The good news is:
• New lows remained at non threatening levels last week.
The negatives
Monday will be the 28th anniversary of the October 19, 1987 crash.
Technical conditions are very different now so there is unlikely to be a replay of that event.
New highs are coming up a little short these days, but, more importantly, new lows have disappeared.
About the only suspicious characteristic of this rally has been the secondaries have been underperforming the blue chips.
The positives
It was comforting to see the weakness early last week did not generate a significant increase in new lows.
The first chart shows 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 lost a little ground last week, but remained in comfortably positive territory.
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 has been a little weaker than NY HL Ratio, but managed to remain in positive territory.
Seasonality
Next week includes the 5 trading days prior to the 4th Friday of October during the 3rd year of the Presidential Cycle. The tables below show the daily change, on a percentage basis for that period.
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 negative by all measures with help from the 1987 crash. However, the past 20 years have been, on average, positive.
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 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1963-3 | 0.49% | -0.06% | -0.14% | 0.37% | 0.60% | 1.25% |
| 1967-3 | -0.22% | -0.38% | -0.40% | -0.62% | 0.62% | -0.99% |
| 1971-3 | -0.49% | -0.98% | -1.31% | 0.03% | 0.18% | -2.57% |
| 1975-3 | 0.64% | 0.38% | 0.61% | 0.19% | -0.56% | 1.27% |
| 1979-3 | -2.51% | -0.41% | 0.31% | -0.22% | 0.77% | -2.06% |
| 1983-3 | -0.96% | 0.65% | -0.27% | -0.13% | -0.49% | -1.20% |
| 1987-3 | -11.35% | -9.00% | 7.34% | -4.47% | -2.28% | -19.76% |
| 1991-3 | -0.36% | 0.03% | -0.37% | -1.20% | -0.68% | -2.58% |
| Avg | -2.91% | -1.67% | 1.53% | -1.16% | -0.65% | -4.87% |
| 1995-3 | -0.25% | 0.22% | -1.22% | -0.87% | 0.79% | -1.33% |
| 1999-3 | -1.56% | -0.03% | 3.72% | 0.49% | 0.52% | 3.14% |
| 2003-3 | 0.67% | 0.82% | -2.21% | -0.66% | -1.06% | -2.44% |
| 2007-3 | 1.06% | 1.65% | -0.88% | -0.86% | 1.94% | 2.90% |
| 2011-3 | 2.35% | -2.26% | 0.46% | 3.32% | -0.05% | 3.82% |
| Avg | 0.45% | 0.08% | -0.02% | 0.28% | 0.43% | 1.22% |
| OTC summary for Presidential Year 3 1963 - 2011 | ||||||
| Avg | -0.96% | -0.72% | 0.44% | -0.36% | 0.02% | -1.58% |
| Win% | 38% | 46% | 38% | 38% | 54% | 38% |
| OTC summary for all years 1963 - 2014 | ||||||
| Avg | 0.08% | -0.45% | 0.12% | -0.03% | -0.10% | -0.39% |
| Win% | 52% | 38% | 55% | 52% | 54% | 50% |
| SPX Presidential Year 3 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1955-3 | 0.75% | -0.65% | -0.80% | -0.35% | 0.55% | -0.51% |
| Avg | 0.75% | -0.65% | -0.80% | -0.35% | 0.55% | -0.51% |
| 1959-3 | -0.56% | -0.61% | -0.19% | -0.97% | 1.00% | -1.34% |
| 1963-3 | 0.08% | -0.57% | 0.05% | 0.38% | 1.00% | 0.94% |
| 1967-3 | -0.44% | -0.57% | 0.11% | 0.44% | 0.02% | -0.44% |
| 1971-3 | -0.45% | -0.36% | -1.39% | -0.05% | -0.09% | -2.35% |
| 1975-3 | 1.08% | 0.82% | 0.17% | 0.58% | -1.55% | 1.11% |
| Avg | -0.06% | -0.26% | -0.25% | 0.08% | 0.08% | -0.41% |
| 1979-3 | -0.88% | -0.43% | 0.16% | -0.44% | 0.57% | -1.01% |
| 1983-3 | 0.02% | 0.29% | -0.65% | -0.33% | -0.89% | -1.56% |
| 1987-3 | -20.47% | 5.33% | 9.10% | -3.92% | -0.01% | -9.97% |
| 1991-3 | -0.63% | -0.56% | 0.03% | -0.74% | -0.23% | -2.13% |
| 1995-3 | -0.41% | 0.26% | -0.70% | -0.99% | 0.52% | -1.32% |
| Avg | -4.47% | 0.98% | 1.59% | -1.28% | -0.01% | -3.20% |
| 1999-3 | 0.55% | 0.57% | 2.24% | -0.46% | 1.41% | 4.30% |
| 2003-3 | 0.52% | 0.13% | -1.50% | 0.33% | -0.47% | -0.99% |
| 2007-3 | 0.38% | 0.88% | -0.24% | -0.10% | 1.38% | 2.30% |
| 2011-3 | 1.29% | -2.00% | 1.05% | 3.43% | 0.04% | 3.80% |
| SPX summary for Presidential Year 3 1955 - 2011 | ||||||
| Avg | -1.28% | 0.17% | 0.50% | -0.21% | 0.22% | -0.61% |
| Win% | 53% | 47% | 53% | 33% | 60% | 33% |
| SPX summary for all years 1953 - 2014 | ||||||
| Avg | -0.12% | -0.10% | 0.18% | -0.15% | -0.04% | -0.24% |
| Win% | 58% | 44% | 57% | 40% | 48% | 47% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has fallen off in the past 2 weeks.
Conclusion
The weakness in the secondaries concerns me a little, but, aside from that, the low of 3 weeks ago appears to have been a successful retest of the August low and is unlikely to be challenged in the near future.
I expect the major averages to be higher on Friday October 23 than they were on Friday October 16.
Last weeks blue chips were up a little while the secondaries were down a little so I am calling last weeks negative forecast a tie.
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Good Luck,
YTD W 15 / L 15 / T 11
