The good news is:
• The NASDAQ composite (OTC) closed at a multi year high on Friday while all of the other broad based indices closed at all time highs.
The negatives
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 Friday while NY NH remains closer to its low of the past 6 months than its high. This is an example of an extreme non confirmation.
The next chart is similar to the one above except it shows the OTC in blue and OTC NH, in green, has been calculated from NASDAQ data.
The OTC closed at a multi year high Friday while OTC NH is well below its July high.
New highs failing to confirm index highs is an indication of narrowing leadership.
The positives
New index highs are a strong positive. 52 week new highs of the individual issues have come up short, but, even more important, new lows have remained dormant.
The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs divided by (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 finished the week above 90%.
There are trading systems that impose a NO SELL filter when variations of this indicator are above 80%.
The next chart is similar to the one above except it shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio also rallied to a very strong 89%.
Seasonality
Next week includes the 5 trading days prior to the 4th Friday of October during the 1st year of the Presidential Cycle.
The tables below show the daily percentage return for the 5 trading days prior to the 4th Friday of October 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 modestly positive during the 1st year of the Presidential Cycle and modestly negative over all years.
Report for the week before the 4th Friday of October.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1965-1 | 0.41% | 0.13% | -0.15% | 0.29% | 0.16% | 0.85% |
| 1969-1 | 1.07% | 0.34% | 0.73% | 2.00% | 0.86% | 5.01% |
| 1973-1 | -0.85% | -0.43% | 0.29% | 0.16% | 0.43% | -0.40% |
| 1977-1 | -0.66% | -1.08% | 0.03% | 0.22% | 0.43% | -1.06% |
| 1981-1 | -0.25% | 0.77% | 0.60% | 0.03% | -0.27% | 0.88% |
| 1985-1 | -0.23% | 0.29% | 0.27% | 0.44% | -0.38% | 0.39% |
| 1989-1 | -0.73% | -1.18% | 0.26% | -1.02% | -1.18% | -3.86% |
| Avg | -0.54% | -0.33% | 0.29% | -0.04% | -0.19% | -0.81% |
| 1993-1 | -0.57% | -1.81% | -0.06% | 0.39% | 0.18% | -1.87% |
| 1997-1 | 1.12% | 1.78% | -0.43% | -2.00% | -1.22% | -0.76% |
| 2001-1 | 2.00% | -0.21% | 1.59% | 2.00% | -0.37% | 5.01% |
| 2005-1 | 1.61% | -0.30% | -0.45% | -1.73% | 1.26% | 0.41% |
| 2009-1 | 0.91% | -0.59% | -0.59% | 0.68% | -0.50% | -0.10% |
| Avg | 1.01% | -0.23% | 0.01% | -0.13% | -0.13% | 0.54% |
| OTC summary for Presidential Year 1 1965 - 2009 | ||||||
| Avg | 0.32% | -0.19% | 0.17% | 0.12% | -0.05% | 0.37% |
| Win% | 50% | 42% | 58% | 75% | 50% | 50% |
| OTC summary for all years 1963 - 2012 | ||||||
| Avg | 0.21% | -0.33% | 0.13% | -0.06% | -0.10% | -0.14% |
| Win% | 50% | 36% | 57% | 50% | 52% | 48% |
| SPX Presidential Year 1 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1953-1 | 0.08% | 0.04% | 0.08% | 0.45% | 0.21% | 0.87% |
| 1957-1 | -2.00% | -0.43% | 2.00% | -0.05% | -0.29% | -0.78% |
| 1961-1 | -0.61% | -0.12% | 0.53% | 0.18% | -0.18% | -0.20% |
| 1965-1 | 0.33% | 0.13% | -0.02% | 0.17% | 0.04% | 0.66% |
| 1969-1 | 0.21% | 0.77% | 0.65% | -0.38% | 0.68% | 1.92% |
| Avg | -0.40% | 0.08% | 0.65% | 0.08% | 0.09% | 0.49% |
| 1973-1 | -0.96% | 0.54% | 0.47% | 0.21% | 0.80% | 1.06% |
| 1977-1 | -0.75% | -0.69% | 1.21% | 0.26% | 0.29% | 0.33% |
| 1981-1 | -0.18% | 1.09% | -0.15% | -0.38% | -0.87% | -0.49% |
| 1985-1 | -0.04% | 0.58% | 0.56% | -0.31% | -0.52% | 0.26% |
| 1989-1 | -0.67% | -0.33% | -0.35% | -1.33% | -0.85% | -3.53% |
| Avg | -0.52% | 0.24% | 0.35% | -0.31% | -0.23% | -0.47% |
| 1993-1 | -0.22% | -0.48% | -0.03% | -0.15% | -0.45% | -1.33% |
| 1997-1 | 1.21% | 1.75% | -0.39% | -1.84% | -0.95% | -0.22% |
| 2001-1 | 1.53% | -0.47% | 0.04% | 1.37% | 0.41% | 2.88% |
| 2005-1 | 1.68% | -0.24% | -0.43% | -1.05% | 1.65% | 1.62% |
| 2009-1 | 0.94% | -0.62% | -0.89% | 1.06% | -1.22% | -0.72% |
| Avg | 1.03% | -0.01% | -0.34% | -0.12% | -0.11% | 0.44% |
| SPX summary for Presidential Year 1 1953 - 2009 | ||||||
| Avg | 0.04% | 0.10% | 0.22% | -0.12% | -0.08% | 0.15% |
| Win% | 47% | 47% | 53% | 47% | 47% | 53% |
| SPX summary for all years 1953 - 2012 | ||||||
| Avg | 0.13% | -0.17% | 0.11% | -0.17% | -0.04% | -0.15% |
| Win% | 57% | 42% | 59% | 38% | 46% | 43% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth declined a little last week.
Conclusion
The market had a strong week with the major indices up 1% - 3% with good strength in the breadth indicators. New highs are not confirming the index highs and volume leaves something to be desired, but, all time highs by all of the broad based indices suggest further advances.
I expect the major averages to be higher on Friday October 25 than they were on Friday October 18.
Last weeks negative forecast was a miss.
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Good Luck,
YTD W 19/L 13/T 10
