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.
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.
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.
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.
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.
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.
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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
