The good news is:
• The market has been following the seasonal pattern quite closely and next week, on average, has been very strong seasonally.
The negatives
New lows have been creeping up while new highs have disappeared.
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 fell sharply last week.
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.
NY NH was also in free fall last week.
The next chart shows 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 for the indicator; the line is solid at the neutral 50% level.
I have moved this chart into the negative group because OTC HL Ratio fell below the neutral level for the first time since early August. There were more new lows than new highs every day last week on the NASDAQ.
The positives
Unlike the NASDAQ, new highs on the NYSE held above new lows last week.
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.
NY HL Ratio held above the neutral level and actually rose a little at the end of last week.
Seasonality
Next week includes the last 3 trading days of October and the first 2 trading days of November during the 4th year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the last 3 trading days of October and the first 2 trading days of November 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 have been positive by all measures.
Report for the last 3 days of October and first 2 days of November.
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 | ||||||
| Day3 | Day2 | Day1 | Day1 | Day2 | Totals | |
| 1964-4 | 0.11% 3 | -0.11% 4 | 0.14% 5 | 0.14% 1 | 0.14% 3 | 0.41% |
| 1968-4 | -0.32% 1 | -0.75% 2 | -0.68% 4 | -0.10% 5 | -0.68% 1 | -2.53% |
| 1972-4 | 0.12% 5 | -0.05% 1 | 0.60% 2 | 1.04% 3 | 0.40% 4 | 2.11% |
| 1976-4 | 0.22% 3 | 0.26% 4 | 0.56% 5 | 0.64% 1 | -1.70% 3 | -0.03% |
| 1980-4 | 0.38% 3 | -1.02% 4 | 0.14% 5 | 0.19% 1 | 1.49% 3 | 1.18% |
| 1984-4 | -0.36% 1 | 0.39% 2 | -0.17% 3 | 0.38% 4 | -0.02% 5 | 0.22% |
| 1988-4 | -0.89% 4 | 0.27% 5 | -0.09% 1 | -0.03% 2 | -0.15% 3 | -0.88% |
| Avg | -0.10% | -0.03% | 0.21% | 0.44% | 0.00% | 0.52% |
| 1992-4 | 0.74% 3 | 0.74% 4 | -0.11% 5 | 0.40% 1 | -0.49% 2 | 1.28% |
| 1996-4 | -1.05% 2 | 0.26% 3 | 1.27% 4 | 0.02% 5 | -0.11% 1 | 0.39% |
| 2000-4 | 0.19% 5 | -2.65% 1 | 5.58% 2 | -1.07% 3 | 2.87% 4 | 4.91% |
| 2004-4 | 2.14% 3 | 0.29% 4 | -0.04% 5 | 0.25% 1 | 0.25% 2 | 2.89% |
| 2008-4 | 0.47% 3 | 2.49% 4 | 1.32% 5 | 0.31% 1 | 3.12% 2 | 7.71% |
| Avg | 0.50% | 0.23% | 1.61% | -0.02% | 1.13% | 3.44% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Averages | 0.15% | 0.01% | 0.71% | 0.18% | 0.43% | 1.47% |
| % Winners | 67% | 58% | 58% | 75% | 50% | 75% |
| MDD 10/30/2000 2.65% -- 11/4/1968 2.51% -- 11/3/1976 1.70% | ||||||
| OTC summary for all years 1963 - 2011 | ||||||
| Averages | -0.09% | 0.28% | 0.46% | 0.23% | 0.28% | 1.15% |
| % Winners | 61% | 55% | 69% | 63% | 55% | 65% |
| MDD 10/31/1978 5.83% -- 10/30/2001 5.74% -- 11/1/2011 4.81% | ||||||
| SPX Presidential Year 4 | ||||||
| Day3 | Day2 | Day1 | Day1 | Day2 | Totals | |
| 1928-4 | 0.59% 1 | -1.09% 2 | -0.37% 3 | 1.43% 4 | -0.18% 5 | 0.38% |
| 1932-4 | 2.01% 5 | -1.27% 6 | -0.57% 1 | -2.87% 2 | -3.55% 3 | -6.25% |
| 1936-4 | 1.53% 4 | 0.17% 5 | -0.12% 6 | -0.23% 1 | 1.51% 3 | 2.88% |
| 1940-4 | 0.19% 2 | 0.83% 3 | 1.47% 4 | 0.00% 5 | 0.36% 6 | 2.84% |
| 1944-4 | 0.31% 6 | -0.23% 1 | 0.16% 2 | 0.39% 3 | 0.55% 4 | 1.17% |
| 1948-4 | -0.66% 4 | 0.24% 5 | 0.24% 6 | 0.97% 1 | -4.61% 3 | -3.82% |
| Avg | 0.68% | -0.05% | 0.24% | -0.35% | -1.15% | -0.64% |
| 1952-4 | 0.08% 3 | 0.00% 4 | 1.53% 5 | 0.33% 1 | 0.28% 3 | 2.23% |
| 1956-4 | 0.28% 1 | -0.06% 2 | -1.70% 3 | 2.06% 4 | 0.99% 5 | 1.56% |
| 1960-4 | 1.07% 4 | -0.39% 5 | -0.04% 1 | 1.03% 2 | 0.52% 3 | 2.19% |
| 1964-4 | -0.36% 3 | 0.05% 4 | 0.15% 5 | 0.38% 1 | -0.05% 3 | 0.17% |
| 1968-4 | -0.29% 1 | -0.58% 2 | 0.11% 4 | -0.34% 5 | 0.04% 1 | -1.06% |
| Avg | 0.16% | -0.20% | 0.01% | 0.69% | 0.36% | 1.02% |
| 1972-4 | -0.33% 5 | -0.03% 1 | 0.90% 2 | 0.98% 3 | 0.50% 4 | 2.01% |
| 1976-4 | 0.69% 3 | -0.15% 4 | 1.27% 5 | 0.19% 1 | -1.14% 3 | 0.86% |
| 1980-4 | -0.11% 3 | -1.27% 4 | 0.93% 5 | 1.23% 1 | 1.77% 3 | 2.56% |
| 1984-4 | -0.31% 1 | 1.25% 2 | -0.45% 3 | 0.84% 4 | -0.04% 5 | 1.29% |
| 1988-4 | -1.46% 4 | 0.45% 5 | 0.16% 1 | 0.03% 2 | 0.00% 3 | -0.82% |
| Avg | -0.30% | 0.05% | 0.56% | 0.66% | 0.22% | 1.18% |
| 1992-4 | 0.39% 3 | 0.17% 4 | -0.52% 5 | 0.97% 1 | -0.67% 2 | 0.35% |
| 1996-4 | 0.61% 2 | -0.09% 3 | 0.62% 4 | -0.21% 5 | 0.42% 1 | 1.35% |
| 2000-4 | 1.11% 5 | 1.38% 1 | 2.20% 2 | -0.57% 3 | 0.50% 4 | 4.62% |
| 2004-4 | 1.29% 3 | 0.18% 4 | 0.24% 5 | 0.03% 1 | 0.00% 2 | 1.74% |
| 2008-4 | -1.11% 3 | 2.58% 4 | 1.54% 5 | -0.25% 1 | 4.08% 2 | 6.84% |
| Avg | 0.46% | 0.85% | 0.82% | -0.01% | 0.87% | 2.98% |
| SPX summary for Presidential Year 4 1928 - 2008 | ||||||
| Averages | 0.26% | 0.10% | 0.37% | 0.30% | 0.06% | 1.10% |
| % Winners | 62% | 48% | 67% | 67% | 62% | 81% |
| MDD 11/2/1932 8.04% -- 11/3/1948 4.61% -- 10/31/1956 1.77% | ||||||
| SPX summary for all years 1928 - 2011 | ||||||
| Averages | -0.06% | 0.41% | 0.22% | 0.21% | 0.00% | 0.76% |
| % Winners | 52% | 59% | 57% | 62% | 58% | 64% |
| MDD 11/6/1929 14.66% -- 11/2/1932 8.04% -- 11/3/1937 6.80% | ||||||
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply held steady last week.
November
Since 1963, over all years, the OTC in November has been up 65% of the time with an average gain of 1.3%. During the 4th year of the Presidential Cycle November has been up 67% time with an average loss of 0.5% (helped considerably by losses of 22.1% in 2000 and 11.1% in 2008). The best November ever for the OTC was 1999 (+12.4%), the worst 2000 (-22.1%).
The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.
In the chart below the blue line shows the average of the OTC in November over all years since 1963 while the black line shows the average during the 4th year of the Presidential Cycle over the same period.
Since 1928 the SPX has been up 54% of the time in November with an average gain of 0.4%. During the 4th year of the Presidential Cycle the SPX has been up 50% of the time with an average gain of 0.3%. The best November ever for the SPX was 1928 (+10.4%), the worst 1948 (-11.7%).
The chart below is similar to the one above except it shows the average daily performance over all years for the SPX in November in red and the performance during the 4th year of the Presidential Cycle in black.
Since 1979 the Russell 2000 (R2K) has been up 67% of the time in November with an average gain of 1.6%. During the 4th year of the Presidential Cycle the R2K has been up 50% of the time with an average loss of -0.4%. The best November ever for the R2K, 1979 (+7.3%), the worst 2008 (-12.1%)
The chart below is similar to those above except it shows the daily performance over all years of the R2K in November in green and the performance during the 4th year of the Presidential Cycle in black.
Since 1885 the Dow Jones Industrial Average (DJIA) has been up 57% of the time in November with an average gain of 0.6%. During the 4th year of the Presidential Cycle the DJIA has been up 58% of the time in November with an average gain of 1.2%. The best November ever for the DJIA, 1928 (+14.9%), the worst 1973 (-13.3%).
The chart below is similar to those above except it shows the daily performance over all years of the DJIA in November in grey and the performance during the 4th year of the Presidential Cycle in black.
Conclusion
Nearly 40 years ago Norman Fosbeck detailed a strategy for seasonal trading that included being in the market the last 2 trading days of every month and the first 5 trading days of the following month. Since 1953 this strategy, exclusive of dividends, has generated a 7.2% compound annual return with a MDD of 37.8% and exposure of 37%. Buy and Hold over the same period has had a compound annual return of 6.9% with an MDD of 56.8%. Not all of the monthly periods have been equal or even similar, but, over the years, the late October early November trade has been one of the best.
I expect the major averages to be higher on Friday November 2 than they were on Friday October 26.
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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 14 /L 16/T 13
