The good news is:
• Most of the major indices closed at or very near multi year highs again last Friday.
The negatives
The market has been up for 4 consecutive weeks so it is a little overbought. New highs have been robust, the secondaries have been strong, breadth has been good by every measure and even volume has been picking up. Negatives are hard to find.
The positives
All of the major indices, except the NASDAQ composite (OTC) closed at or near multi year highs on Friday while the mid and small cap indices closed at all time highs.
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 vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the neutral 50% level.
OTC HL Ratio finished the week at 95%, its highest level since early 2010. There are trading systems that impose a no sell filter when variations of this indicator are above 80%.
The chart below is similar to the one above except it shows the S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio finished the week at an extremely strong 97%.
Seasonality
Next week includes the last 4 trading days of January and the 1st trading day of February during the 1st year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the last 4 trading days of January and the 1st trading day of February during the 1st year of the Presidential Cycle.
OTC data covers the period from 1963 - 2012 and SPX data covers the period from 1928 - 2012. There are summaries for both the 1st year of the Presidential Cycle and all years combined.
Average returns have been positive by all measures.
Last 4 days of January and first day of February.
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 1 | ||||||
| Day4 | Day3 | Day2 | Day1 | Day1 | Totals | |
| 1965-1 | 0.39% 2 | 0.62% 3 | 0.75% 4 | 0.36% 5 | 0.23% 1 | 2.35% |
| 1969-1 | -0.14% 2 | 0.09% 3 | 0.22% 4 | 0.39% 5 | 0.67% 1 | 1.23% |
| 1973-1 | -0.56% 5 | 0.00% 1 | -1.00% 2 | -0.19% 3 | 0.14% 4 | -1.61% |
| 1977-1 | -0.57% 3 | -0.49% 4 | -0.33% 5 | -0.19% 1 | 0.80% 2 | -0.78% |
| 1981-1 | 1.05% 2 | -0.41% 3 | 0.26% 4 | -0.04% 5 | -2.39% 1 | -1.53% |
| 1985-1 | 0.38% 1 | 0.41% 2 | 0.87% 3 | 0.04% 4 | -0.10% 5 | 1.61% |
| 1989-1 | 0.78% 4 | 0.22% 5 | 0.32% 1 | 0.52% 2 | 0.48% 3 | 2.31% |
| Avg | 0.21% | -0.05% | 0.02% | 0.03% | -0.21% | 0.00% |
| 1993-1 | 0.03% 2 | -1.31% 3 | -0.46% 4 | 0.24% 5 | 0.78% 1 | -0.72% |
| 1997-1 | 0.12% 2 | 0.06% 3 | 1.17% 4 | 0.65% 5 | -0.28% 1 | 1.72% |
| 2001-1 | 0.98% 5 | 2.05% 1 | 0.00% 2 | -2.31% 3 | 0.36% 4 | 1.08% |
| 2005-1 | 1.29% 3 | 0.05% 4 | -0.55% 5 | 1.31% 1 | 0.30% 2 | 2.40% |
| 2009-1 | 1.04% 2 | 3.55% 3 | -3.24% 4 | -2.08% 5 | 1.22% 1 | 0.48% |
| Avg | 0.69% | 0.88% | -0.62% | -0.44% | 0.48% | 0.99% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Averages | 0.40% | 0.40% | -0.17% | -0.11% | 0.19% | 0.71% |
| % Winners | 75% | 67% | 58% | 58% | 75% | 67% |
| MDD 1/30/2009 5.26% -- 2/2/1981 2.57% -- 1/31/2001 2.31% | ||||||
| OTC summary for all years 1963 - 2012 | ||||||
| Averages | 0.20% | 0.16% | -0.06% | 0.25% | 0.29% | 0.82% |
| % Winners | 60% | 63% | 56% | 66% | 69% | 64% |
| MDD 1/28/2000 6.73% -- 2/2/1970 6.34% -- 1/30/2009 5.26% | ||||||
| SPX Presidential Year 1 | ||||||
| Day4 | Day3 | Day2 | Day1 | Day1 | Totals | |
| 1929-1 | -0.31% 1 | 0.04% 2 | 0.35% 3 | 1.14% 4 | 0.39% 5 | 1.61% |
| 1933-1 | -0.14% 5 | -1.14% 6 | 0.29% 1 | -0.57% 2 | -3.89% 3 | -5.45% |
| 1937-1 | 0.80% 3 | -0.11% 4 | 0.79% 5 | 0.34% 6 | 0.28% 1 | 2.10% |
| 1941-1 | -0.57% 2 | -2.01% 3 | -1.76% 4 | 0.30% 5 | -0.70% 6 | -4.74% |
| 1945-1 | 0.45% 6 | 0.15% 1 | -0.59% 2 | 0.07% 3 | 0.22% 4 | 0.30% |
| 1949-1 | -0.26% 4 | -0.33% 5 | 0.20% 6 | -0.07% 1 | 0.79% 2 | 0.33% |
| Avg | 0.05% | -0.69% | -0.21% | 0.01% | -0.66% | -1.49% |
| 1953-1 | 0.12% 2 | 0.31% 3 | 0.27% 4 | 0.69% 5 | 0.49% 1 | 1.87% |
| 1957-1 | -0.74% 1 | 0.49% 2 | 0.45% 3 | -0.42% 4 | -0.22% 5 | -0.44% |
| 1961-1 | 0.15% 4 | 1.02% 5 | 1.19% 1 | -0.31% 2 | 0.19% 3 | 2.25% |
| 1965-1 | 0.09% 2 | 0.33% 3 | 0.29% 4 | 0.09% 5 | 0.02% 1 | 0.83% |
| 1969-1 | 0.01% 2 | 0.10% 3 | 0.04% 4 | 0.45% 5 | -0.12% 1 | 0.48% |
| Avg | -0.07% | 0.45% | 0.45% | 0.10% | 0.07% | 1.00% |
| 1973-1 | -0.24% 5 | -0.38% 1 | -0.16% 2 | 0.17% 3 | -1.09% 4 | -1.69% |
| 1977-1 | -0.77% 3 | -0.54% 4 | 0.14% 5 | 0.10% 1 | 0.50% 2 | -0.57% |
| 1981-1 | 0.99% 2 | -0.59% 3 | -0.08% 4 | -0.53% 5 | -2.04% 1 | -2.25% |
| 1985-1 | 0.03% 1 | -0.03% 2 | 1.15% 3 | 0.13% 4 | -0.56% 5 | 0.73% |
| 1989-1 | 0.88% 4 | 0.73% 5 | 0.40% 1 | 0.84% 2 | -0.13% 3 | 2.72% |
| Avg | 0.18% | -0.16% | 0.29% | 0.14% | -0.66% | -0.21% |
| 1993-1 | -0.01% 2 | -0.42% 3 | 0.13% 4 | 0.03% 5 | 0.85% 1 | 0.57% |
| 1997-1 | 0.00% 2 | 0.98% 3 | 1.51% 4 | 0.25% 5 | 0.07% 1 | 2.81% |
| 2001-1 | -0.19% 5 | 0.68% 1 | 0.70% 2 | -0.56% 3 | 0.55% 4 | 1.18% |
| 2005-1 | 0.48% 3 | 0.04% 4 | -0.27% 5 | 0.85% 1 | 0.69% 2 | 1.79% |
| 2009-1 | 1.09% 2 | 3.36% 3 | -3.31% 4 | -2.28% 5 | -0.05% 1 | -1.20% |
| Avg | 0.27% | 0.93% | -0.25% | -0.34% | 0.42% | 1.03% |
| SPX summary for Presidential Year 1 1929 - 2009 | ||||||
| Averages | 0.09% | 0.13% | 0.08% | 0.03% | -0.18% | 0.15% |
| % Winners | 52% | 57% | 71% | 67% | 57% | 67% |
| MDD 2/2/2009 5.57% -- 2/1/1933 5.39% -- 2/1/1941 4.67% | ||||||
| SPX summary for all years 1928 - 2012 | ||||||
| Averages | 0.15% | 0.07% | 0.07% | 0.26% | 0.20% | 0.74% |
| % Winners | 52% | 49% | 60% | 64% | 64% | 67% |
| MDD 2/2/2009 5.57% -- 2/1/1933 5.39% -- 1/30/1932 5.05% | ||||||
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has been falling from its elevated trend.
February
Since 1963, over all years, the OTC in February has been up 54% of the time with an average gain of 0.1%. During the 1st year of the Presidential Cycle February has been up only 25% time with an average loss of 4.1% (helped considerably by a 22.7% loss in 2001). The best February ever for the OTC was 2000 (+15.9%), the worst 2001 (-22.7%).
The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change 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 daily performance of the OTC in February over all years since 1963 in blue, while the green line shows the average during the 1st year of the Presidential Cycle over the same period.
Since 1928 the SPX has been up 53% of the time in February with an average loss of -0.4%. During the 1st year of the Presidential Cycle the SPX has been up 38% of the time with an average loss of -2.1%. The best February for the SPX was 1931 (+11.0%) the worst 1933 (-15.1%).
The chart below is similar to the one above except it shows the average daily average performance over all years since 1928 for the SPX in February in red and the average daily performance during the 1st year of the Presidential Cycle, over the same period, in green.
Since 1979 the Russell 2000 (R2K) has been up 56% of the time in February with an average gain of 0.6%. During the 1st year of the Presidential Cycle the R2K has been up 50% of the time with an average loss of -2.4%. The best February for the R2K 2000 (+14.7%), the worst 2009 (-13.5%)
The chart below is similar to those above except it shows the average daily performance of the R2K, over all years since 1979, in February in magenta and the average daily performance during the 1st year of the Presidential Cycle in green.
Since 1885 the Dow Jones Industrial Average (DJIA) has been up 51% of the time in February with an average loss of -0.3%. During the 1st year of the Presidential Cycle the DJIA has been up 38% of the time in February with an average loss of -1.2%. The best February for the DJIA 1931 (+12.4%), the worst 1933 (-13.0%)
The chart below is similar to those above except it shows the average daily performance over all years for the DJIA in February in black and the average performance during the 1st year of the Presidential Cycle in green.
Conclusion
The market is overbought, but the breadth indicators are strong and seasonality remains positive.
I expect the major averages to be higher on Friday February 1 than they were on Friday January 25.
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Good Luck,
YTD W 4/L 0/T 0
