The good news is:
• All of the major, broad based, indices closed at multi year highs on Friday.
The negatives
The first chart shows the average daily return of the NASDAQ composite (OTC) during the 4th year of the Presidential Cycle since 1963. The market has been following the average 4th year of the Presidential Cycle quite closely and, if it continues to follow the average pattern, the next three weeks will be discomforting.
March is the only month that has been out of synch with the 4th year average. March has been, on average, a down month and this year it was very strong. On average the index has hit its high for the year in mid to late September.
The next chart shows the current year to date.
The next two charts are similar to those above except they show the S&P 500 (SPX) with data going back to 1928.
The last 2 charts are similar to those above except they show the Russell 2000 (R2K) with data going back to 1979.
The positives
Breadth has been great and the secondaries have been outperforming the blue chips.
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 finished the week at 97%.
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 closed at a very strong 88% on Friday. There are trading systems that impose a no sell filter when variations of this indicator are above 80%.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of September during the 4th year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the 5 trading days prior to the 3rd Friday of September 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.
Average returns for the coming week have been negative by all measures.
Report for the week before the 4th Friday of September.
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 | 0.28% | 0.52% | 0.33% | 0.21% | 0.56% | 1.90% |
| 1968-4 | 0.03% | 0.14% | 0.00% | -0.09% | -0.08% | 0.00% |
| 1972-4 | -0.05% | -0.15% | 0.07% | -0.16% | 0.13% | -0.16% |
| 1976-4 | 0.31% | 0.58% | 0.02% | -0.18% | 0.04% | 0.76% |
| 1980-4 | 0.31% | -0.45% | 0.07% | -0.58% | -1.69% | -2.34% |
| 1984-4 | -0.74% | -0.31% | 0.09% | 0.02% | -0.14% | -1.09% |
| 1988-4 | -0.12% | 0.17% | 0.21% | -0.01% | 0.03% | 0.28% |
| Avg | -0.06% | -0.03% | 0.09% | -0.18% | -0.33% | -0.51% |
| 1992-4 | -0.09% | -0.95% | -0.01% | 0.51% | -1.49% | -2.03% |
| 1996-4 | -0.67% | 0.31% | 0.77% | 0.27% | 0.17% | 0.86% |
| 2000-4 | -2.83% | 3.73% | 0.82% | -1.76% | -0.66% | -0.69% |
| 2004-4 | -0.11% | 0.69% | -1.85% | 0.04% | -0.37% | -1.60% |
| 2008-4 | -4.17% | -1.18% | 0.11% | 1.43% | -0.15% | -3.96% |
| Avg | -1.58% | 0.52% | -0.03% | 0.10% | -0.50% | -1.48% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | -0.66% | 0.26% | 0.06% | -0.03% | -0.30% | -0.67% |
| Win% | 33% | 58% | 82% | 50% | 42% | 42% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | -0.26% | -0.04% | 0.05% | -0.39% | -0.13% | -0.77% |
| Win% | 40% | 51% | 57% | 36% | 49% | 43% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -0.39% | -1.40% | 0.15% | -0.48% | -0.55% | -2.66% |
| 1960-4 | -2.27% | 0.28% | 1.04% | -0.38% | -0.85% | -2.18% |
| 1964-4 | 0.46% | 0.04% | 0.02% | 0.11% | 0.25% | 0.87% |
| 1968-4 | 0.57% | 0.34% | 0.00% | -0.22% | -0.05% | 0.64% |
| 1972-4 | -0.18% | -0.06% | 0.05% | -0.16% | 0.08% | -0.27% |
| 1976-4 | 0.05% | 1.42% | -0.34% | -0.50% | -0.11% | 0.51% |
| 1980-4 | 0.89% | -0.74% | 0.73% | -1.27% | -1.84% | -2.23% |
| 1984-4 | -0.24% | 0.21% | 0.40% | 0.41% | -0.52% | 0.26% |
| 1988-4 | -0.68% | 0.34% | 0.16% | -0.36% | 0.22% | -0.33% |
| Avg | -0.03% | 0.23% | 0.20% | -0.38% | -0.43% | -0.41% |
| 1992-4 | -0.19% | -1.18% | 0.07% | 0.25% | -0.98% | -2.04% |
| 1996-4 | -0.08% | -0.13% | 0.03% | 0.01% | 0.05% | -0.12% |
| 2000-4 | -1.45% | 1.07% | -0.59% | -0.16% | -0.02% | -1.15% |
| 2004-4 | -0.56% | 0.63% | -1.39% | -0.47% | 0.16% | -1.63% |
| 2008-4 | -3.82% | -1.56% | -0.20% | 1.97% | 0.32% | -3.30% |
| Avg | -1.22% | -0.24% | -0.41% | 0.32% | -0.10% | -1.65% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.56% | -0.05% | 0.01% | -0.09% | -0.27% | -0.97% |
| Win% | 29% | 57% | 69% | 36% | 43% | 29% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | -0.44% | 0.00% | -0.06% | -0.24% | -0.15% | -0.88% |
| Win% | 32% | 48% | 52% | 38% | 42% | 37% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has been modestly positive.
Conclusion
The seasonal pattern suggests a sharp decline over the next several weeks.
I expect the major averages to be lower on Friday September 21 than they were on Friday September 14.
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Good Luck,
YTD W 11 /L14/T 12
