The good news is:
• Until last Friday new lows have been insignificant.
The negatives
Seasonally there is another week of weakness ahead of us. The breadth indicators have held up pretty well, but there has not been a sustained rally since the mid September highs.
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 in green. Dashed vertical lines have been drawn on the 1st trading day of each month.
OTC NH did not confirm the sharp rally early last week, but, it did not fall as sharply as prices did on Friday either.
The next chart 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 SPX has been stronger than the OTC, but NY NH has not been confirming that strength.
The positives
New lows remained dormant until last Friday when they approached the thresholds of concern (NYSE 40, OTC 70).
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 closed Friday at a very strong 86%.
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 has been weaker than NY HL Ratio but closed at a positive 56%.
Seasonality
Next week includes the first 5 trading days prior to the 4th Friday of October 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 4th Friday of October 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 have been negative by all measures.
Report for the week before the 4th Friday of October.
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 | -0.43% | 0.25% | -0.18% | -0.23% | 0.44% | -0.16% |
| 1968-4 | 0.71% | -0.65% | 0.00% | -0.63% | -0.76% | -1.33% |
| 1972-4 | 0.52% | 0.19% | -0.02% | 0.37% | 0.12% | 1.19% |
| 1976-4 | 0.45% | -0.01% | 0.20% | -0.16% | -0.26% | 0.23% |
| 1980-4 | -0.05% | -0.35% | 0.73% | -1.06% | 0.18% | -0.53% |
| 1984-4 | -0.25% | 0.02% | 0.09% | -0.73% | -0.65% | -1.52% |
| 1988-4 | -0.35% | -0.29% | -0.24% | -0.89% | 0.27% | -1.50% |
| Avg | 0.06% | -0.09% | 0.15% | -0.49% | -0.07% | -0.43% |
| 1992-4 | 1.38% | 0.34% | 0.75% | -0.01% | 0.03% | 2.50% |
| 1996-4 | -0.49% | -1.33% | 0.65% | -0.07% | -0.36% | -1.60% |
| 2000-4 | -0.41% | -1.41% | -5.56% | 1.32% | 0.19% | -5.88% |
| 2004-4 | 1.31% | -0.70% | 0.52% | 1.07% | -1.97% | 0.23% |
| 2008-4 | 3.43% | -4.14% | -4.77% | -0.73% | -3.23% | -9.45% |
| Avg | 1.04% | -1.45% | -1.68% | 0.32% | -1.07% | -2.84% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | 0.48% | -0.67% | -0.71% | -0.14% | -0.50% | -1.49% |
| Win% | 50% | 33% | 55% | 25% | 50% | 33% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | 0.05% | -0.51% | 0.16% | -0.08% | -0.13% | -0.52% |
| Win% | 49% | 37% | 58% | 49% | 51% | 49% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -0.02% | -0.24% | -0.41% | -0.17% | 0.92% | 0.07% |
| 1960-4 | -1.16% | -0.76% | 1.43% | 1.07% | -0.39% | 0.20% |
| 1964-4 | 0.12% | 0.29% | -0.09% | -0.19% | 0.24% | 0.37% |
| 1968-4 | 0.16% | -0.40% | 0.00% | -0.70% | 0.35% | -0.59% |
| 1972-4 | 1.02% | 0.42% | -0.08% | 0.24% | -0.33% | 1.26% |
| 1976-4 | 0.61% | -0.02% | 0.29% | -0.95% | -0.80% | -0.88% |
| 1980-4 | 0.83% | -0.58% | 0.06% | -1.81% | 0.25% | -1.26% |
| 1984-4 | -0.36% | -0.16% | 0.07% | -0.53% | -0.61% | -1.60% |
| 1988-4 | -0.49% | 0.04% | -0.35% | -1.46% | 0.45% | -1.81% |
| Avg | 0.32% | -0.06% | 0.00% | -0.90% | -0.21% | -0.86% |
| 1992-4 | 0.79% | 0.12% | 0.05% | -0.19% | -0.19% | 0.58% |
| 1996-4 | -0.14% | -0.46% | 0.10% | -0.70% | -0.19% | -1.40% |
| 2000-4 | -0.08% | 0.17% | -2.38% | -0.03% | 1.11% | -1.21% |
| 2004-4 | 0.53% | -0.97% | 0.04% | 0.26% | -0.97% | -1.12% |
| 2008-4 | 4.77% | -3.08% | -6.10% | 1.26% | -3.45% | -6.60% |
| Avg | 1.17% | -0.84% | -1.66% | 0.12% | -0.74% | -1.95% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | 0.47% | -0.40% | -0.57% | -0.28% | -0.26% | -1.00% |
| Win% | 57% | 36% | 54% | 29% | 43% | 36% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | -0.15% | -0.13% | 0.21% | -0.19% | -0.06% | -0.31% |
| Win% | 56% | 43% | 60% | 37% | 47% | 46% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply fell last week.
Conclusion
The seasonal pattern calls for another week of weakness.
I expect the major averages to be lower on Friday October 26 than they were on Friday October 19.
Last week the blue chips were up slightly while the secondaries were down slightly so I am calling last weeks positive forecast a tie.
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In his latest newsletter, Jerry Minton looks at Alpha's seasonal strategies and the upcoming switch to equities. You can read it and sign up for his free newsletter at Alpha's homepage: http://alphaim.net/
Good Luck,
YTD W 13 /L 16/T 13
