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 5 consecutive weeks so it is 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, but, there are some areas of concern:
On the NASDAQ, New lows picked up a bit last week. Not by much, but, new lows increasing as the major indices are hitting new highs is note worthy.
The secondaries underperformed the blue chips last week, not by much, but they were not leading which is what we like to see.
Most important, the period of seasonal strength we have been enjoying ends in the next week.
I do not know much about fixed income, but, I did work on a bond timing model last year. That model generated a sell signal last week. The model's last signal was over a year ago and it turned out to be a whipsaw, but, over the last 40 years its record has been pretty good.
The positives
All of the major indices 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 NASDAQ composite (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 declined sharply last week for the first time in over a month, but is still very strong at 90%.
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 96%, down, only slightly, from last week.
The next chart covers the past 6 months showing the OTC in blue and a 10% trend of NASDAQ new highs (OTC NH) in green.
OTC NH closed at its highest level in nearly 2 years.
The next chart is similar to the one above except is shows the SPX in red and NY NH, in green, has been calculated from NYSE data.
NY NH finished the week slightly off its highest level in nearly 3 years.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of February during the 1st year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the 5 trading days 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 1953 - 2012. There are summaries for both the 1st 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 for the coming week have been negative by most measures.
Report for the week before the 2nd Friday of February.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | -0.33% | -0.25% | 0.53% | -1.38% | -0.59% | -2.03% |
| 1969-1 | 0.00% | 0.25% | -0.23% | 0.32% | 0.00% | 0.34% |
| 1973-1 | -0.36% | -0.38% | 0.21% | -1.01% | -0.82% | -2.36% |
| 1977-1 | -0.13% | -0.02% | -0.62% | 0.31% | -0.21% | -0.67% |
| 1981-1 | -0.48% | -0.12% | -0.45% | -0.61% | -0.37% | -2.03% |
| 1985-1 | 0.84% | 0.69% | 0.62% | 0.96% | 0.40% | 3.51% |
| 1989-1 | -0.09% | 0.79% | -0.30% | -0.39% | -0.99% | -0.98% |
| Avg | -0.04% | 0.19% | -0.11% | -0.15% | -0.40% | -0.50% |
| 1993-1 | -0.36% | -0.89% | 0.41% | 0.12% | -0.77% | -1.49% |
| 1997-1 | -1.65% | -0.29% | 2.07% | 0.86% | -0.26% | 0.74% |
| 2001-1 | -0.65% | 0.81% | -2.13% | -1.75% | -3.56% | -7.28% |
| 2005-1 | -0.22% | 0.22% | -1.64% | 0.03% | 1.15% | -0.46% |
| 2009-1 | -0.01% | -4.20% | 0.38% | 0.73% | -0.48% | -3.57% |
| Avg | -0.58% | -0.87% | -0.18% | 0.00% | -0.78% | -2.41% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Avg | -0.31% | -0.28% | -0.10% | -0.15% | -0.59% | -1.36% |
| Win% | 09% | 42% | 50% | 58% | 18% | 25% |
| OTC summary for all years 1963 - 2012 | ||||||
| Avg | -0.08% | -0.09% | 0.08% | 0.26% | -0.06% | 0.11% |
| Win% | 39% | 54% | 56% | 70% | 55% | 56% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | -0.46% | -0.27% | 0.08% | 0.00% | 0.39% | -0.27% |
| 1957-1 | -0.20% | -1.44% | -0.16% | -0.46% | -0.69% | -2.94% |
| 1961-1 | -0.74% | -0.18% | 0.91% | -0.31% | -0.84% | -1.15% |
| 1965-1 | -0.39% | 0.33% | -0.89% | -1.06% | 0.74% | -1.28% |
| 1969-1 | 0.00% | 0.12% | -0.98% | 1.05% | -0.10% | 0.09% |
| Avg | -0.45% | -0.29% | -0.21% | -0.19% | -0.10% | -1.11% |
| 1973-1 | -0.10% | 0.19% | -0.69% | -0.44% | 1.34% | 0.30% |
| 1977-1 | 0.01% | -0.28% | -0.86% | 0.09% | -0.60% | -1.64% |
| 1981-1 | -1.02% | -0.02% | -0.77% | -0.59% | -0.39% | -2.80% |
| 1985-1 | 0.96% | 0.14% | -0.10% | 0.77% | 0.20% | 1.98% |
| 1989-1 | -0.31% | 1.21% | -0.33% | -0.87% | -1.36% | -1.66% |
| Avg | -0.09% | 0.25% | -0.55% | -0.21% | -0.16% | -0.76% |
| 1993-1 | -0.24% | -0.56% | 0.20% | 0.32% | -0.69% | -0.97% |
| 1997-1 | -0.52% | 0.53% | 1.67% | 1.13% | -0.41% | 2.39% |
| 2001-1 | 0.36% | -0.15% | -0.84% | -0.62% | -1.33% | -2.59% |
| 2005-1 | -0.11% | 0.05% | -0.86% | 0.42% | 0.69% | 0.20% |
| 2009-1 | 0.15% | -4.91% | 0.80% | 0.17% | -1.00% | -4.79% |
| Avg | -0.07% | -1.01% | 0.19% | 0.28% | -0.55% | -1.15% |
| SPX summary for Presidential Year 1 1953 - 2009 | ||||||
| Avg | -0.19% | -0.35% | -0.19% | -0.03% | -0.27% | -1.01% |
| Win% | 29% | 47% | 33% | 50% | 33% | 33% |
| SPX summary for all years 1953 - 2012 | ||||||
| Avg | -0.23% | -0.14% | 0.13% | 0.01% | 0.00% | -0.21% |
| Win% | 38% | 48% | 60% | 44% | 49% | 55% |
Conclusion
The market is overbought and seasonality is turning negative.
I expect the major averages to be lower on Friday February 8 than they were on Friday February 1.
Gordon Harms produces a Power Point for our local timing group meetings. You can get a copy of that at: http://www.stockmarket-ta.com/
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.
Good Luck,
YTD W 5/L 0/T 0
