The good news is:
• The market is closely following the average seasonal pattern and that pattern calls for another week of modest strength.
The negatives
Over the past 2 weeks the major indices are up 4% - 7% so the market is overbought and the pace of the past 2 weeks is unlikely to continue.
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 been sluggish during this rally.
The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and NY NH, in green, has been calculated from NYSE data.
NY NL has also been sluggish coming off its low.
The positives
Since the mid November low, new lows have disappeared and the secondaries have been outperforming the blue chips.
The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs / (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.
OTC HL Ratio managed to climb above the neutral level last week after hitting its low for the year 2 weeks ago.
The chart below is similar to the one above except it shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio is very strong at nearly 90%.
Seasonality
Next week includes the first 5 trading days of December during the 4th year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the first 5 trading days of December 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 modestly positive by all measures, but a little weaker during the 4th year of the Presidential Cycle than other years.
Report for the first 5 days of December.
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 | ||||||
| Day1 | Day2 | Day3 | Day4 | Day5 | Totals | |
| 1964-4 | -0.64% 2 | -0.82% 3 | 0.69% 4 | -0.02% 5 | 0.09% 1 | -0.70% |
| 1968-4 | 0.52% 1 | 1.75% 2 | 0.10% 4 | 0.24% 5 | -0.24% 1 | 2.37% |
| 1972-4 | 0.74% 5 | 0.15% 1 | 0.10% 2 | 0.30% 3 | 0.28% 4 | 1.57% |
| 1976-4 | 0.78% 3 | 0.01% 4 | 0.51% 5 | 0.35% 1 | 0.41% 2 | 2.06% |
| 1980-4 | -1.56% 1 | -0.59% 2 | 0.58% 3 | 0.63% 4 | -1.54% 5 | -2.47% |
| 1984-4 | -0.67% 1 | 0.02% 2 | -0.90% 3 | 0.12% 4 | -0.05% 5 | -1.48% |
| 1988-4 | 0.65% 4 | 0.01% 5 | 0.40% 1 | 0.42% 2 | -0.17% 3 | 1.32% |
| Avg | -0.01% | -0.08% | 0.14% | 0.36% | -0.21% | 0.20% |
| 1992-4 | 0.19% 2 | -0.16% 3 | 0.53% 4 | 0.80% 5 | 0.75% 1 | 2.10% |
| 1996-4 | 0.56% 1 | 0.05% 2 | -0.26% 3 | 0.24% 4 | -0.95% 5 | -0.37% |
| 2000-4 | 1.82% 5 | -1.12% 1 | 10.47% 2 | -3.23% 3 | -1.57% 4 | 6.39% |
| 2004-4 | 1.98% 3 | 0.25% 4 | 0.20% 5 | 0.15% 1 | -1.70% 2 | 0.88% |
| 2008-4 | -8.95% 1 | 3.70% 2 | 2.94% 3 | -3.14% 4 | 4.41% 5 | -1.04% |
| Avg | -0.88% | 0.54% | 2.78% | -1.04% | 0.19% | 1.59% |
| OTC summary for Presidential Year 4 1964 - 2008 | ||||||
| Averages | -0.38% | 0.27% | 1.28% | -0.26% | -0.02% | 0.89% |
| % Winners | 67% | 67% | 83% | 75% | 42% | 58% |
| MDD 12/1/2008 8.95% -- 12/7/2000 4.74% -- 12/5/1980 2.46% | ||||||
| OTC summary for all years 1963 - 2011 | ||||||
| Averages | 0.21% | 0.21% | 0.48% | -0.04% | 0.00% | 0.87% |
| % Winners | 65% | 65% | 69% | 55% | 47% | 61% |
| MDD 12/1/2008 8.95% -- 12/6/1974 7.53% -- 12/5/1975 5.18% | ||||||
| SPX Presidential Year 4 | ||||||
| Day1 | Day2 | Day3 | Day4 | Day5 | Totals | |
| 1928-4 | -1.03% 6 | -0.75% 1 | 0.25% 2 | -0.42% 3 | -3.78% 4 | -5.73% |
| 1932-4 | 2.75% 4 | -3.86% 5 | -0.15% 6 | 1.24% 1 | 5.05% 2 | 5.01% |
| 1936-4 | -0.81% 2 | -1.11% 3 | 0.53% 4 | -0.18% 5 | 0.12% 6 | -1.45% |
| 1940-4 | 0.09% 1 | -0.38% 2 | 0.00% 3 | -0.66% 4 | 0.19% 5 | -0.75% |
| 1944-4 | -0.23% 5 | 0.23% 6 | 0.62% 1 | 0.39% 2 | 0.00% 3 | 1.01% |
| 1948-4 | 1.76% 3 | -0.07% 4 | 0.87% 5 | 0.79% 6 | -0.13% 1 | 3.22% |
| Avg | 0.71% | -1.04% | 0.37% | 0.32% | 1.04% | 1.41% |
| 1952-4 | 0.08% 1 | 0.23% 2 | -0.12% 3 | -0.39% 4 | 0.04% 5 | -0.15% |
| 1956-4 | 2.00% 1 | -0.30% 2 | 1.20% 3 | 0.91% 4 | 0.49% 5 | 4.29% |
| 1960-4 | -0.43% 4 | 0.16% 5 | -0.14% 1 | 0.29% 2 | 0.99% 3 | 0.87% |
| 1964-4 | -1.03% 2 | 0.29% 3 | 0.47% 4 | 0.20% 5 | -0.02% 1 | -0.10% |
| 1968-4 | -0.23% 1 | -0.09% 2 | -0.32% 4 | 0.24% 5 | -0.25% 1 | -0.66% |
| Avg | 0.08% | 0.06% | 0.22% | 0.25% | 0.25% | 0.85% |
| 1972-4 | 0.61% 5 | 0.33% 1 | -0.16% 2 | 0.37% 3 | 0.50% 4 | 1.65% |
| 1976-4 | 0.38% 3 | -0.36% 4 | 0.63% 5 | 0.78% 1 | -0.07% 2 | 1.36% |
| 1980-4 | -2.36% 1 | -0.17% 2 | -0.19% 3 | -0.17% 4 | -1.80% 5 | -4.68% |
| 1984-4 | -0.46% 1 | 0.34% 2 | -0.78% 3 | 0.41% 4 | -0.31% 5 | -0.80% |
| 1988-4 | -0.44% 4 | -0.25% 5 | 1.15% 1 | 0.97% 2 | 0.19% 3 | 1.62% |
| Avg | -0.45% | -0.02% | 0.13% | 0.47% | -0.30% | -0.17% |
| 1992-4 | -0.13% 2 | -0.21% 3 | 0.00% 4 | 0.50% 5 | 0.75% 1 | 0.92% |
| 1996-4 | -0.06% 1 | -1.09% 2 | -0.42% 3 | -0.10% 4 | -0.64% 5 | -2.32% |
| 2000-4 | 0.02% 5 | 0.74% 1 | 3.89% 2 | -1.82% 3 | -0.59% 4 | 2.25% |
| 2004-4 | 1.50% 3 | -0.09% 4 | 0.07% 5 | -0.08% 1 | -1.11% 2 | 0.29% |
| 2008-4 | -8.93% 1 | 3.99% 2 | 2.58% 3 | -2.93% 4 | 3.65% 5 | -1.63% |
| Avg | -1.52% | 0.67% | 1.23% | -0.89% | 0.41% | -0.10% |
| SPX summary for Presidential Year 4 1928 - 2008 | ||||||
| Averages | -0.33% | -0.11% | 0.47% | 0.02% | 0.16% | 0.20% |
| % Winners | 43% | 38% | 57% | 57% | 48% | 52% |
| MDD 12/1/2008 8.93% -- 12/6/1928 5.64% -- 12/5/1980 4.62% | ||||||
| SPX summary for all years 1928 - 2011 | ||||||
| Averages | -0.01% | 0.15% | 0.26% | 0.07% | 0.10% | 0.56% |
| % Winners | 51% | 57% | 64% | 53% | 47% | 68% |
| MDD 12/1/2008 8.93% -- 12/6/1974 7.09% -- 12/6/1928 5.64% | ||||||
Money Supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth dropped sharply last week.
December
Since 1963, over all years, the OTC in December has been up 63% of the time with an average gain of 1.8%. During the 4th year of the Presidential Cycle December has been up 58% time with an average gain of 1.7% (helped considerably by a gain of 12.8% in 2008). The best December ever for the OTC was 1999 (+21.3%), the worst 2002 (-10.1%).
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 December 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 75% of the time in December with an average gain of 1.5%. During the 4th year of the Presidential Cycle the SPX has been up 81% of the time with an average gain of 1.8%. The best December ever for the SPX was 2008 (+10.7%), the worst 1931 (-13.4%).
The chart below is similar to the one above except it shows the average daily performance over all years for the SPX in December in red and the performance during the 4th year of the Presidential Cycle in black.
Since 1979 the Russell 2000 (R2K) has been up 76% of the time in December with an average gain of 3.0%. During the 4th year of the Presidential Cycle the R2K has been up 88% of the time (1980 has been its only down year) with an average gain of 4.4% (helped considerably by a 19.8% gain in 2008). The best December ever for the R2K, 2008 (+19.8%), the worst 2002 (-6.2%)
The chart below is similar to those above except it shows the daily performance over all years of the R2K in December 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 70% of the time in December with an average gain of 1.2%. During the 4th year of the Presidential Cycle the DJIA has been up 65% of the time in December with an average gain of 1.1%. The best December ever for the DJIA, 1903 (+10.7%), the worst 1931 (-14.6%).
The chart below is similar to those above except it shows the daily performance over all years of the DJIA in December in grey and the performance during the 4th year of the Presidential Cycle in black.
Conclusion
The market is overbought and the seasonal pattern is weakening, but still positive.
I expect the major averages to be higher on Friday December 7 than they were on Friday November 30.
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Good Luck,
YTD W 18 /L 16/T 14
