The good news is:
• The Russell 2000 closed at an all time high Friday.
• There were 308 new highs on the NASDAQ last Friday, the largest number since December 7, 2010.
The negatives
The market is overbought.
The NASDAQ composite (OTC) has been up for 7 consecutive days. The last time we saw the OTC up for 7 consecutive days was July 6, 2011. The following week it fell 3.9%.
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. Dashed vertical lines have been drawn on the 1st trading day of each month.
OTC NH recovered a bit last week, but it is far below its high set 6 weeks ago. The OTC is only 0.6% off its May high so we have a setup for a non confirmation of the OTC by OTC NH.
The next chart is similar to the one above except is shows the S&P 500 (SPX) in red and NY NH has been calculated from NYSE data.
NY NH has been dead in the water during this rally.
The positives
The number of new lows on the NASDAQ has bee insignificant while, over the past 2 weeks the number of new lows on the NYSE has been all over the place from a low of 11 to a high of 573.
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 closed at 87% on Friday.
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 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 than OTC HL Ratio, but it managed to close at a solidly positive69%.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of July 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 2nd Friday of July during the 1st year of the Presidential Cycle.
OTC data covers the period from 1963 - 2012 while SPX data runs 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.
Returns for the coming week have been positive by all measures.
Report for the week before the 2nd Friday of July.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | 0.00% | 0.82% | -0.28% | -0.06% | 0.83% | 1.31% |
| 1969-1 | -0.01% | -0.87% | -0.44% | 0.37% | 0.79% | -0.15% |
| 1973-1 | 0.53% | 1.17% | 1.49% | 0.47% | -0.14% | 3.53% |
| 1977-1 | 0.00% | 0.22% | -0.16% | 0.32% | 0.53% | 0.91% |
| 1981-1 | 0.15% | -0.46% | 0.46% | 0.56% | 0.35% | 1.05% |
| 1985-1 | -0.26% | -0.22% | 0.46% | 0.67% | 0.62% | 1.27% |
| 1989-1 | 0.06% | 0.41% | 0.52% | 0.24% | 0.23% | 1.46% |
| Avg | 0.12% | 0.22% | 0.55% | 0.45% | 0.32% | 1.64% |
| 1993-1 | 0.00% | -0.32% | -0.49% | 0.56% | 0.44% | 0.19% |
| 1997-1 | 1.42% | 1.19% | 2.50% | -0.74% | -1.33% | 3.04% |
| 2001-1 | 1.13% | -3.15% | 0.47% | 5.26% | 0.44% | 4.14% |
| 2005-1 | 0.00% | 1.04% | -0.49% | 0.34% | 1.79% | 2.69% |
| 2009-1 | 2.12% | 0.36% | 3.51% | 1.19% | 0.08% | 7.26% |
| Avg | 1.55% | -0.18% | 1.10% | 1.32% | 0.28% | 3.46% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Avg | 0.64% | 0.02% | 0.63% | 0.76% | 0.39% | 2.22% |
| Win% | 75% | 58% | 58% | 83% | 83% | 92% |
| OTC summary for all years 1963 - 2012 | ||||||
| Avg | 0.04% | -0.13% | 0.35% | 0.29% | 0.38% | 0.92% |
| Win% | 66% | 50% | 59% | 66% | 74% | 66% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | 0.08% | 0.53% | -0.04% | -0.29% | -0.08% | 0.21% |
| 1957-1 | 0.43% | -0.37% | 0.68% | -0.39% | 0.45% | 0.80% |
| 1961-1 | -0.09% | -0.03% | -0.56% | -0.70% | 0.65% | -0.74% |
| 1965-1 | 0.00% | -0.20% | -0.38% | 0.85% | 0.37% | 0.65% |
| 1969-1 | -1.27% | -0.33% | 1.00% | 0.61% | -0.85% | -0.84% |
| Avg | -0.21% | -0.08% | 0.14% | 0.02% | 0.11% | 0.02% |
| 1973-1 | 0.85% | 1.35% | 2.20% | -0.28% | -1.34% | 2.78% |
| 1977-1 | 0.00% | -0.01% | -0.51% | 0.35% | -0.14% | -0.31% |
| 1981-1 | 0.21% | 0.01% | 0.46% | 0.07% | 0.32% | 1.07% |
| 1985-1 | -0.31% | -0.46% | 0.69% | 0.30% | 0.18% | 0.40% |
| 1989-1 | 0.65% | 0.54% | 0.31% | 0.04% | 0.57% | 2.12% |
| Avg | 0.35% | 0.29% | 0.63% | 0.10% | -0.08% | 1.21% |
| 1993-1 | 0.00% | -0.99% | 0.32% | 1.31% | -0.11% | 0.53% |
| 1997-1 | 0.19% | 0.80% | 1.17% | -0.53% | -1.75% | -0.12% |
| 2001-1 | 0.69% | -1.44% | -0.11% | 2.37% | 0.62% | 2.13% |
| 2005-1 | 0.00% | 0.88% | -0.83% | 0.25% | 1.17% | 1.46% |
| 2009-1 | 2.49% | 0.53% | 2.96% | 0.86% | -0.04% | 6.81% |
| Avg | 1.12% | -0.04% | 0.70% | 0.85% | -0.02% | 2.16% |
| SPX summary for Presidential Year 1 1953 - 2009 | ||||||
| Avg | 0.36% | 0.06% | 0.49% | 0.32% | 0.00% | 1.13% |
| Win% | 73% | 47% | 60% | 67% | 53% | 73% |
| SPX summary for all years 1953 - 2012 | ||||||
| Avg | 0.01% | -0.04% | 0.27% | 0.16% | 0.28% | 0.67% |
| Win% | 57% | 45% | 58% | 61% | 67% | 67% |
Conclusion
The market is overbought so we should see a few down days in the near future, but, the coming week has, seasonally, been very strong. The OTC has not been down during the week prior to the 2nd Friday in July during the 1st year of the Presidential Cycle since 1969.
I expect the major averages to be higher on Friday July 12 than they were on Friday July 5.
Gordon Harms produces a Power Point for our local timing group meetings. You can get a copy of that at: http://www.stockmarket-ta.com/
This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://www.alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.
Good Luck,
YTD W 15/L 8/T 4
