The good news is:
• All of the major indices closed at all time or multi year highs on Friday.
The negatives
The market is overbought.
Over the past 2 ½ weeks the major indices are all up 5.5% - 9.0%.
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.
The SPX closed at an all time high last Friday that, unlike its high last May, was unconfirmed by NY NH.
Because of the high percentage of fixed income issues on the NYSE, the NYSE advance - decline line (NY ADL) (a running total of declining issues subtracted from advancing issues), over the past 10 years has developed a wildly positive bias.
The chart below covers the past 6 months showing the SPX in red and the NYSE ADL in blue.
The NYSE ADL failed to confirm the SPX high on Friday.
The numbers were not all bad, the NASDAQ ADL, which typically has a more negative bias than the NYSE ADL, did confirm Friday's high as did the NASDAQ new high indicator.
New index highs usually generate interest, indicated by volume, but not this time.
The chart below covers the past 6 months showing the SPX in red and a 5% trend (39 day EMA) of total NYSE volume.
Volume has been falling sharply for the past 2 weeks. (The end of the quarter might have had something to do with that.)
The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC Tot Vol T, in red has been calculated from NASDAQ data.
Like the NYSE, volume has fallen sharply on the NASDAQ.
The positives
The number of new lows has remained insignificant while new highs increased substantially.
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 96% 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 closed the week at a very solid 90%.
Seasonality
Next week includes the 5 trading days prior to the 3rd 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 3rd 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.
Average returns for the coming week have been positive during the 1st year of the Presidential Cycle and negative during all of the other years.
Report for the week before the 3rd Friday of July.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | 0.47% | 0.27% | -0.04% | 0.99% | 2.06% | 3.75% |
| 1969-1 | 0.00% | -0.35% | -0.99% | -0.56% | -0.13% | -2.04% |
| 1973-1 | 0.91% | 0.64% | 1.08% | 0.71% | 1.09% | 4.43% |
| 1977-1 | 0.04% | -0.10% | 0.18% | 0.00% | 0.48% | 0.59% |
| 1981-1 | -1.64% | -1.00% | -0.49% | 0.12% | 0.77% | -2.24% |
| 1985-1 | 0.21% | 0.70% | 0.85% | -0.29% | 0.29% | 1.77% |
| 1989-1 | 0.22% | -0.45% | 0.75% | -0.44% | 0.01% | 0.09% |
| Avg | -0.05% | -0.04% | 0.48% | 0.03% | 0.53% | 0.93% |
| 1993-1 | 0.26% | 0.11% | 0.57% | -0.53% | -1.26% | -0.85% |
| 1997-1 | -0.76% | 1.80% | 0.24% | 0.09% | 0.03% | 1.41% |
| 2001-1 | -2.67% | 1.88% | -2.47% | 1.51% | -0.84% | -2.59% |
| 2005-1 | 1.07% | 0.36% | 0.04% | 0.41% | 0.18% | 2.06% |
| 2009-1 | 1.20% | 0.36% | 0.53% | 2.45% | -0.39% | 4.16% |
| Avg | -0.18% | 0.90% | -0.22% | 0.78% | -0.46% | 0.84% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Avg | -0.06% | 0.35% | 0.02% | 0.40% | 0.19% | 0.88% |
| Win% | 73% | 67% | 67% | 64% | 67% | 67% |
| OTC summary for all years 1963 - 2012 | ||||||
| Avg | -0.12% | -0.13% | 0.04% | 0.04% | -0.16% | -0.34% |
| Win% | 55% | 38% | 51% | 57% | 48% | 44% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | -0.98% | -0.37% | 0.29% | 0.12% | 0.70% | -0.24% |
| 1957-1 | 0.10% | -0.51% | -0.61% | -0.10% | 0.10% | -1.02% |
| 1961-1 | -0.75% | -0.59% | 0.45% | 0.02% | 0.23% | -0.64% |
| 1965-1 | -0.02% | -0.12% | 0.33% | -0.17% | -0.03% | -0.02% |
| 1969-1 | 0.00% | -1.51% | -0.43% | -0.34% | -0.91% | -3.18% |
| Avg | -0.41% | -0.62% | 0.01% | -0.10% | 0.02% | -1.02% |
| 1973-1 | 1.52% | 0.05% | 0.60% | 0.19% | 0.55% | 2.90% |
| 1977-1 | -0.24% | -0.10% | 0.14% | 0.00% | 0.59% | 0.39% |
| 1981-1 | -1.56% | -0.30% | -0.94% | 0.21% | 0.83% | -1.75% |
| 1985-1 | -0.29% | 1.04% | 0.48% | -0.65% | 0.39% | 0.96% |
| 1989-1 | 0.18% | -0.33% | 1.32% | -0.66% | 0.72% | 1.23% |
| Avg | -0.08% | 0.07% | 0.32% | -0.23% | 0.62% | 0.75% |
| 1993-1 | 0.19% | -0.20% | 0.44% | -0.19% | -0.77% | -0.53% |
| 1997-1 | -0.26% | 2.30% | 0.28% | 0.40% | -0.16% | 2.56% |
| 2001-1 | -1.09% | 1.00% | -0.55% | 0.61% | -0.34% | -0.38% |
| 2005-1 | 0.63% | 0.23% | 0.09% | 0.26% | 0.12% | 1.32% |
| 2009-1 | 1.14% | 0.36% | -0.05% | 2.33% | 0.30% | 4.09% |
| Avg | 0.12% | 0.74% | 0.04% | 0.68% | -0.17% | 1.41% |
| SPX summary for Presidential Year 1 1953 - 2009 | ||||||
| Avg | -0.10% | 0.06% | 0.12% | 0.14% | 0.15% | 0.38% |
| Win% | 43% | 40% | 67% | 57% | 67% | 47% |
| SPX summary for all years 1953 - 2012 | ||||||
| Avg | -0.12% | -0.21% | 0.03% | -0.01% | -0.11% | -0.42% |
| Win% | 47% | 32% | 51% | 58% | 50% | 38% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth is even with its trend of the past 2 years.
Conclusion
The market is overdue for a pull back. Like the highs last May, there were enough confirmations of Friday's high to imply higher highs ahead. The overbought condition and low volume could conspire to make an interesting week ahead. Seasonality for next week has been, on average, positive during the 1st year of the Presidential Cycle, but negative during each of the other 3 years.
I expect the major averages to be lower on Friday July 19 than they were on Friday July 12.
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In his latest newsletter titled "Summer Temptations" Jerry Minton discusses the prudence of investing in what he calls the "dead zone". You can sign up for his free newsletter at: http://www.alphaim.net/
Good Luck,
YTD W 16/L 8/T 4
