The good news is:
• The market is oversold as we are approaching a very strong seasonal period.
The negatives
New lows hit their highest levels since mid October on Friday.
The chart below covers the past 6 months showing the NASDAQ composite (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 vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels of the indicator, the line is solid at the neutral 50% level.
OTC HL ratio fell below the neutral level closing the week at 36%.
The next chart is similar to the one above except is shows the S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio also declined finishing the week at 40%.
The positives
The decline last week was seasonally on schedule and aggravated by the sharp decline in oil prices.
Short term, new highs which usually give a warning of impending tops, peaked a week ago with prices.
The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs in green.
OTC NH peaked a few days after the peak in prices. Not what you expect to see at a top.
The next chart is similar to the one above except is covers the past year.
Longer term OTC_NH is far from confirming the recent high.
The next chart is similar to the first of this group covering the past 6 months except is shows the SPX in red and NY NH has been calculated from NYSE data.
Looking at the past 6 months NY NH failed to confirm the recent all time high in the SPX, but was not too far off.
The next chart is similar to the one above except it covers the past year.
Longer term NY NH looks stronger than OTC NH.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of December during the 2nd year of the Presidential Cycle.
The tables below show the daily change, on a percentage basis, of the OTC and SPX for the 5 trading days prior to the 3rd Friday of December 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 positive by all measures.
Report for the week before the 3rd Friday of December.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 3rd Friday.
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | 0.58% | 0.65% | 0.09% | 0.04% | -0.57% | 0.78% |
| 1970-2 | 0.35% | -0.74% | -0.14% | 0.11% | 0.28% | -0.13% |
| 1974-2 | -0.62% | 0.58% | 0.74% | -0.29% | -1.33% | -0.92% |
| 1978-2 | 0.32% | -0.55% | -0.31% | 0.02% | -0.63% | -1.15% |
| 1982-2 | -0.22% | -0.86% | -2.44% | -0.04% | 1.48% | -2.08% |
| 1986-2 | -0.73% | 0.13% | -0.42% | -0.26% | 0.24% | -1.04% |
| 1990-2 | -0.84% | 1.22% | 0.28% | 0.29% | 0.35% | 1.30% |
| Avg | -0.42% | 0.10% | -0.43% | -0.06% | 0.02% | -0.78% |
| 1994-2 | 0.01% | 0.05% | 0.86% | 0.69% | -0.22% | 1.39% |
| 1998-2 | -3.07% | 2.32% | -0.16% | 1.72% | 2.06% | 2.87% |
| 2002-2 | 2.78% | -0.59% | -2.19% | -0.54% | 0.66% | 0.11% |
| 2006-2 | 0.23% | -0.46% | 0.03% | 0.88% | 0.14% | 0.82% |
| 2010-2 | -0.48% | 0.11% | -0.40% | 0.77% | 0.21% | 0.21% |
| Avg | -0.11% | 0.29% | -0.37% | 0.70% | 0.57% | 1.08% |
| OTC summary for Presidential Year 2 1966 - 2010 | ||||||
| Avg | -0.14% | 0.15% | -0.34% | 0.28% | 0.22% | 0.18% |
| Win% | 50% | 58% | 42% | 67% | 67% | 58% |
| OTC summary for all years 1963 - 2013 | ||||||
| Avg | 0.00% | 0.11% | -0.07% | -0.02% | 0.20% | 0.22% |
| Win% | 51% | 51% | 48% | 59% | 61% | 61% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | 0.09% | -0.69% | 0.61% | 1.07% | 0.26% | 1.33% |
| 1958-2 | 0.28% | 0.37% | 0.65% | 0.43% | -0.15% | 1.59% |
| 1962-2 | -0.32% | -0.48% | 0.82% | 0.38% | -0.29% | 0.12% |
| 1966-2 | 1.05% | -0.33% | -0.11% | -1.21% | -0.07% | -0.67% |
| 1970-2 | -0.51% | -0.16% | 0.07% | 0.36% | 0.20% | -0.04% |
| Avg | 0.12% | -0.26% | 0.41% | 0.21% | -0.01% | 0.47% |
| 1974-2 | -0.91% | 1.69% | 0.47% | -0.37% | -1.09% | -0.21% |
| 1978-2 | 0.50% | -0.54% | -0.55% | -0.02% | -0.74% | -1.35% |
| 1982-2 | 0.27% | -1.83% | -1.56% | 0.04% | 1.62% | -1.46% |
| 1986-2 | 0.35% | 0.74% | -0.99% | -0.32% | 1.20% | 0.97% |
| 1990-2 | -0.24% | 1.24% | 0.05% | -0.02% | 0.49% | 1.51% |
| Avg | -0.01% | 0.26% | -0.52% | -0.14% | 0.29% | -0.11% |
| 1994-2 | 0.56% | 0.15% | 1.07% | 0.08% | 0.76% | 2.62% |
| 1998-2 | -2.17% | 1.89% | -0.07% | 1.55% | 0.68% | 1.88% |
| 2002-2 | 2.35% | -0.81% | -1.31% | -0.77% | 1.30% | 0.75% |
| 2006-2 | 0.23% | -0.10% | 0.12% | 0.87% | 0.11% | 1.22% |
| 2010-2 | 0.00% | 0.09% | -0.51% | 0.62% | 0.08% | 0.29% |
| Avg | 0.19% | 0.24% | -0.14% | 0.47% | 0.59% | 1.35% |
| SPX summary for Presidential Year 2 1954 - 2010 | ||||||
| Avg | 0.10% | 0.08% | -0.08% | 0.18% | 0.29% | 0.57% |
| Win% | 67% | 47% | 53% | 60% | 67% | 67% |
| SPX summary for all years 1953 - 2013 | ||||||
| Avg | 0.05% | 0.17% | 0.04% | -0.02% | 0.17% | 0.41% |
| Win% | 57% | 50% | 52% | 48% | 61% | 62% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth picked up a bit last week but is still below its long term trend.
Conclusion
The market is oversold and seasonally this period of weakness ends around the middle of next week.
I expect the major averages to be higher on Friday December 19 than they were on Friday December 12.
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Good Luck,
YTD W 17 / L 16 / T 17
