The good news is:
• The secondaries have been holding up better than the blue chips.
The negatives
In the past I have complained about the contamination of NYSE data by fixed income issues. This past week we saw the problem clearly when new lows on the NYSE hit extremes while new lows on the NASDAQ were dormant.
There were 162 new lows (that is a big number) on the NYSE on Friday and a high percentage of those were Municipal Bond funds.
In the early part of this century the Fed kept interest rates too low for too long causing the bubble in the housing market. The housing market finally collapsed of its own weight in 2007. Recently, holding interest rates below the rate of inflation, the Fed has been causing a bubble in the bond market. I and many others have been uneasy and wrong about the bond market for quite a while. What we are seeing now may be just another dip from which the bond market will recover to new all time highs or this could be the beginning of something more serious.
It is difficult to imagine how the Fed can extricate itself from this situation.
The positives
There is a stark contrast between NYSE and NASDAQ data. I prefer NASDAQ data because it is not contaminated with a high percentage of fixed income issues.
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 rose a little last week to close at a very strong 84%. 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 sharply to 54% on Friday reflecting the contamination problem.
Seasonality
Next week includes the first 5 trading days of June during the 1st year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the first 5 trading days of June 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.
Seasonality for the coming week has been modestly positive by all measures.
Report for the first 5 trading days of June.
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 | ||||||
| Day1 | Day2 | Day3 | Day4 | Day5 | Totals | |
| 1965-1 | 0.40% 2 | -1.17% 3 | -0.50% 4 | -0.38% 5 | 0.14% 1 | -1.52% |
| 1969-1 | 0.28% 1 | -0.49% 2 | -0.15% 3 | -0.52% 4 | 0.44% 5 | -0.45% |
| 1973-1 | -0.33% 5 | -1.50% 1 | 0.93% 2 | -0.01% 3 | 0.86% 4 | -0.05% |
| 1977-1 | 0.28% 3 | -0.06% 4 | 0.41% 5 | -0.08% 1 | 0.06% 2 | 0.61% |
| 1981-1 | -0.20% 1 | -1.54% 2 | -0.32% 3 | 0.36% 4 | 0.74% 5 | -0.96% |
| 1985-1 | -0.07% 1 | 0.14% 2 | 0.27% 3 | 0.03% 4 | -0.28% 5 | 0.08% |
| 1989-1 | 0.48% 4 | 0.74% 5 | -0.84% 1 | 0.03% 2 | 0.95% 3 | 1.35% |
| Avg | 0.03% | -0.44% | 0.09% | 0.06% | 0.46% | 0.21% |
| 1993-1 | 0.54% 2 | 0.22% 3 | 0.05% 4 | -0.60% 5 | -1.05% 1 | -0.84% |
| 1997-1 | 0.32% 1 | -1.42% 2 | -0.38% 3 | 0.75% 4 | 1.06% 5 | 0.34% |
| 2001-1 | 1.84% 5 | 0.30% 1 | 3.61% 2 | -0.72% 3 | 2.09% 4 | 7.13% |
| 2005-1 | 0.95% 3 | 0.48% 4 | -1.26% 5 | 0.21% 1 | -0.41% 2 | -0.04% |
| 2009-1 | 3.06% 1 | 0.44% 2 | -0.59% 3 | 1.32% 4 | -0.03% 5 | 4.20% |
| Avg | 1.34% | 0.01% | 0.29% | 0.19% | 0.33% | 2.16% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Averages | 0.63% | -0.32% | 0.10% | 0.03% | 0.38% | 0.82% |
| % Winners | 75% | 50% | 42% | 50% | 67% | 50% |
| MDD 6/3/1981 2.05% -- 6/4/1965 2.05% -- 6/4/1973 1.82 | ||||||
| OTC summary for all years 1963 - 2012 | ||||||
| Averages | 0.15% | 0.39% | 0.17% | 0.06% | -0.01% | 0.76% |
| % Winners | 57% | 72% | 60% | 56% | 48% | 62% |
| MDD 6/7/2010 5.61% -- 6/7/2002 4.97% -- 6/7/2011 4.72% | ||||||
| SPX Presidential Year 1 | ||||||
| Day1 | Day2 | Day3 | Day4 | Day5 | Totals | |
| 1929-1 | 0.36% 6 | 1.40% 1 | 1.46% 2 | -0.20% 3 | 0.20% 4 | 3.23% |
| 1933-1 | 1.04% 4 | 4.00% 5 | -2.76% 6 | 2.23% 1 | -0.30% 2 | 4.21% |
| 1937-1 | -1.85% 2 | 0.69% 3 | 0.19% 4 | 1.12% 5 | -0.18% 6 | -0.04% |
| 1941-1 | 0.11% 1 | 1.18% 2 | -0.11% 3 | 0.42% 4 | -0.11% 5 | 1.49% |
| 1945-1 | 0.13% 5 | 0.20% 6 | -0.07% 1 | -0.13% 2 | -0.47% 3 | -0.33% |
| 1949-1 | -0.35% 3 | 0.00% 4 | -0.64% 5 | -1.64% 1 | 0.14% 2 | -2.48% |
| Avg | -0.18% | 1.21% | -0.68% | 0.40% | -0.18% | 0.57% |
| 1953-1 | -1.59% 1 | 0.29% 2 | -0.17% 3 | -0.62% 4 | 0.25% 5 | -1.84% |
| 1957-1 | -0.13% 1 | -0.19% 2 | -0.02% 3 | 0.70% 4 | 0.11% 5 | 0.47% |
| 1961-1 | 0.00% 4 | 0.26% 5 | 0.52% 1 | -0.28% 2 | -0.37% 3 | 0.12% |
| 1965-1 | -0.79% 2 | -0.72% 3 | -0.22% 4 | 0.24% 5 | -0.26% 1 | -1.75% |
| 1969-1 | -0.50% 1 | -0.30% 2 | -0.04% 3 | 0.17% 4 | -0.62% 5 | -1.30% |
| Avg | -0.60% | -0.13% | 0.02% | 0.04% | -0.18% | -0.86% |
| 1973-1 | -0.97% 5 | -0.92% 1 | 1.60% 2 | -0.30% 3 | 1.47% 4 | 0.88% |
| 1977-1 | 0.84% 3 | -0.20% 4 | 0.98% 5 | -0.47% 1 | 0.51% 2 | 1.67% |
| 1981-1 | -0.14% 1 | -1.35% 2 | 0.07% 3 | 0.19% 4 | 0.96% 5 | -0.27% |
| 1985-1 | -0.12% 1 | 0.38% 2 | 0.06% 3 | 0.47% 4 | -0.72% 5 | 0.07% |
| 1989-1 | 0.45% 4 | 1.10% 5 | -1.07% 1 | 0.69% 2 | 0.84% 3 | 2.00% |
| Avg | 0.01% | -0.20% | 0.33% | 0.12% | 0.61% | 0.87% |
| 1993-1 | 0.81% 2 | 0.00% 3 | -0.30% 4 | -0.54% 5 | -0.53% 1 | -0.55% |
| 1997-1 | -0.23% 1 | -0.10% 2 | -0.63% 3 | 0.39% 4 | 1.73% 5 | 1.16% |
| 2001-1 | 0.39% 5 | 0.51% 1 | 1.30% 2 | -1.05% 3 | 0.55% 4 | 1.69% |
| 2005-1 | 0.90% 3 | 0.17% 4 | -0.69% 5 | 0.12% 1 | -0.02% 2 | 0.49% |
| 2009-1 | 2.58% 1 | 0.20% 2 | -1.37% 3 | 1.15% 4 | -0.25% 5 | 2.30% |
| Avg | 0.89% | 0.16% | -0.34% | 0.01% | 0.30% | 1.02% |
| SPX summary for Presidential Year 1 1929 - 2009 | ||||||
| Averages | 0.05% | 0.31% | -0.09% | 0.13% | 0.14% | 0.54% |
| % Winners | 48% | 62% | 38% | 57% | 48% | 62% |
| MDD 6/3/1933 2.76% -- 6/6/1949 2.61% -- 6/4/1953 2.08% | ||||||
| SPX summary for all years 1928 - 2012 | ||||||
| Averages | -0.04% | 0.21% | 0.21% | 0.21% | -0.03% | 0.55% |
| % Winners | 49% | 62% | 53% | 53% | 48% | 59% |
| MDD 6/2/1931 6.30% -- 6/7/2010 4.75% -- 6/7/2011 4.48% | ||||||
Money Supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has fallen below the trend rate.
In his latest "Trend in Focus" Tom McClellan takes a slightly different look at the M2 data: M2’s Slow Growth Creates Opportunity in Bonds
June
Since 1963, over all years, the OTC in June has been up 50% of the time with an average gain of 0.5%. During the 1st year of the Presidential Cycle the OTC in June has been up 50% of the time with an average loss of -0.7% (helped considerably by -9.2% & 7.1% losses in 1965 & 1969 respectively). The best June ever for the OTC was 2000 (+16.6%), the worst 2002 (-9.4%).
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 June over all years since 1963, 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 55% of the time in June with an average gain of 0.8%. During the 1st year of the Presidential Cycle the SPX has been up 38% of the time with an average gain of 0.7%. The best June ever for the SPX was 1938 (+24.7%) the worst 1930 (-16.5%).
The chart below is similar to the one above except it shows the average daily performance over all years since 1928 for the SPX in June 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 62% of the time in June with an average gain of 0.5%. During the 1st year of the Presidential Cycle the R2K has been up 75% of the time with an average gain of 1.1%. The best June ever for the R2K, 2000 (+8.6%), the worst 2010 (-7.9%)
The chart below is similar to those above except it shows the average daily performance of the R2K, over all years since 1979, in June 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 46% of the time in June with an average gain of 0.1%. During the 1st year of the Presidential Cycle the DJIA has been up 38% of the time in June with an average gain of 0.2%. The best June ever for the DJIA 1938 (+24.3%), the worst 1930 (-17.7%)
The chart below is similar to those above except it shows the average daily performance over all years for the DJIA in June in black and the average performance during the 1st year of the Presidential Cycle in green.
Conclusion
The market continued its sell off last week, but the secondaries outperformed the blue chips. The R2K was only down 0.01% while the SPX was down 1.14%. The surprise was the dramatic increase in NYSE new lows caused by the bond market sell off.
I expect the major averages to be higher on Friday June 7 than they were on Friday May 31.
Last weeks positive forecast was a miss.
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Good Luck,
YTD W 11/L 7/T 4
