4 | -1.42% | 0.02% | -0.11% | 0.44% | -0.63% | -1.69% |
| 1996-4 | 0.44% | 0.57% | -0.22% | 0.42% | 0.09% | 1.30% |
| 2000-4 | -0.32% | 3.30% | -1.09% | 0.27% | -0.85% | 1.30% |
| 2004-4 | 0.11% | -1.56% | 0.53% | 1.41% | 0.06% | 0.55% |
| 2008-4 | -0.34% | 0.46% | 2.27% | 0.06% | 1.81% | 4.27% |
| Avg | -0.31% | 0.56% | 0.28% | 0.52% | 0.10% | 1.15% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.22% | 0.64% | -0.01% | 0.31% | 0.17% | 0.89% |
| Win% | 36% | 71% | 50% | 79% | 57% | 71% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | -0.12% | 0.28% | 0.08% | 0.12% | -0.04% | 0.31% |
| Win% | 47% | 53% | 59% | 63% | 49% | 66% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth continued to increase last week while the 50 day ROC continued to fall.
Conclusion
The market is oversold and seasonally next week has been strong.
I expect the major averages to be higher on Friday April 20 than they were on Friday April 13.
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Good Luck,
YTD W 4 /L6 /T 5
