The good news is:
• New lows declined to non threatening levels last week.
The negatives
The market has been volatile for the past 2 months. One week up and the next down. Which ever way it breaks should set the trend for a while. The Fed, for the time being, has abandoned its aggressively accommodative position.
The first chart covers the past 6 months showing the NASDAQ composite (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.
The index is only 1.3% off its multi year high while OTC NH has been in a down trend for the past month.
The next chart is similar to the one above except it covers the past year.
OTC NH has been declining for the past year. The implication is leadership has been narrowing.
The positives
New lows, which had been at threatening levels a week ago, declined sharply last week. Seasonally (until July) this is the strongest period of the 4 year Presidential Cycle.
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 rose above the neutral line last week reaching its highest level in a month.
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 is at a very strong 88%.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of February during the 3rd year of the Presidential Cycle.
The tables below show the daily change, on a percentage basis for the 5 trading days prior to the 2nd Friday of February during the 3rd year of the Presidential Cycle.
OTC data covers the period from 1963 to 2014 while SPX data runs from 1953 through 2014. There are summaries for both the 3rd 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 mixed, but stronger during the 3rd year of the Presidential Cycle than other years.
Report for the week before the 2nd Friday of February.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | -0.42% | -0.03% | -0.03% | 0.42% | -0.93% | -1.00% |
| 1967-3 | 0.21% | 0.31% | -0.13% | 0.95% | 0.83% | 2.16% |
| 1971-3 | 0.84% | -0.08% | -0.07% | 0.75% | 0.59% | 2.04% |
| 1975-3 | -0.42% | 0.01% | 1.07% | 1.80% | 0.52% | 2.99% |
| 1979-3 | -1.18% | -0.02% | -1.21% | 0.50% | 0.28% | -1.63% |
| 1983-3 | 0.15% | -0.37% | 0.11% | 1.35% | 0.73% | 1.98% |
| 1987-3 | -0.28% | -0.56% | 0.62% | 0.78% | 0.81% | 1.37% |
| 1991-3 | 1.70% | 1.74% | 1.63% | -0.96% | 0.41% | 4.52% |
| Avg | -0.01% | 0.16% | 0.44% | 0.69% | 0.55% | 1.84% |
| 1995-3 | 0.88% | 0.02% | 0.62% | 0.21% | 0.64% | 2.36% |
| 1999-3 | 1.32% | -3.91% | -0.06% | 4.16% | -3.48% | -1.97% |
| 2003-3 | 1.11% | -0.09% | -1.27% | -0.12% | 2.56% | 2.18% |
| 2007-3 | -0.21% | 0.04% | 0.77% | -0.07% | -1.16% | -0.64% |
| 2011-3 | 0.53% | 0.47% | -0.29% | 0.05% | 0.68% | 1.44% |
| Avg | 0.72% | -0.70% | -0.05% | 0.85% | -0.15% | 0.68% |
| OTC summary for Presidential Year 3 1963 - 2011 | ||||||
| Avg | 0.33% | -0.19% | 0.14% | 0.76% | 0.19% | 1.22% |
| Win% | 62% | 46% | 46% | 77% | 77% | 69% |
| OTC summary for all years 1963 - 2014 | ||||||
| Avg | -0.10% | -0.04% | 0.08% | 0.27% | -0.04% | 0.17% |
| Win% | 39% | 56% | 56% | 69% | 57% | 58% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 0.00% | -1.35% | 0.80% | 0.90% | 0.19% | 0.53% |
| 1959-3 | -1.45% | 1.38% | 0.06% | -0.64% | 0.78% | 0.12% |
| 1963-3 | -0.21% | -0.09% | 0.44% | -0.35% | 0.00% | -0.21% |
| 1967-3 | -0.21% | -0.26% | 0.89% | -0.41% | 0.15% | 0.15% |
| 1971-3 | 0.54% | 0.06% | -0.12% | 0.53% | 0.53% | 1.54% |
| Avg | -0.33% | -0.05% | 0.41% | 0.01% | 0.41% | 0.43% |
| 1975-3 | -0.34% | 0.28% | 1.71% | 1.36% | 0.60% | 3.61% |
| 1979-3 | -1.42% | -0.04% | -0.91% | 0.50% | 0.23% | -1.64% |
| 1983-3 | 0.54% | -0.84% | -0.48% | 1.72% | 0.09% | 1.04% |
| 1987-3 | -0.66% | -1.12% | 0.90% | -0.69% | 1.48% | -0.10% |
| 1991-3 | 1.54% | 0.84% | 1.94% | -0.43% | 0.79% | 4.68% |
| Avg | -0.07% | -0.18% | 0.63% | 0.49% | 0.64% | 1.52% |
| 1995-3 | 0.52% | -0.07% | 0.08% | -0.21% | 0.26% | 0.59% |
| 1999-3 | 0.36% | -2.23% | 0.61% | 2.49% | -1.91% | -0.68% |
| 2003-3 | 0.76% | -0.81% | -1.27% | -0.16% | 2.14% | 0.66% |
| 2007-3 | -0.10% | 0.07% | 0.14% | -0.12% | -0.71% | -0.71% |
| 2011-3 | 0.62% | 0.42% | -0.28% | 0.07% | 0.55% | 1.39% |
| Avg | 0.43% | -0.52% | -0.14% | 0.42% | 0.07% | 0.25% |
| SPX summary for Presidential Year 3 1955 - 2011 | ||||||
| Avg | 0.03% | -0.25% | 0.30% | 0.31% | 0.37% | 0.73% |
| Win% | 50% | 40% | 67% | 47% | 86% | 67% |
| SPX summary for all yaers 1953 - 2014 | ||||||
| Avg | -0.24% | -0.10% | 0.12% | 0.02% | 0.02% | -0.16% |
| Win% | 38% | 50% | 60% | 44% | 51% | 56% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has gotten back on trend without QE.
Conclusion
The market got off to a rough start in January. Measured by the Dow Jones Industrial Average and the SPX it was the worst January in the 3rd year of the Presidential Cycle since 1939. Measured by the OTC and Russell 2000 the worst ever 3rd year of the Presidential Cycle. Considering all years it is a different story. This past January was stronger than January a year ago.
If the recent volatility continues, next week will be down, however the big decline in new lows last week makes me optimistic.
I expect the major averages to be higher on Friday February 13 than they were on Friday February 6.
Last weeks negative forecast was a miss.
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Good Luck,
YTD W 2 / L 3 / T 0
