The good news is:
• This period of weakness should end soon.
The negatives
Several years ago a reporter asked a Fed governor (I think it might have been Donald Kohn) if he thought QE had been successful. The Fed governor replied that it (QE) had been successful because the dollar was down and the stock market up. This statement was revealing because it was an explicit admission that, among QE objectives, were manipulation of the equity and forex markets.
The chart below, using FastTrack data, covers the past year showing the S&P 500 in red and the dollar index in green plotted on log scales. Correlation over the previous 21 trading days is shown in black. Dashed vertical lines have been drawn on the 1st trading day of each month. Dashed horizontal lines have been drawn at 25% increments of the correlation indicator.
The Fed has been tapering QE since last spring and the effect is becoming noticeable, the dollar is up and the stock market is down. I wonder when they will panic and announce the next round of QE.
Last week new lows remained at threatening levels every day and finished the week at the highest levels seen since March of 2009.
It will be easy to tell when this decline is over because new lows will disappear and by that I mean decline to less than 40 on the NYSE and less than 70 on the NASDAQ for at least 5 consecutive days.
The chart below covers the past year showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new lows (NY NL) in blue. NY NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).
NY NL continued its sharp decline last week.
The next chart is similar to the first one except it shows the NASDAQ composite (OTC) in blue and OTC NL, in red, has been calculated from NASDAQ data.
The pattern of OTC NL is similar to NY NL.
At this point new lows are all that matter.
The positives
It has been many years since the Fed has allowed a bear market to play itself out. I expect Fed intervention if the form of another round of QE before this one plays itself out.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of October during the 2nd year of the Presidential Cycle.
The tables below show the change, on a percentage basis, of the OTC and SPX for the 5 trading days prior to the 3rd Friday of October during the 2nd year of the Presidential Cycle.
OTC data covers the period from 1963 to 2013 while SPX data runs from 1953 through 2013. There are summaries for both the 2nd 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 next week have been positive by all measures and stronger during the 2nd year of the Presidential Cycle.
Report for the week before the 3rd Friday of October.
The number following the year is its position in the Presidential Cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | -0.02% | 0.77% | 1.80% | -1.12% | -0.21% | 1.22% |
| 1970-2 | -0.66% | -0.85% | -0.56% | 0.19% | 0.39% | -1.50% |
| 1974-2 | 2.17% | -0.53% | -0.34% | 1.39% | 1.14% | 3.83% |
| 1978-2 | -1.21% | -2.22% | -1.56% | -1.32% | -2.67% | -8.98% |
| 1982-2 | 1.72% | -0.07% | 1.49% | -0.16% | -0.19% | 2.79% |
| 1986-2 | 0.15% | -0.08% | 0.53% | 0.20% | -0.18% | 0.62% |
| 1990-2 | 0.61% | -1.24% | 0.41% | 2.22% | 1.00% | 2.99% |
| Avg | 0.69% | -0.83% | 0.11% | 0.47% | -0.18% | 0.25% |
| 1994-2 | -0.17% | -0.13% | 0.76% | -0.31% | -0.37% | -0.22% |
| 1998-2 | 3.59% | -2.37% | 2.11% | 4.52% | 0.62% | 8.47% |
| 2002-2 | 0.83% | 5.07% | -3.90% | 3.24% | 1.22% | 6.46% |
| 2006-2 | 0.28% | -0.80% | -0.33% | 0.16% | 0.06% | -0.63% |
| 2010-2 | 0.02% | 0.65% | 0.96% | -0.24% | 1.37% | 2.76% |
| Avg | 0.91% | 0.49% | -0.08% | 1.47% | 0.58% | 3.37% |
| OTC summary for Presidential Year 2 1966 - 2010 | ||||||
| Avg | 0.61% | -0.15% | 0.11% | 0.73% | 0.18% | 1.48% |
| Win% | 67% | 25% | 58% | 58% | 58% | 67% |
| OTC summary for all years 1963 - 2013 | ||||||
| Avg | 0.39% | -0.02% | -0.23% | 0.46% | -0.14% | 0.44% |
| Win% | 62% | 53% | 50% | 65% | 55% | 53% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | -0.80% | -0.40% | -0.03% | -1.21% | -0.53% | -2.97% |
| 1958-2 | 0.45% | -0.70% | -1.33% | 0.71% | 1.02% | 0.16% |
| 1962-2 | 0.56% | -0.33% | -0.33% | -0.97% | -1.33% | -2.40% |
| 1966-2 | 1.14% | 1.56% | -0.80% | -0.27% | 0.45% | 2.08% |
| 1970-2 | -1.07% | -0.13% | 0.15% | 0.55% | -0.44% | -0.94% |
| Avg | 0.06% | 0.00% | -0.47% | -0.24% | -0.17% | -0.81% |
| 1974-2 | 2.25% | -1.79% | -1.55% | 1.19% | 1.56% | 1.66% |
| 1978-2 | -1.96% | -1.32% | -0.76% | -1.15% | -1.39% | -6.58% |
| 1982-2 | 2.61% | -0.02% | 1.69% | -1.57% | -0.74% | 1.97% |
| 1986-2 | 0.18% | -0.23% | 1.46% | 0.31% | -0.29% | 1.43% |
| 1990-2 | 1.07% | -1.42% | -0.05% | 2.34% | 2.20% | 4.13% |
| Avg | 0.83% | -0.96% | 0.16% | 0.22% | 0.27% | 0.52% |
| 1994-2 | -0.03% | -0.28% | 0.56% | -0.73% | -0.42% | -0.90% |
| 1998-2 | 1.36% | -0.29% | 1.08% | 4.18% | 0.85% | 7.17% |
| 2002-2 | 0.73% | 4.73% | -2.41% | 2.23% | 0.59% | 5.88% |
| 2006-2 | 0.25% | -0.37% | 0.14% | 0.07% | 0.12% | 0.22% |
| 2010-2 | 0.01% | 0.38% | 0.71% | -0.36% | 0.20% | 0.95% |
| Avg | 0.47% | 0.84% | 0.02% | 1.08% | 0.27% | 2.66% |
| SPX summary for Presidential Year 2 1954 - 2010 | ||||||
| Avg | 0.45% | -0.04% | -0.10% | 0.35% | 0.12% | 0.79% |
| Win% | 73% | 20% | 47% | 53% | 53% | 67% |
| SPX summary for all years 1953 - 2013 | ||||||
| Avg | 0.43% | 0.00% | -0.25% | 0.26% | -0.18% | 0.25% |
| Win% | 65% | 38% | 48% | 59% | 48% | 61% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth fell sharply last week.
Conclusion
There is no bottom in sight.
New lows are at their highest levels in nearly 6 years and climbing.
Without Fed intervention we are likely to see a real bear market, the first one in over a decade.
I expect the major averages to be lower on Friday October 17 than they were on Friday October 10.
Last weeks positive forecast was a miss.
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Good Luck,
YTD W 12 / L 16 / T 13
