The good news is:
• There will be clear signals when a bottom has been reached.
The negatives
The accumulation of new lows has been accelerating. New lows increased on Friday which was a modest up day for prices.
The chart below covers the past year showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in red. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good). Dashed vertical lines have been drawn on the 1st trading day of each month.
You can see on the chart below, in the past, when a bottom has been reached, OTC NL moves sharply upward. Currently the value of the indicator is 69, so as long as NASDAQ new lows remain near or above 69 the decline will not be over.
The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and NY NL, in blue, has been calculated from NYSE data.
The patterns are similar. The value of NY NL is 47 so we are looking for several days of NYSE new low numbers significantly below 47.
There have been long standing rules of thumb regarding NYSE and NASDAQ new lows which identify market risk as significant when NASDAQ new lows exceed 70 and NYSE new lows exceed 40 for several days. That flag is up.
The positives
Except for last March, which was up, the market has been following the seasonal pattern for the 4th year of the Presidential Cycle quite closely. That pattern calls for a bottom right around Thanksgiving.
The chart below shows an average of the daily performance of the OTC during the 4th year of the Presidential Cycle since 1963.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday in November 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 November 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 over all periods.
Report for the week before the 3rd Friday of November.
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 | 0.27% | 0.29% | 0.27% | 0.13% | 0.04% | 1.02% |
| 1968-4 | 0.00% | 0.27% | 0.31% | 0.13% | 0.57% | 1.29% |
| 1972-4 | -0.26% | 0.10% | -0.34% | -0.14% | 0.05% | -0.59% |
| 1976-4 | 0.03% | 0.44% | 0.55% | 0.90% | 0.18% | 2.11% |
| 1980-4 | -0.08% | 1.08% | 0.62% | 0.72% | -0.21% | 2.12% |
| 1984-4 | -0.10% | -0.57% | -0.35% | -0.39% | -0.36% | -1.77% |
| 1988-4 | -0.37% | -0.06% | -1.17% | -0.10% | 0.04% | -1.66% |
| Avg | -0.16% | 0.20% | -0.14% | 0.20% | -0.06% | 0.04% |
| 1992-4 | -0.49% | -1.09% | 1.24% | 0.58% | 0.63% | 0.87% |
| 1996-4 | 0.41% | -0.49% | 0.18% | 0.93% | -0.68% | 0.35% |
| 2000-4 | -2.06% | 5.78% | 0.87% | -4.22% | -0.16% | 0.22% |
| 2004-4 | 0.42% | -0.74% | 1.01% | 0.22% | -1.60% | -0.69% |
| 2008-4 | -2.29% | 0.08% | -6.53% | -5.07% | 5.18% | -8.63% |
| Avg | -0.80% | 0.71% | -0.65% | -1.51% | 0.68% | -1.58% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Avg | -0.41% | 0.42% | -0.28% | -0.53% | 0.31% | -0.45% |
| Win% | 36% | 58% | 67% | 58% | 58% | 58% |
| OTC summary for all years 1963 - 2011 | ||||||
| Avg | -0.14% | 0.11% | -0.09% | 0.01% | 0.02% | -0.08% |
| Win% | 46% | 53% | 57% | 55% | 53% | 55% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | 0.32% | -0.47% | -0.56% | -0.63% | 0.04% | -1.30% |
| 1960-4 | -0.50% | 0.40% | -0.20% | -0.27% | 0.49% | -0.09% |
| 1964-4 | 0.52% | 0.44% | 0.22% | -0.05% | 0.12% | 1.25% |
| 1968-4 | 0.00% | 0.64% | 0.49% | 0.07% | 0.55% | 1.75% |
| 1972-4 | 0.15% | 0.92% | -0.39% | 0.55% | 0.31% | 1.54% |
| 1976-4 | 0.67% | 0.14% | 0.57% | 1.27% | 0.03% | 2.68% |
| 1980-4 | 0.44% | 1.42% | -0.46% | 0.96% | -0.92% | 1.44% |
| 1984-4 | -0.14% | -0.83% | 0.01% | -0.06% | -1.08% | -2.10% |
| 1988-4 | -0.07% | 0.23% | -1.68% | 0.30% | 0.71% | -0.53% |
| Avg | 0.21% | 0.38% | -0.39% | 0.60% | -0.19% | 0.61% |
| 1992-4 | -0.41% | -0.34% | 0.85% | 0.18% | 0.72% | 1.00% |
| 1996-4 | 0.15% | -0.32% | 0.21% | 0.65% | 0.24% | 0.93% |
| 2000-4 | -1.08% | 2.35% | 0.50% | -1.26% | -0.34% | 0.17% |
| 2004-4 | -0.03% | -0.71% | 0.55% | 0.14% | -1.12% | -1.16% |
| 2008-4 | -2.58% | 0.98% | -6.12% | -6.71% | 6.32% | -8.10% |
| Avg | -0.79% | 0.39% | -0.80% | -1.40% | 1.17% | -1.43% |
| SPX summary for Presidential Year 4 1956 - 2008 | ||||||
| Avg | -0.20% | 0.35% | -0.43% | -0.35% | 0.43% | -0.18% |
| Win% | 46% | 64% | 57% | 57% | 71% | 57% |
| SPX summary for all years 1953 - 2011 | ||||||
| Avg | -0.03% | 0.00% | -0.04% | -0.08% | 0.12% | -0.02% |
| Win% | 45% | 47% | 63% | 49% | 60% | 53% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. Money supply has jumped during the markets decline.
Conclusion
The seasonal pattern calls for another week of weakness and there is nothing in the breadth indicators suggesting that weakness will be attenuated.
I expect the major averages to be lower on Friday November 16 than they were on Friday November 9.
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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 15 /L 16/T 14
