The good news is:
• Most of the major indices closed at or very near multi year highs again last Friday.
The negatives
Most of the major indices have been up for 6 consecutive weeks so the market is overbought. The rate of advance has declined and some of the breadth indicators have weakened. The real problem is seasonality which remains weak for the rest of the month.
The chart below covers the past 6 months showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.
NY NH fell last week failing to confirm the new high in the SPX.
The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC NH, in green, has been calculated from NASDAQ data.
OTC NH also failed to confirm the new high in the OTC.
The positives
All of the major indices, except the Dow Jones Industrial Average, closed at multi year highs on Friday. As shown above there was some deterioration in the number of new highs, however, more importantly, new lows remained dormant.
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 held at a very high 91% last week.
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 SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio also finished the week unchanged at an extremely high 96%.
As long as new lows remain dormant the effects of negative seasonality will be minimal.
Seasonality
Next week includes the 5 trading days prior to the 3rd 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 prior to the 3rd Friday 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.
1989 was the last time the coming week was up.
Report for the week before the 3rd Friday of February.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | 0.43% | -0.25% | -0.40% | 0.79% | 0.21% | 0.77% |
| 1969-1 | -1.88% | -0.74% | -0.90% | 0.53% | -0.82% | -3.82% |
| 1973-1 | 1.52% | 1.06% | -1.39% | -0.79% | 0.10% | 0.50% |
| 1977-1 | 0.04% | 0.29% | 0.22% | -0.06% | -0.19% | 0.30% |
| 1981-1 | 0.00% | 0.05% | 0.39% | -1.02% | -0.23% | -0.82% |
| 1985-1 | -0.32% | -0.30% | 0.61% | 0.01% | -0.22% | -0.22% |
| 1989-1 | -0.27% | 0.19% | 0.67% | 0.24% | 0.37% | 1.19% |
| Avg | 0.24% | 0.26% | 0.10% | -0.32% | -0.03% | 0.19% |
| 1993-1 | 0.00% | -3.64% | -0.90% | 0.46% | 0.18% | -3.90% |
| 1997-1 | 0.00% | 0.00% | -0.12% | -1.33% | -0.97% | -2.42% |
| 2001-1 | 0.76% | -2.49% | 2.62% | 2.47% | -4.99% | -1.64% |
| 2005-1 | 0.30% | 0.30% | -0.09% | -1.25% | -0.13% | -0.86% |
| 2009-1 | 0.00% | -4.15% | -0.18% | -1.71% | -0.11% | -6.16% |
| Avg | 0.53% | -2.50% | 0.27% | -0.27% | -1.21% | -3.00% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Avg | 0.07% | -0.88% | 0.04% | -0.14% | -0.57% | -1.42% |
| Win% | 63% | 45% | 42% | 50% | 33% | 33% |
| OTC summary for all years 1963 - 2012 | ||||||
| Avg | 0.09% | -0.15% | 0.06% | 0.17% | -0.16% | -0.02% |
| Win% | 59% | 47% | 56% | 62% | 48% | 58% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | -0.35% | -0.58% | -0.08% | 0.35% | 0.23% | -0.43% |
| 1957-1 | -1.73% | -0.42% | 1.53% | -0.12% | 1.21% | 0.47% |
| 1961-1 | -0.59% | 0.44% | 0.83% | 0.61% | -0.32% | 0.98% |
| 1965-1 | -0.12% | -0.46% | 0.12% | 0.33% | 0.19% | 0.05% |
| 1969-1 | -1.19% | -0.63% | 0.48% | -0.31% | -0.01% | -1.67% |
| Avg | -0.79% | -0.33% | 0.58% | 0.17% | 0.26% | -0.12% |
| 1973-1 | 1.20% | 0.62% | -1.44% | -0.56% | 0.46% | 0.28% |
| 1977-1 | 0.52% | 0.30% | 0.46% | -0.57% | -0.43% | 0.27% |
| 1981-1 | 0.00% | 0.65% | 0.52% | -1.46% | -0.02% | -0.30% |
| 1985-1 | -0.92% | 0.03% | 1.55% | -0.51% | -0.44% | -0.31% |
| 1989-1 | 0.18% | -0.25% | 0.83% | 0.19% | 0.66% | 1.62% |
| Avg | 0.24% | 0.27% | 0.38% | -0.58% | 0.05% | 0.31% |
| 1993-1 | 0.00% | -2.40% | -0.14% | -0.32% | 0.54% | -2.33% |
| 1997-1 | 0.00% | 0.97% | -0.47% | -1.19% | -0.13% | -0.82% |
| 2001-1 | 1.18% | -0.87% | -0.22% | 0.81% | -1.89% | -0.98% |
| 2005-1 | 0.07% | 0.33% | 0.02% | -0.79% | 0.07% | -0.30% |
| 2009-1 | 0.00% | -4.56% | -0.10% | 0.07% | -2.39% | -6.98% |
| Avg | 0.63% | -1.30% | -0.18% | -0.29% | -0.76% | -2.28% |
| SPX summary for Presidential Year 1 1953 - 2009 | ||||||
| Avg | -0.16% | -0.46% | 0.26% | -0.23% | -0.15% | -0.70% |
| Win% | 45% | 47% | 60% | 40% | 47% | 40% |
| SPX summary for all years 1953 - 2012 | ||||||
| Avg | 0.07% | -0.05% | 0.18% | -0.01% | -0.01% | 0.15% |
| Win% | 48% | 53% | 58% | 50% | 48% | 58% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has been flat.
Conclusion
The market is overbought and seasonality is negative.
I expect the major averages to be lower on Friday February 15 than they were on Friday February 8.
Last week the Dow Jones Industrial Average was down slightly while the other indices were up slightly so I am calling last weeks negative forecast a tie.
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In his latest news letter Jerry Minton discusses the January effect. You can sign up for his letter at: http://alphaim.net/
Good Luck,
YTD W 5/L 0/T 1
