The good news is:
• New lows have not increased during this recent dip.
The negatives
New highs fell sharply last week.
Down over 90% on the NYSE to 48 on Thursday from 498 on Monday.
Down over 80% on the NASDAQ to 49 on Thursday from 291 on Monday.
All of the major indices closed at multi year or all time highs on Tuesday.
Tuesday's highs were confirmed by the breadth indicators which implies additional highs for, at least, the blue chip averages in the near future.
The rapid decline in new highs suggests a very good possibility the highs, in the near future will not be confirmed. That would be a setup for a cycle top.
The positives
New highs fell sharply, but there was no significant increase in new lows.
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 horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the neutral 50% level.
OTC HL Ratio fell last week, but closed the week at a strong 82%. 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 S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio fell to 77% on Friday, still very strong.
Seasonality
Next week includes the last 4 trading days of May 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 May during the 1st year of the Presidential Cycle.
OTC data covers the period from 1963 - 2012 while SPX data runs from 1928 - 2012. There are summaries for both the 1st year of the Presidential Cycle and all years combined.
The coming week has been pretty much flat on average and a little weaker during the 1st year of the Presidential Cycle than other years.
Report for the last 4 days of May.
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 | Totals | |
| 1965-1 | -0.73% 2 | 0.60% 3 | -0.83% 4 | -0.36% 5 | -1.32% |
| 1969-1 | -0.13% 1 | -0.09% 2 | -0.75% 3 | -0.27% 4 | -1.24% |
| 1973-1 | 0.86% 5 | -0.30% 2 | -1.58% 3 | -0.53% 4 | -1.56% |
| 1977-1 | -0.50% 3 | -0.01% 4 | -0.28% 5 | -0.32% 2 | -1.11% |
| 1981-1 | 0.46% 2 | 0.88% 3 | 0.51% 4 | 0.07% 5 | 1.92% |
| 1985-1 | -0.43% 2 | -0.08% 3 | -0.24% 4 | 0.30% 5 | -0.46% |
| 1989-1 | 0.32% 4 | 0.52% 5 | -0.22% 2 | 0.44% 3 | 1.06% |
| Avg | 0.14% | 0.20% | -0.36% | -0.01% | -0.03% |
| 1993-1 | 0.05% 2 | 1.30% 3 | 0.07% 4 | -0.58% 5 | 0.85% |
| 1997-1 | 1.40% 2 | 0.07% 3 | -0.51% 4 | -0.19% 5 | 0.77% |
| 2001-1 | -1.36% 5 | -3.35% 2 | -4.18% 3 | 1.25% 4 | -7.65% |
| 2005-1 | -0.56% 3 | 1.03% 4 | 0.22% 5 | -0.36% 2 | 0.33% |
| 2009-1 | 3.45% 2 | -1.11% 3 | 1.20% 4 | 1.29% 5 | 4.83% |
| Avg | 0.60% | -0.41% | -0.64% | 0.28% | -0.17% |
| OTC summary for Presidential Year 1 1965 - 2009 | |||||
| Averages | 0.24% | -0.05% | -0.55% | 0.06% | -0.30% |
| % Winners | 50% | 50% | 33% | 42% | 50% |
| MDD 5/30/2001 8.65% -- 5/31/1973 2.41% -- 5/28/1965 1.32% | |||||
| OTC summary for all years 1963 - 2012 | |||||
| Averages | 0.07% | 0.05% | 0.24% | 0.28% | 0.64% |
| % Winners | 52% | 62% | 58% | 70% | 62% |
| MDD 5/30/2001 8.65% -- 5/27/1970 3.17% -- 5/25/1999 2.97% | |||||
| SPX Presidential Year 1 | |||||
| Day4 | Day3 | Day2 | Day1 | Totals | |
| 1929-1 | -3.32% 1 | 1.61% 2 | 0.12% 3 | 0.85% 5 | -0.73% |
| 1933-1 | 2.86% 5 | 3.21% 6 | 1.45% 1 | -1.43% 3 | 6.10% |
| 1937-1 | -1.28% 2 | -0.12% 3 | 0.18% 4 | 0.00% 5 | -1.21% |
| 1941-1 | 0.64% 2 | 0.00% 3 | -0.11% 4 | -0.32% 6 | 0.22% |
| 1945-1 | 0.54% 6 | 1.08% 1 | 0.53% 2 | -0.66% 4 | 1.49% |
| 1949-1 | 0.48% 3 | -0.07% 4 | -0.34% 5 | -2.21% 2 | -2.13% |
| Avg | 0.65% | 0.82% | 0.34% | -0.92% | 0.89% |
| 1953-1 | -0.48% 2 | -0.92% 3 | -0.73% 4 | 0.33% 5 | -1.81% |
| 1957-1 | -0.91% 1 | -0.19% 2 | 0.90% 3 | 0.68% 5 | 0.48% |
| 1961-1 | -0.63% 3 | -0.38% 4 | 0.64% 5 | 0.20% 3 | -0.18% |
| 1965-1 | 0.58% 2 | -0.34% 3 | -0.52% 4 | 0.66% 5 | 0.38% |
| 1969-1 | -0.22% 1 | -0.76% 2 | -0.30% 3 | 0.19% 4 | -1.08% |
| Avg | -0.33% | -0.52% | 0.00% | 0.41% | -0.44% |
| 1973-1 | 0.75% 5 | -0.40% 2 | -1.49% 3 | -0.91% 4 | -2.05% |
| 1977-1 | -0.92% 3 | 0.25% 4 | -0.76% 5 | -0.16% 2 | -1.59% |
| 1981-1 | 1.10% 2 | 0.75% 3 | -0.24% 4 | -0.64% 5 | 0.97% |
| 1985-1 | -0.23% 2 | -0.10% 3 | 0.04% 4 | 0.96% 5 | 0.67% |
| 1989-1 | 0.01% 4 | 0.76% 5 | -0.79% 2 | 0.46% 3 | 0.44% |
| Avg | 0.14% | 0.25% | -0.65% | -0.06% | -0.31% |
| 1993-1 | 0.19% 2 | 1.02% 3 | -0.23% 4 | -0.49% 5 | 0.49% |
| 1997-1 | 0.32% 2 | -0.29% 3 | -0.37% 4 | 0.50% 5 | 0.15% |
| 2001-1 | -1.18% 5 | -0.78% 2 | -1.57% 3 | 0.62% 4 | -2.91% |
| 2005-1 | -0.34% 3 | 0.64% 4 | 0.10% 5 | -0.61% 2 | -0.21% |
| 2009-1 | 2.63% 2 | -1.90% 3 | 1.54% 4 | 1.36% 5 | 3.63% |
| Avg | 0.32% | -0.26% | -0.10% | 0.28% | 0.23% |
| SPX summary for Presidential Year 1 1929 - 2009 | |||||
| Averages | 0.03% | 0.15% | -0.09% | -0.03% | 0.05% |
| % Winners | 52% | 38% | 43% | 52% | 52% |
| MDD 5/30/2001 3.49% -- 5/27/1929 3.32% -- 5/31/1973 2.77% | |||||
| SPX summary for all years 1928 - 2012 | |||||
| Averages | 0.09% | -0.04% | 0.22% | 0.05% | 0.31% |
| % Winners | 56% | 49% | 61% | 58% | 62% |
| MDD 5/31/1932 12.52% -- 5/28/1962 8.45% -- 5/31/1935 4.49% | |||||
Money Supply (M2)
The money supply chart was provided by Gordon Harms. M2 has been growing at the trend rate.
Conclusion
The market finally sold off a bit last week, no surprises there, it was very overbought. The surprise was how sharply new highs declined. Fed is still throwing $85 billion a month at the markets so nothing very bad is likely to happen.
I expect the major averages to be higher on Friday May 31 than they were on Friday May 24.
Last weeks positive forecast was a miss.
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Good Luck,
YTD W 11/L 6/T 4
