The good news is:
• The Dow Jones Industrial Average (DJIA) and S&P 500 (SPX) closed at all time highs last Monday.
The negatives
The DJIA and the SPX, both blue chip indices closed at all time highs on Monday. None of the broader indices accompanied them.
The chart below covers the period from March 4 when the Russell 2000 (R2K) hit its all time high and the NASDAQ composite (OTC) hit a multi year high. It shows the major indices on log scales to illustrate the stratification in performance. Dashed vertical lines have been drawn on the 1st trading day of the week and the 1st trading day of the month.
Over the period the DJIA, in black, has lingered near its all time high followed closely by the SPX, in red. Next in performance has been the S&P mid cap (MID), in green, followed by the OTC, in blue, and, at the bottom, the R2K, in magenta. Highest quality on the top and lowest on the bottom.
The next chart 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 is at its lowest level in nearly a year and a half.
The next chart is similar the one above except it shows the SPX in red and NY NH, in green has been calculated from NYSE data.
NY NH fell last week.
The next chart covers the past 6 months showing the OTC in blue and a 10% trend of NASDAQ new lows (OTC NL) in red. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).
OTC NL recovered a little last week, but remains at a dangerously high level.
The next chart shows the OTC in blue and a 40% trend (19 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 bounced Monday then fell back to 22%, very negative.
The positives
NYSE breadth, in all forms (volume, new highs, new lows, advancing issues and declining issues) weakened a little last week, but continued to hold up much better than breadth on the NASDAQ.
The chart below covers the past 6 months showing the SPX, in red, and a 40% trend (4 day EMA) of NYSE new highs divided by new highs + new lows (NY HL Ratio), in blue. Dashed horizontal lines have been drawn at 10% increments for the indicator, the line is solid at the neutral 50% level.
NY HL Ratio rose a bit last week to 68%.
Seasonality
From a seasonal perspective next week can be viewed as either the 5 trading days prior to the 4th Friday or the 5 trading days prior to Memorial Day during the 2nd year of the Presidential Cycle.
In the tables below I have chosen to show the 5 trading days prior to Memorial day, but, either way, the numbers are similar.
Since 1971 Memorial Day has been defined as the last Monday of May.
Average returns for the coming week have been slightly positive over all years and slightly negative during the 2nd year of the Presidential Cycle. Notice Thursday has been a blow out to the upside.
Report for the 5 trading days before Memorial Day
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 2 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1974-2 | -0.61% 1 | -0.17% 2 | -0.70% 3 | -0.21% 4 | 1.12% 5 | -0.58% |
| 1978-2 | 0.30% 1 | -0.79% 2 | -0.97% 3 | 0.02% 4 | 0.03% 5 | -1.41% |
| 1982-2 | -0.38% 1 | -0.32% 2 | -1.29% 3 | -0.23% 4 | 0.10% 5 | -2.13% |
| 1986-2 | -0.24% 1 | 0.40% 2 | 0.32% 3 | 0.81% 4 | 0.59% 5 | 1.87% |
| 1990-2 | 1.02% 1 | 0.22% 2 | 0.66% 3 | 0.31% 4 | -1.00% 5 | 1.21% |
| Avg | 0.02% | -0.13% | -0.40% | 0.14% | 0.17% | -0.21% |
| 1994-2 | -0.24% 1 | 0.90% 2 | 0.18% 3 | -0.16% 4 | 0.21% 5 | 0.89% |
| 1998-2 | -0.82% 1 | 0.78% 2 | -0.76% 3 | -0.59% 4 | -0.88% 5 | -2.27% |
| 2002-2 | -2.29% 1 | -2.20% 2 | 0.56% 3 | 1.44% 4 | -2.13% 5 | -4.61% |
| 2006-2 | -0.96% 1 | -0.65% 2 | 0.48% 3 | 1.34% 4 | 0.55% 5 | 0.77% |
| 2010-2 | -0.69% 1 | -0.12% 2 | -0.68% 3 | 3.73% 4 | -0.91% 5 | 1.32% |
| Avg | -1.00% | -0.26% | -0.05% | 1.15% | -0.63% | -0.78% |
| OTC summary for Presidential Year 2 1974 - 2010 | ||||||
| Averages | -0.49% | -0.19% | -0.22% | 0.65% | -0.23% | -0.49% |
| % Winners | 20% | 40% | 50% | 60% | 60% | 50% |
| MDD 5/25/1970 9.39% -- 5/24/2002 4.59% -- 5/22/1998 2.26% | ||||||
| OTC summary for all years 1971 - 2013 | ||||||
| Averages | -0.15% | -0.18% | 0.02% | 0.24% | 0.11% | 0.05% |
| % Winners | 43% | 47% | 56% | 58% | 58% | 60% |
| SPX Presidential Year 2 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1974-2 | -0.40% 1 | 0.06% 2 | -0.93% 3 | 0.23% 4 | 1.48% 5 | 0.43% |
| 1978-2 | 0.99% 1 | -1.05% 2 | -0.99% 3 | -0.29% 4 | -0.23% 5 | -1.57% |
| 1982-2 | -0.09% 1 | -0.34% 2 | -1.13% 3 | -0.40% 4 | -0.69% 5 | -2.64% |
| 1986-2 | 0.19% 1 | 1.25% 2 | -0.28% 3 | 1.98% 4 | 0.51% 5 | 3.65% |
| 1990-2 | 0.95% 1 | 0.12% 2 | 0.24% 3 | -0.24% 4 | -1.07% 5 | -0.01% |
| Avg | 0.33% | 0.01% | -0.62% | 0.26% | 0.00% | -0.03% |
| 1994-2 | -0.38% 1 | 0.36% 2 | 0.34% 3 | 0.16% 4 | 0.06% 5 | 0.53% |
| 1998-2 | -0.26% 1 | 0.33% 2 | 0.87% 3 | -0.40% 4 | -0.37% 5 | 0.17% |
| 2002-2 | -1.33% 1 | -1.10% 2 | 0.57% 3 | 1.02% 4 | -1.21% 5 | -2.05% |
| 2006-2 | -0.39% 1 | -0.43% 2 | 0.16% 3 | 1.14% 4 | 0.57% 5 | 1.04% |
| 2010-2 | -1.29% 1 | 0.04% 2 | -0.57% 3 | 3.29% 4 | -1.24% 5 | 0.23% |
| Avg | -0.73% | -0.16% | 0.27% | 1.04% | -0.44% | -0.02% |
| SPX summary for Presidential Year 2 1974 - 2010 | ||||||
| Averages | -0.20% | -0.08% | -0.17% | 0.65% | -0.22% | -0.02% |
| % Winners | 30% | 60% | 50% | 60% | 40% | 60% |
| MDD 5/28/1962 12.72% -- 5/25/1970 8.72% -- 5/28/1982 2.62% | ||||||
| SPX summary for all years 1971 - 2013 | ||||||
| Averages | -0.02% | -0.07% | -0.07% | 0.12% | 0.09% | 0.04% |
| % Winners | 53% | 49% | 51% | 53% | 56% | 58% |
Money Supply (M2)
The Money supply chart has been provided by Gordon Harms. M2 continued its fall.
May through October during the 2nd year of the Presidential Cycle.
The period beginning around May 1 during the 2nd year of the Presidential Cycle has, on average, been the weakest 6 month period of the cycle. The charts below all cover the period from around May 1 through November 1 during the 2nd year of the Presidential Cycle showing the major indices on log scales to offer a perspective on the relative performance of various segments of the equity market during that period.
The DJIA is shown in black, the SPX in red, OTC in blue and in the more recent charts the R2K in magenta and MID in green. Prior to the early 1990's the OTC was very similar to the R2K. Dashed vertical lines have been drawn on the 1st trading day of the month. The middle month is May.
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
Conclusion
In spite of the blue chip record highs on Monday the breadth indicators continued to deteriorate.
I expect the major averages to be lower on Friday May 23 than they were on Friday May 16.
Last week the OTC was up while all of the other major indices were down so I am calling last weeks negative forecast a tie.
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Good Luck,
YTD W 6/L 6/T 8
