The good news is:
• Most of the major indices were down for 4 consecutive days last week and, during that time, there was no build up of new lows.
The negatives
Typically new highs expand as the major indices rise. Failure of new highs to rise with increasing prices often an indicator of a developing top.
The chart below 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 month.
OTC NH has failed to confirm this months rally.
The next chart is similar to the one above except it covers the past 2 years.
A pattern of declining new highs is visible both long and short term.
The next chart is similar to the first one except it shows the S&P 500 (SPX) in red and NY NH has been calculated from NYSE data.
NY NH has been much stronger than OTC NH, but it has taken a sharp dive this month.
The next chart is similar to the one above except it covers the past 2 years.
The longer term patterns of NY NH have been similar to OTC NH.
The positives
It is the counter trend days that offer insight into the strength of a move. We had 4 of them last week and the rally looks intact.
The chart below covers the past 6 months showing the SPX in red and a 40% trend (4 day EMA) of NYSE new highs divided by new highs + new lows (NY HL Ratio) in black. Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral 50% level.
NY HL Ratio fell a little last week, but closed at a very strong 85%.
The next chart is similar to the one above except it shows the OTC in blue and OTC HL Ratio, in red, has been calculated from NASDAQ data.
OTC HL Ratio also fell last week, but held above neutral.
Seasonality
Next week includes the last 5 trading days of August during the 4th year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the last 5 trading days of August during the 4th year of the Presidential Cycle.
OTC data covers the period from 1963 - 2011 and SPX data covers the period from 1928 - 2011. There are summaries for both the 4th year of the Presidential Cycle and all years combined.
Average returns for the coming week have been modestly positive by most measures and a little stronger during the 4th year of the Presidential Cycle than other years.
Report for last 5 days of August.
The number following the year represents its position in the Presidential Cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
| OTC Presidential Year 4 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1964-4 | -0.05% 2 | -0.51% 3 | 0.12% 4 | 0.46% 5 | 0.00% 1 | 0.03% |
| 1968-4 | 0.06% 5 | 0.50% 1 | 0.22% 2 | -0.58% 4 | 0.28% 5 | 0.48% |
| 1972-4 | -0.07% 5 | -0.41% 1 | -0.25% 2 | 0.26% 3 | 0.13% 4 | -0.34% |
| 1976-4 | 0.47% 3 | -0.39% 4 | -0.07% 5 | 0.16% 1 | 0.47% 2 | 0.64% |
| 1980-4 | -0.07% 1 | 0.45% 2 | -0.13% 3 | -0.64% 4 | 0.29% 5 | -0.10% |
| 1984-4 | -0.58% 1 | 0.43% 2 | 0.17% 3 | -0.10% 4 | 0.03% 5 | -0.05% |
| 1988-4 | -0.53% 4 | 0.10% 5 | 0.48% 1 | 0.07% 2 | 0.02% 3 | 0.14% |
| Avg | -0.16% | 0.03% | 0.04% | -0.05% | 0.19% | 0.06% |
| 1992-4 | -0.21% 2 | 0.83% 3 | 0.80% 4 | 0.05% 5 | -0.08% 1 | 1.39% |
| 1996-4 | -0.34% 1 | 0.86% 2 | 0.43% 3 | -0.77% 4 | -0.31% 5 | -0.13% |
| 2000-4 | -0.26% 5 | 0.69% 1 | 0.28% 2 | 0.53% 3 | 2.50% 4 | 3.74% |
| 2004-4 | 1.30% 3 | -0.42% 4 | 0.49% 5 | -1.37% 1 | 0.09% 2 | 0.09% |
| 2008-4 | -2.03% 1 | -0.15% 2 | 0.87% 3 | 1.22% 4 | -1.83% 5 | -1.92% |
| Avg | -0.31% | 0.36% | 0.57% | -0.07% | 0.07% | 0.63% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Averages | -0.19% | 0.16% | 0.28% | -0.06% | 0.13% | 0.33% |
| % Winners | 25% | 58% | 75% | 58% | 67% | 58% |
| MDD 8/26/2008 2.18% -- 8/30/2004 1.37% -- 8/30/1996 1.07% | ||||||
| OTC summary for all years 1963 - 2011 | ||||||
| Averages | 0.16% | -0.16% | 0.06% | -0.14% | 0.12% | 0.04% |
| % Winners | 57% | 51% | 61% | 63% | 73% | 59% |
| MDD 8/31/1998 16.63% -- 8/30/2001 6.53% -- 8/30/1966 6.30% | ||||||
| SPX Presidential Year 4 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1928-4 | -0.34% 1 | 0.79% 2 | 0.19% 3 | 0.15% 4 | 1.26% 5 | 2.04% |
| 1932-4 | 1.57% 5 | 2.15% 6 | 0.12% 1 | -1.28% 2 | -0.94% 3 | 1.61% |
| 1936-4 | -0.77% 3 | 2.19% 4 | 0.19% 5 | 0.25% 6 | 0.19% 1 | 2.05% |
| 1940-4 | 0.00% 2 | 1.37% 3 | -0.48% 4 | 1.74% 5 | 0.57% 6 | 3.20% |
| 1944-4 | -0.23% 5 | 0.00% 1 | 0.31% 2 | 0.23% 3 | -0.39% 4 | -0.08% |
| 1948-4 | -0.19% 3 | 0.31% 4 | 0.44% 5 | -0.81% 1 | -0.06% 2 | -0.31% |
| Avg | 0.08% | 1.20% | 0.11% | 0.03% | -0.13% | 1.30% |
| 1952-4 | -0.48% 1 | -0.16% 2 | 0.44% 3 | 0.12% 4 | 0.24% 5 | 0.16% |
| 1956-4 | -0.60% 1 | -0.19% 2 | -0.44% 3 | -0.89% 4 | 1.21% 5 | -0.91% |
| 1960-4 | -0.48% 4 | -0.33% 5 | -0.28% 1 | -1.04% 2 | 0.21% 3 | -1.92% |
| 1964-4 | -0.57% 2 | -0.15% 3 | 0.47% 4 | 0.35% 5 | -0.20% 1 | -0.09% |
| 1968-4 | -0.01% 5 | 0.25% 1 | -0.13% 2 | -0.07% 4 | 0.12% 5 | 0.16% |
| Avg | -0.43% | -0.11% | 0.01% | -0.31% | 0.32% | -0.52% |
| 1972-4 | -0.32% 5 | -0.40% 1 | 0.16% 2 | 0.14% 3 | 0.47% 4 | 0.07% |
| 1976-4 | 0.75% 3 | -0.70% 4 | 0.16% 5 | 0.58% 1 | 0.82% 2 | 1.62% |
| 1980-4 | -0.68% 1 | -0.26% 2 | -1.06% 3 | -1.17% 4 | 0.25% 5 | -2.92% |
| 1984-4 | -0.64% 1 | 0.58% 2 | -0.18% 3 | -0.30% 4 | 0.05% 5 | -0.49% |
| 1988-4 | -0.75% 4 | 0.19% 5 | 1.02% 1 | 0.07% 2 | -0.38% 3 | 0.16% |
| Avg | -0.33% | -0.12% | 0.02% | -0.13% | 0.24% | -0.31% |
| 1992-4 | 0.22% 2 | 0.46% 3 | 0.00% 4 | 0.32% 5 | -0.20% 1 | 0.80% |
| 1996-4 | -0.47% 1 | 0.38% 2 | -0.24% 3 | -1.11% 4 | -0.82% 5 | -2.27% |
| 2000-4 | -0.12% 5 | 0.51% 1 | -0.28% 2 | -0.48% 3 | 1.00% 4 | 0.63% |
| 2004-4 | 0.80% 3 | 0.01% 4 | 0.24% 5 | -0.78% 1 | 0.46% 2 | 0.74% |
| 2008-4 | -1.96% 1 | 0.37% 2 | 0.80% 3 | 1.48% 4 | -1.37% 5 | -0.68% |
| Avg | -0.31% | 0.35% | 0.10% | -0.11% | -0.18% | -0.16% |
| SPX summary for Presidential Year 4 1928 - 2008 | ||||||
| Averages | -0.25% | 0.35% | 0.07% | -0.12% | 0.12% | 0.17% |
| % Winners | 19% | 62% | 62% | 52% | 62% | 57% |
| MDD 8/28/1980 3.13% -- 8/30/1996 2.25% -- 8/31/1932 2.21% | ||||||
| SPX summary for all years 1928 - 2011 | ||||||
| Averages | -0.07% | -0.10% | 0.00% | -0.08% | 0.13% | -0.11% |
| % Winners | 43% | 46% | 61% | 49% | 63% | 57% |
| MDD 8/31/1998 12.39% -- 8/29/1938 6.10% -- 8/29/1966 5.74% | ||||||
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 rose quickly last week.
Conclusion
4 consecutive down days with no build up in new lows suggests the rally is still alive.
I expect the major averages to be higher on Friday August 31 than they were on Friday August 24.
Last weeks positive forecast was a miss.
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Good Luck,
YTD W 9 /L14/T 11
