The good news is:
• The major indices as well as the breadth indicators have held up well during what has been an historically weak period.
The negatives
Seasonally, during the 1st year of the Presidential Cycle, February or September, depending on the index, has been the weakest month of the year.
So far this month the rate of advance has been retarded, but all of the major indices are up and the breadth indicators have held up quite well.
The positives
Last week, for the first time in several weeks, the secondaries outperformed the blue chips and new highs began increasing while new lows remained dormant.
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 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 S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio also finished the week down slightly, but still extremely high at 94%.
The new high indicators turned upward last week.
The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.
OTC NH is 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 has been calculated from NYSE data.
NY NH turned upward, but is still off its high set late last month. The NY NH high set last month was its highest high in nearly 3 years.
Seasonality
Next week includes the 5 trading days prior to the 4th 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 4th 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.
Average returns for the coming week have been negative by all measures.
Report for the week before the 4th Friday of February.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | 0.00% | 0.61% | 0.93% | 0.54% | -0.15% | 1.94% |
| 1969-1 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1973-1 | 0.00% | 0.37% | -0.85% | -0.22% | -1.08% | -1.78% |
| 1977-1 | 0.00% | -0.25% | -0.40% | -0.96% | 0.06% | -1.54% |
| 1981-1 | 0.40% | 0.46% | 0.03% | 1.10% | 0.96% | 2.94% |
| 1985-1 | 0.00% | -0.28% | 0.13% | -0.10% | -0.28% | -0.54% |
| 1989-1 | 0.00% | -0.20% | -0.96% | 0.14% | -0.77% | -1.78% |
| Avg | 0.40% | 0.02% | -0.41% | -0.01% | -0.22% | -0.54% |
| 1993-1 | -1.69% | -0.16% | 1.70% | 0.70% | 0.55% | 1.11% |
| 1997-1 | 0.81% | 0.19% | -0.53% | -2.08% | -0.28% | -1.89% |
| 2001-1 | 0.00% | -4.41% | -2.14% | -1.05% | 0.78% | -6.82% |
| 2005-1 | 0.00% | -1.37% | 0.05% | 1.01% | 0.67% | 0.35% |
| 2009-1 | -3.71% | 3.90% | -1.14% | -2.38% | -0.98% | -4.31% |
| Avg | -1.53% | -0.37% | -0.41% | -0.76% | 0.15% | -2.31% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Avg | -1.05% | -0.10% | -0.29% | -0.30% | -0.05% | -1.12% |
| Win% | 50% | 45% | 45% | 45% | 45% | 36% |
| OTC summary for all years 1963 - 2012 | ||||||
| Avg | -0.28% | -0.31% | 0.21% | 0.05% | 0.10% | -0.07% |
| Win% | 40% | 37% | 65% | 63% | 55% | 57% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | 0.00% | 0.47% | 0.62% | 0.15% | -0.19% | 1.05% |
| 1957-1 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1961-1 | 0.35% | 0.06% | 0.00% | 0.37% | 0.40% | 1.19% |
| 1965-1 | 0.00% | 0.50% | 0.61% | 0.03% | 0.26% | 1.41% |
| 1969-1 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Avg | 0.35% | 0.34% | 0.62% | 0.19% | 0.16% | 1.22% |
| 1973-1 | 0.00% | 0.37% | -0.62% | -0.22% | -1.12% | -1.59% |
| 1977-1 | 0.00% | 0.00% | -0.30% | -0.59% | -0.12% | -1.01% |
| 1981-1 | 0.61% | 0.03% | 0.89% | 1.23% | 0.90% | 3.66% |
| 1985-1 | 0.00% | -0.15% | -0.08% | -0.55% | -0.46% | -1.24% |
| 1989-1 | 0.00% | -0.26% | -1.71% | 0.39% | -1.68% | -3.27% |
| Avg | 0.61% | 0.00% | -0.36% | 0.05% | -0.50% | -0.69% |
| 1993-1 | 0.23% | -0.10% | 1.40% | 0.33% | 0.24% | 2.10% |
| 1997-1 | 1.06% | 0.21% | -0.78% | -1.32% | -0.54% | -1.35% |
| 2001-1 | 0.00% | -1.74% | -1.85% | -0.20% | -0.56% | -4.34% |
| 2005-1 | 0.00% | -1.45% | 0.56% | 0.79% | 0.93% | 0.83% |
| 2009-1 | -3.47% | 4.01% | -1.07% | -1.58% | -2.36% | -4.46% |
| Avg | -0.72% | 0.19% | -0.35% | -0.39% | -0.46% | -1.44% |
| SPX summary for Presidential Year 1 1953 - 2009 | ||||||
| Avg | -0.24% | 0.16% | -0.19% | -0.09% | -0.33% | -0.54% |
| Win% | 80% | 58% | 42% | 54% | 38% | 46% |
| SPX summary for all years 1953 - 2012 | ||||||
| Avg | -0.24% | -0.19% | 0.18% | -0.08% | 0.09% | -0.10% |
| Win% | 36% | 42% | 52% | 46% | 61% | 46% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has leveled off at an elevated trend.
Conclusion
The market looks strong, but, seasonality is negative.
I expect the major averages to be lower on Friday February 22 than they were on Friday February 15.
Last week the Dow Jones Industrial Average and OTC were down while the OTC and Russell 2000 were up so I am calling last weeks negative forecast a tie.
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Good Luck,
YTD W 5/L 0/T 2
