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The Problem With Modern Monetary Theory

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Technical Market Report for December 15, 2012

The good news is:
• Seasonally last week was the weakest period of the month and the market survived it quite well.


The negatives

The market has been closely following the seasonal pattern for most of this year and that pattern calls for strength from now through the end of the year. Unfortunately the number of new highs has not kept up with the rebound in prices. That implies a narrowing of leadership which is not good.

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 not kept up with the advance in prices.

OTC_NH has not kept up with the advance in prices

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.

Relatively NY NH has been even weaker than OTC NH.

Relatively NY NH has been even weaker than OTC NH


The positives

Seasonally last week was the weakest of the month. On average prices were down slightly, however, the breadth indicators held up well.

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 hold above the neutral level.

OTC HL Ratio managed to hold above the neutral level

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 continued its fall, but at 72% remains well above the neutral level.

NY HL Ratio continued its fall, but at 72% remains well above the neutral level


Seasonality

Next week includes the 5 trading days prior to the 3rd Friday of December 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 December 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 distorted by huge losses in 2000.

Report for the week before the 3rd Friday of December.
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 0.41% -0.05% -0.21% 0.14% 0.11% 0.42%
1968-4 0.03% 0.42% 0.00% -0.29% -0.08% 0.09%
 
1972-4 -0.24% -0.42% -0.45% -0.25% 0.15% -1.20%
1976-4 0.00% 0.03% 0.29% 0.01% -0.31% 0.02%
1980-4 0.32% 0.03% 1.12% 1.54% 0.46% 3.46%
1984-4 -0.24% 2.09% 0.59% -0.16% -0.09% 2.19%
1988-4 -0.27% -0.33% -0.06% 0.06% 0.75% 0.16%
Avg -0.11% 0.28% 0.30% 0.24% 0.19% 0.93%
 
1992-4 -0.16% -0.61% -0.17% 1.36% 0.43% 0.85%
1996-4 -1.86% 0.42% 1.50% 0.82% -0.56% 0.32%
2000-4 3.35% -2.76% -3.72% -3.34% -2.76% -9.23%
2004-4 0.96% 0.53% 0.13% -0.76% -0.51% 0.34%
2008-4 -2.10% 5.41% -0.67% -1.71% 0.77% 1.70%
Avg 0.04% 0.60% -0.59% -0.72% -0.53% -1.20%
 
OTC summary for Presidential Year 4 1964 - 2008
Avg 0.02% 0.40% -0.15% -0.21% -0.14% -0.07%
Win% 45% 58% 45% 50% 50% 83%
 
OTC summary for all years 1963 - 2011
Avg -0.05% 0.08% -0.09% -0.02% 0.21% 0.14%
Win% 49% 51% 48% 59% 61% 59%
 
SPX Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1956-4 0.00% 0.00% -0.24% -0.78% 0.65% -0.36%
1960-4 0.35% 0.05% -0.07% -0.28% 0.92% 0.97%
1964-4 -0.25% -0.28% 0.40% 0.42% 0.46% 0.75%
1968-4 -0.45% -0.41% 0.00% 0.29% -0.59% -1.16%
 
1972-4 0.22% -0.39% -0.08% -0.27% 0.02% -0.50%
1976-4 -0.07% 0.42% 0.07% -0.32% -0.52% -0.42%
1980-4 0.17% 0.89% 1.75% 0.08% 0.53% 3.42%
1984-4 0.49% 2.83% -0.57% -0.47% -0.52% 1.76%
1988-4 -0.18% -0.08% -0.36% -0.37% 0.73% -0.26%
Avg 0.12% 0.74% 0.16% -0.27% 0.05% 0.80%
 
1992-4 -0.21% -0.06% -0.24% 0.91% 1.34% 1.74%
1996-4 -1.05% 0.70% 0.76% 1.94% 0.42% 2.77%
2000-4 0.75% -0.65% -0.82% -1.40% -2.15% -4.26%
2004-4 0.90% 0.39% 0.19% -0.21% -0.75% 0.53%
2008-4 -1.27% 5.14% -0.96% -2.12% 0.29% 1.09%
Avg -0.17% 1.10% -0.21% -0.18% -0.17% 0.37%
 
SPX summary for Presidential Year 4 1956 - 2008
Avg -0.05% 0.66% -0.01% -0.18% 0.06% 0.43%
Win% 46% 54% 38% 36% 64% 57%
 
SPX summary for all years 1953 - 2011
Avg 0.02% 0.17% 0.03% -0.03% 0.19% 0.36%
Win% 55% 50% 52% 47% 61% 61%


Money Supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth leveled off last week.

M2


Conclusion

Seasonality has been the dominant influence in the markets behavior and that pattern calls for strength through the end of the year.

I expect the major averages to be higher on Friday December 21 than they were on Friday December 14.

Last week all of the major indices were down a little except the Russell 2000 which was up a little so I am calling last weeks negative forecast a tie.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html If it is not for you, reply with REMOVE in the subject line.

In his current letter, Jerry Minton calls our current condition one of "Financial Repression". You can read about it and sign up for his letter at: http://alphaim.net/

Good Luck,

YTD W 18 /L 16/T 16

 

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