The good news is:
• The market is oversold and next week seasonality turns positive.
The negatives
New highs disappeared last week while new lows returned to threatening levels.
The first chart covers the past 6 months showing the S&P 500 (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 vertical lines have been drawn on the 1st trading day of each month. Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the 50%, neutral level.
NY HL Ratio moved downward finishing the week at a very weak 22% and is in a clearly defined down trend.
The next chart is similar to the one above except it shows the NASDAQ composite (OTC), in blue, and OTC HL Ratio, in red, has been calculated from NASDAQ data.
OTC HL Ratio declined to 27%.
The positives
The market weakness of the past several weeks has been consistent with a negative seasonal pattern that ends early next week. New lows increased last week, but, so far, have not reached the levels of 2 weeks ago.
The chart below covers the past 6 months showing the 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 turned downward last week, but stopped, possibly initiating a pattern of higher lows.
Most of the breadth indicators were moving downward as of Friday's close. However, this period of weakness has been right on schedule with the average seasonal pattern and that pattern turns positive on Tuesday.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of August 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 August during the 3rd year of the Presidential Cycle.
OTC data covers the period from 1963 to 2014 while SPX data runs from 1953 to 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 positive by all measures.
Report for the week before the 2nd Friday of August.
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 | 0.24% | 0.33% | 0.41% | 0.03% | 0.50% | 1.51% |
| 1967-3 | 0.05% | 0.23% | 0.50% | 0.72% | -0.13% | 1.36% |
| 1971-3 | -0.58% | -0.14% | 1.01% | 1.09% | 0.22% | 1.60% |
| 1975-3 | -1.03% | -1.00% | 0.09% | -0.81% | -0.05% | -2.80% |
| 1979-3 | -0.15% | 0.62% | 0.53% | 0.15% | 0.55% | 1.70% |
| 1983-3 | -1.76% | -0.23% | 0.81% | 0.31% | 0.68% | -0.18% |
| 1987-3 | 0.61% | 0.69% | -0.03% | 0.52% | 0.01% | 1.80% |
| 1991-3 | -0.61% | 0.52% | 0.45% | 0.38% | -0.21% | 0.53% |
| Avg | -0.59% | 0.12% | 0.37% | 0.11% | 0.20% | 0.21% |
| 1995-3 | 0.42% | 0.19% | 0.80% | -0.45% | 0.35% | 1.31% |
| 1999-3 | -1.14% | -1.15% | 3.01% | -0.60% | 3.46% | 3.58% |
| 2003-3 | -0.09% | -2.37% | -1.24% | -0.03% | -0.49% | -4.22% |
| 2007-3 | 1.44% | 0.56% | 2.01% | -2.16% | -0.45% | 1.39% |
| 2011-3 | -6.90% | 5.29% | -4.09% | 4.69% | 0.61% | -0.39% |
| Avg | -1.25% | 0.51% | 0.10% | 0.29% | 0.70% | 0.33% |
| OTC summary for Presidential Year 3 1963 - 2011 | ||||||
| Avg | -0.73% | 0.27% | 0.33% | 0.29% | 0.39% | 0.55% |
| Win% | 38% | 62% | 77% | 62% | 62% | 69% |
| OTC summary for all years 1963 - 2014 | ||||||
| Avg | -0.32% | 0.16% | 0.12% | 0.07% | 0.03% | 0.06% |
| Win% | 44% | 54% | 61% | 63% | 48% | 58% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | -0.59% | -1.32% | -0.02% | 0.93% | 0.19% | -0.81% |
| 1959-3 | -2.09% | 1.31% | -0.24% | -0.17% | 0.24% | -0.94% |
| 1963-3 | 0.59% | 0.66% | -0.30% | 0.09% | 0.66% | 1.69% |
| 1967-3 | -0.26% | 0.12% | 0.09% | -0.26% | -0.40% | -0.71% |
| 1971-3 | -0.76% | 0.01% | 1.20% | 1.42% | -0.32% | 1.54% |
| Avg | -0.62% | 0.16% | 0.15% | 0.40% | 0.07% | 0.15% |
| 1975-3 | -0.95% | -1.06% | 0.02% | 0.06% | -0.32% | -2.25% |
| 1979-3 | 0.25% | 1.29% | 0.31% | -0.46% | 0.86% | 2.26% |
| 1983-3 | -1.58% | 0.60% | 0.88% | 0.01% | 0.38% | 0.28% |
| 1987-3 | 1.55% | 1.62% | -0.28% | 0.68% | -0.20% | 3.37% |
| 1991-3 | -0.55% | 1.44% | -0.02% | -0.32% | -0.57% | 0.00% |
| Avg | -0.26% | 0.78% | 0.18% | -0.01% | 0.03% | 0.73% |
| 1995-3 | 0.20% | 0.06% | -0.12% | -0.40% | -0.42% | -0.69% |
| 1999-3 | -0.19% | -1.26% | 1.61% | -0.29% | 2.27% | 2.13% |
| 2003-3 | 0.27% | -1.77% | 0.17% | 0.73% | 0.36% | -0.24% |
| 2007-3 | 2.42% | 0.62% | 1.41% | -2.96% | 0.04% | 1.51% |
| 2011-3 | -6.66% | 4.74% | -4.42% | 4.63% | 0.53% | -1.18% |
| Avg | -0.79% | 0.48% | -0.27% | 0.34% | 0.55% | 0.31% |
| SPX summary for Presidential Year 3 1955 - 2011 | ||||||
| Avg | -0.56% | 0.47% | 0.02% | 0.24% | 0.22% | 0.40% |
| Win% | 40% | 73% | 53% | 53% | 60% | 47% |
| SPX summary for all years 1953 - 2014 | ||||||
| Avg | -0.31% | 0.20% | 0.07% | 0.07% | 0.07% | 0.09% |
| Win% | 40% | 60% | 54% | 50% | 53% | 56% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. M2 growth has been holding at its trend.
Conclusion
The recent period of weakness has been consistent with the average seasonal pattern and that pattern turns positive next Tuesday.
I expect the major averages to be higher on Friday August 14 than they were on Friday August 7.
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Good Luck,
YTD W 11 / L 12 / T 8
