The good news is:
• New lows disappeared on Friday.
The negatives
At bottoms downside volume, like new lows disappears. Friday was the only day last week where that appeared to be happening.
The chart below covers this calendar year showing the S&P 500 (SPX) in red and a 5% trend (39 day EMA) of NYSE downside volume, (NY DV) in maroon. NY DV has been plotted on an inverted Y axis so decreasing downside volume moves the indicator upward (up is good). Dashed vertical lines have been drawn on the 1st trading day of each month.
You can see how NY DV has moved sharply upward following a short term price lows earlier in the year. That is not visible yet.
There was a lot of buying going on last week.
For contrast the next chart shows the SPX in red and a 5% trend of NYSE upside volume (NY UV) in green. NY UV has been plotted on a conventional Y Axis.
NY UV moved sharply upward last week.
The next chart is similar to the first one except it shows the NASDAQ composite (OTC) in blue and OTC DV, in orange, has been calculated from NASDAQ data.
OTC DV also did not snap up like it typically does coming off a bottom.
The next chart is similar to the second one except it shows the OTC in blue and OTC UV has been calculated from NASDAQ data.
OTC UV also moved sharply upward.
The high levels of downside volume remain a threat to the rally.
The positives
Last week I incorrectly attributed a Fed definition of QE success to Donald Kohn. It was actually James Bullard, President of the St. Louis Fed that defined QE as a success because it pushed the stock market up and the dollar down. I saw the error Thursday when he was reported as saying it might be appropriate to put QE tapering on hold. In some circles that statement was credited with arresting the decline in the equity market.
New lows on the NYSE declined from a high of 617 of Wednesday to 23 on Friday. On the NASADAQ they declined from 362 on Wednesday to 39 on Friday.
Last week the secondaries outperformed the blue chips. The Russell 2000 and S&P mid cap indices were up for the week while the Dow Jones Industrial Average, SPX and OTC were down.
If last week's low turns out to be the bottom for this period of weakness, it will have come only 4-5 days later than the average for the 2nd year of the Presidential Cycle.
Since it was only the last 2 days of the week that were strong there is nothing very convincing in the charts and downside volume suggests there is still a lot of selling going on. Next week will be important. If new lows remain anywhere near the levels we saw on Friday, we will be out of the woods.
Seasonality
Next week includes the 5 trading days prior to the 4th 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 4th 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 the coming week have been a little negative over all years, but pretty strong during the 2nd year of the Presidential Cycle.
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 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | -0.33% | 0.27% | 0.45% | 0.82% | 1.33% | 2.53% |
| 1970-2 | -0.20% | -1.41% | 0.41% | -0.42% | -0.48% | -2.10% |
| 1974-2 | 1.71% | 0.50% | -1.15% | -1.26% | 0.45% | 0.24% |
| 1978-2 | -1.52% | -0.66% | 0.02% | -2.61% | -2.33% | -7.10% |
| 1982-2 | 1.05% | 0.42% | 1.55% | 1.70% | -0.13% | 4.59% |
| 1986-2 | -0.62% | -0.12% | 0.23% | 0.64% | 0.13% | 0.27% |
| 1990-2 | 1.11% | -0.01% | -0.03% | -0.36% | -1.58% | -0.87% |
| Avg | 0.35% | 0.03% | 0.12% | -0.38% | -0.69% | -0.57% |
| 1994-2 | -0.54% | -0.39% | 0.66% | 0.55% | 1.13% | 1.41% |
| 1998-2 | 1.71% | -0.58% | 2.17% | 1.66% | -0.51% | 4.45% |
| 2002-2 | 1.69% | -1.29% | 2.12% | -1.63% | 2.50% | 3.39% |
| 2006-2 | 0.57% | -0.46% | 0.50% | 0.96% | -1.20% | 0.37% |
| 2010-2 | 0.48% | -1.76% | 0.84% | 0.09% | 0.80% | 0.45% |
| Avg | 0.78% | -0.89% | 1.26% | 0.33% | 0.54% | 2.02% |
| OTC summary for Presidential Year 2 1966 - 2010 | ||||||
| Avg | 0.43% | -0.46% | 0.65% | 0.01% | 0.01% | 0.64% |
| Win% | 58% | 25% | 83% | 58% | 50% | 75% |
| OTC summary for all years 1963 - 2013 | ||||||
| Avg | 0.06% | -0.51% | 0.14% | -0.07% | -0.11% | -0.50% |
| Win% | 51% | 37% | 56% | 51% | 53% | 49% |
| SPX Presidential Year 2 | ||||||
| Mon | Tue | Wed | Thur | Fri | Totals | |
| 1954-2 | 0.38% | 0.25% | 0.81% | -0.12% | 0.00% | 1.32% |
| Avg | 0.38% | 0.25% | 0.81% | -0.12% | 0.00% | 1.32% |
| 1958-2 | -0.37% | 0.00% | -0.39% | -0.20% | -0.31% | -1.27% |
| 1962-2 | -1.13% | -2.67% | 3.22% | -0.94% | -0.27% | -1.81% |
| 1966-2 | 0.29% | 0.61% | 0.86% | 0.82% | 0.01% | 2.60% |
| 1970-2 | -1.34% | 0.59% | 0.02% | -0.33% | 0.47% | -0.59% |
| 1974-2 | 1.69% | -0.50% | -2.87% | -1.14% | -0.14% | -2.97% |
| Avg | -0.17% | -0.49% | 0.17% | -0.36% | -0.05% | -0.81% |
| 1978-2 | 0.23% | -0.70% | -0.18% | -1.32% | -1.50% | -3.47% |
| 1982-2 | 2.37% | -0.11% | 1.94% | -0.12% | -0.14% | 3.94% |
| 1986-2 | -1.20% | -0.04% | 0.16% | 1.28% | -0.43% | -0.23% |
| 1990-2 | 0.73% | -0.76% | 0.08% | -0.78% | -1.76% | -2.49% |
| 1994-2 | -0.87% | 0.15% | 0.24% | 0.70% | 1.70% | 1.91% |
| Avg | 0.25% | -0.29% | 0.45% | -0.05% | -0.42% | -0.07% |
| 1998-2 | 0.57% | 0.14% | 0.56% | 0.80% | -0.72% | 1.35% |
| 2002-2 | 1.73% | -1.06% | 0.67% | -1.52% | 1.72% | 1.54% |
| 2006-2 | 0.62% | 0.03% | 0.35% | 0.50% | -0.85% | 0.64% |
| 2010-2 | 0.72% | -1.59% | 1.05% | 0.18% | 0.24% | 0.61% |
| SPX summary for Presidential Year 2 1954 - 2013 | ||||||
| Avg | 0.29% | -0.41% | 0.43% | -0.15% | -0.14% | 0.07% |
| Win% | 67% | 43% | 80% | 40% | 36% | 53% |
| SPX summary for all years 1953 - 2013 | ||||||
| Avg | -0.14% | -0.14% | 0.19% | -0.17% | -0.05% | -0.31% |
| Win% | 57% | 43% | 58% | 39% | 47% | 46% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth continued to fall last week.
Conclusion
A little jawboning from the Fed and it looks like we have a bottom.
From a seasonal perspective the bottom, if it holds, was about a week late.
Seasonally next week has been pretty strong so the market has that wind at its back.
I expect the major averages to be higher on Friday October 24 than they were on Friday October 17.
Last week the blue chips were down while the secondaries were up so I am calling last weeks negative forecast a tie.
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Good Luck,
YTD W 12 / L 16 / T 14
