The good news is:
• New lows retreated to non threatening levels last week.
The negatives
Last week, between Tuesday and Thursday the market rallied about 2.5% leaving it a little overbought for the short term. The rally brought new lows down to comfortable levels, but new highs were weaker than I would like to see.
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 did not respond to last weeks rally in prices.
The next chart is similar to the one above except is shows the NASDAQ composite in blue and OTC NH has been calculated from NASDAQ data.
OTC NH was a little more responsive and has not fallen as much than NY NH.
The implication of the mid May confirmations of price highs by the new high indicators is; prices should, at least, return to their previous highs.
The positives
The recent period of weakness has been consistent with the seasonal pattern and should be ending next week. The recent decline in the number of new lows supports this view.
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.
Last Monday OTC HL Ratio dropped below the 50% level, but then recovered to close at 74% on Friday.
The chart below is similar to the one above except is shows the SPX in red and NY HL Ratio has been calculated from NYSE data.
NY HL Ratio has been in a weaker pattern, but also managed to close above the neutral level last Friday.
The next 2 charts have been calculated using FastTrack (fasttrack.net) data and show a 20 day moving correlation, in black, between the SPX, in red and the dollar index, in green. Dashed horizontal lines have been drawn at 25%, 50% and 75% levels for the correlation indicator.
Late last May the correlation hit 75%, its highest level in nearly 5 years.
The next chart is similar to the one above except it covers the past 5 years and dashed vertical lines have been drawn on the 1st trading day of each year.
The indicator has spent most of the last 5 years under the 50% level and some significant stretches under the 25% level, indicating a very strong negative correlation. This is one of many indicators that have been "Out of Whack" for the last 4-5 years. I hope it indicates that things are returning to "normal".
Seasonality
Next week includes first 4 trading days of July during the 1st year of the Presidential Cycle.
The tables below show the daily return on a percentage basis for the first 4 trading days of July 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.
Over all average returns have been mostly positive, but, for the past 20 years they have been weak.
Report for the first 4 days of July.
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 | Totals | |
| 1965-1 | 1.80% 4 | 0.73% 5 | 0.82% 2 | -0.28% 3 | 3.08% |
| 1969-1 | 0.60% 2 | 0.60% 3 | 0.47% 4 | 0.98% 1 | 2.65% |
| 1973-1 | -0.82% 1 | -0.70% 2 | -0.06% 4 | 0.09% 5 | -1.49% |
| 1977-1 | 0.17% 5 | 0.22% 2 | -0.16% 3 | 0.32% 4 | 0.55% |
| 1981-1 | -0.52% 3 | -0.85% 4 | -1.74% 1 | -0.52% 2 | -3.63% |
| 1985-1 | 0.09% 1 | 0.15% 2 | 0.14% 3 | 0.42% 5 | 0.80% |
| 1989-1 | 0.16% 1 | 0.22% 3 | 0.60% 4 | 0.65% 5 | 1.63% |
| Avg | -0.18% | -0.19% | -0.24% | 0.19% | -0.43% |
| 1993-1 | -0.05% 4 | 0.13% 5 | -0.32% 2 | -0.49% 3 | -0.73% |
| 1997-1 | -0.26% 2 | 1.20% 3 | 0.82% 4 | 0.21% 1 | 1.98% |
| 2001-1 | -0.55% 1 | -0.37% 2 | -2.83% 4 | -3.65% 5 | -7.40% |
| 2005-1 | 0.02% 5 | 1.04% 2 | -0.49% 3 | 0.34% 4 | 0.91% |
| 2009-1 | 0.58% 3 | -2.67% 4 | -0.51% 1 | -2.31% 2 | -4.90% |
| Avg | -0.05% | -0.13% | -0.67% | -1.18% | -2.03% |
| OTC summary for Presidential Year 1 1965 - 2009 | |||||
| Averages | 0.10% | -0.02% | -0.27% | -0.35% | -0.55% |
| % Winners | 58% | 67% | 42% | 58% | 58% |
| MDD 7/6/2001 7.24% -- 7/7/2009 5.39% -- 7/7/1981 3.59% | |||||
| OTC summary for all years 1963 - 2012 | |||||
| Averages | 0.10% | -0.22% | 0.02% | 0.13% | 0.02% |
| % Winners | 60% | 52% | 50% | 52% | 58% |
| MDD 7/6/2001 7.24% -- 7/2/2002 7.20% -- 7/7/2009 5.39% | |||||
| SPX Presidential Year 1 | |||||
| Day1 | Day2 | Day3 | Day4 | Totals | |
| 1929-1 | 0.54% 1 | 1.04% 2 | 0.43% 3 | 0.50% 5 | 2.51% |
| 1933-1 | 2.57% 6 | 3.84% 1 | -0.60% 3 | 2.60% 4 | 8.40% |
| 1937-1 | 0.45% 4 | 1.49% 5 | 3.50% 2 | 0.74% 3 | 6.18% |
| 1941-1 | -0.30% 2 | 0.71% 3 | 0.20% 4 | 0.10% 6 | 0.71% |
| 1945-1 | 0.47% 1 | 0.00% 2 | -1.13% 4 | 0.34% 5 | -0.33% |
| 1949-1 | 0.71% 5 | 0.56% 2 | 1.26% 3 | 0.00% 4 | 2.52% |
| Avg | 0.78% | 1.32% | 0.65% | 0.75% | 3.50% |
| 1953-1 | 0.41% 3 | 0.29% 4 | 0.21% 5 | 0.08% 1 | 0.99% |
| 1957-1 | 0.13% 1 | 0.99% 2 | 1.17% 3 | 0.47% 5 | 2.76% |
| 1961-1 | 0.88% 1 | 0.64% 3 | 0.27% 4 | -0.06% 5 | 1.74% |
| 1965-1 | 0.43% 4 | 0.80% 5 | -0.20% 2 | -0.38% 3 | 0.66% |
| 1969-1 | 0.38% 2 | 0.88% 3 | 0.68% 4 | -0.58% 1 | 1.35% |
| Avg | 0.45% | 0.72% | 0.43% | -0.09% | 1.50% |
| 1973-1 | -1.30% 1 | -1.00% 2 | -0.09% 4 | -0.49% 5 | -2.89% |
| 1977-1 | -0.38% 5 | -0.01% 2 | -0.51% 3 | 0.35% 4 | -0.55% |
| 1981-1 | -1.10% 3 | -0.87% 4 | -0.99% 1 | 0.68% 2 | -2.27% |
| 1985-1 | 0.30% 1 | -0.22% 2 | -0.29% 3 | 0.56% 5 | 0.35% |
| 1989-1 | 0.39% 1 | 0.44% 3 | 0.28% 4 | 1.04% 5 | 2.16% |
| Avg | -0.42% | -0.33% | -0.32% | 0.43% | -0.64 |
| 1993-1 | -0.34% 4 | -0.71% 5 | -0.99% 2 | 0.32% 3 | -1.72% |
| 1997-1 | 0.66% 2 | 1.46% 3 | 1.43% 4 | -0.51% 1 | 3.04% |
| 2001-1 | 0.86% 1 | -0.18% 2 | -1.23% 4 | -2.35% 5 | -2.91% |
| 2005-1 | 0.26% 5 | 0.88% 2 | -0.83% 3 | 0.25% 4 | 0.56% |
| 2009-1 | 0.44% 3 | -2.91% 4 | 0.26% 1 | -1.97% 2 | -4.19% |
| Avg | 0.38% | -0.29% | -0.27% | -0.85% | -1.04% |
| SPX summary for Presidential Year 1 1929 - 2009 | |||||
| Averages | 0.31% | 0.39% | 0.13% | 0.08% | 0.91% |
| % Winners | 76% | 62% | 52% | 62% | 67% |
| MDD 7/7/2009 4.58% -- 7/6/2001 3.73% -- 7/6/1981 2.93% | |||||
| SPX summary for all years 1928 - 2012 | |||||
| Averages | 0.32% | 0.18% | 0.31% | 0.05% | 0.84% |
| % Winners | 70% | 59% | 61% | 57% | 69% |
| MDD 7/7/2009 4.58% -- 7/2/2002 4.30% -- 7/6/2001 3.73% | |||||
Money Supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has been declining.
July
Since 1963, over all years, the OTC in July has been up 50% of the time with an average gain of 0.2%. During the 1st year of the Presidential Cycle the OTC in July has been up 75% of the time with an average gain of 2.4%. The best July ever for the OTC was 1997 (+10.7%), the worst 2002 (-9.2%).
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 July 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 56% of the time in July with an average gain of 1.5%. During the 1st year of the Presidential Cycle the SPX has been up 62% of the time with an average gain of 2.2%. The best July ever for the SPX was 1932 (+37.7%) the worst 1934 (-11.5%).
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 July 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 47% of the time in July with an average loss 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 2.6%. The best July ever for the R2K, 1980 (+11.0%), the worst 2002 (-15.2%)
The chart below is similar to those above except it shows the average daily performance of the R2K, over all years since 1979, in July 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 61% of the time in July with an average gain of 1.2%. During the 1st year of the Presidential Cycle the DJIA has been up 72% of the time in July with an average gain of 1.6%. The best July ever for the DJIA 1932 (+26.7%), the worst 1893 (-15.7%)
The chart below is similar to those above except it shows the average daily performance over all years for the DJIA in July in black and the average performance during the 1st year of the Presidential Cycle in green.
Conclusion
Last week the market recovered from its oversold condition.
There is not much to get excited about for next week. The market is a little overbought, but, seasonality is slightly positive.
I expect the major averages to be higher on Friday July 5 than they were on Friday June 28.
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Good Luck,
YTD W 14/L 8/T 4
