The good news is:
• New highs picked up last week.
The negatives
We expect to see the secondaries lead both up and down and they have been the laggards since the recent lows.
Here are the recent performance summaries for the Dow Jones Industrial Average (DJIA) (very large cap), S&P 500 (SPX)(large cap), NASDAQ composite (OTC)(big tech) and the Russell 2000 (R2K)(small cap).
| Index | Above recent low | Below all time high |
| DJIA | 10.3% | 0.6% |
| SPX | 11.1% | 1.6% |
| OTC | 11.7% | 2.1% |
| R2k | 7.6% | 5.9% |
This is not the pattern we like to see.
We are entering a strong seasonal pattern that is likely to give us new all time highs in the blue chip indices. However, if the secondaries do not improve, this is likely to be a developing top.
New lows also picked up last week (not what you like to see in a strong week for the major indices).
The positives
New highs picked up nicely, finishing the week with 130 on the NYSE and 141 on the NASDAQ.
The first chart shows the 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 finished the week at a comfortable 68%.
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. Same as last week.
New highs are finally showing some life.
The next chart covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH), in green.
NY NH moved sharply upward last week.
The next chart is similar to the one above except is shows the OTC in blue and OTC NH, in green, has been calculated from NASDAQ data.
OTC NH is also showing the first signs of life in months.
Seasonality
Next week includes the last 5 trading days 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 1928 to 2014 There are summaries for both the 3rd year of the Presidential Cycle and all years combined.
Average returns for the coming week have been positive by all measures. Monday has been the worst day of the week.
Report for the last 5 days of October.
The number following the year represents its position in the Presidential Cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.
| OTC Presidential Year 3 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1963-3 | 0.60% 5 | 1.24% 1 | 0.14% 2 | -0.64% 3 | -0.81% 4 | 0.52% |
| 1967-3 | -0.40% 3 | -0.62% 4 | 0.62% 5 | -0.24% 1 | 0.02% 2 | -0.61% |
| 1971-3 | -0.48% 1 | -0.56% 2 | -1.33% 3 | 0.21% 4 | 0.57% 5 | -1.59% |
| 1975-3 | -0.42% 1 | 0.56% 2 | -1.46% 3 | -0.17% 4 | -0.59% 5 | -2.08% |
| 1979-3 | -0.22% 4 | 0.77% 5 | 0.12% 1 | 1.17% 2 | 0.04% 3 | 1.88% |
| 1983-3 | 0.65% 2 | -0.27% 3 | -0.13% 4 | -0.49% 5 | -0.58% 1 | -0.81% |
| 1987-3 | -9.00% 1 | -0.86% 2 | -1.51% 3 | 5.20% 4 | 5.29% 5 | -0.87% |
| 1991-3 | -0.68% 5 | 0.82% 1 | 0.96% 2 | 1.27% 3 | 0.31% 4 | 2.67% |
| Avg | -1.93% | 0.20% | -0.40% | 1.40% | 0.89% | 0.16% |
| 1995-3 | -1.22% 3 | -0.87% 4 | 0.79% 5 | 1.37% 1 | -0.35% 2 | -0.27% |
| 1999-3 | -0.02% 1 | -0.16% 2 | -0.32% 3 | 2.59% 4 | 3.17% 5 | 5.27% |
| 2003-3 | 0.93% 1 | 2.62% 2 | 0.22% 3 | -0.20% 4 | -0.02% 5 | 3.55% |
| 2007-3 | -0.86% 4 | 1.94% 5 | 0.47% 1 | -0.03% 2 | 1.51% 3 | 3.03% |
| 2011-3 | -2.26% 2 | 0.46% 3 | 3.32% 4 | -0.05% 5 | -1.93% 1 | -0.46% |
| Avg | -0.69% | 0.80% | 0.90% | 0.74% | 0.48% | 2.22% |
| OTC summary for Presidential Year 3 1963 - 2011 | ||||||
| Averages | -1.03% | 0.39% | 0.15% | 0.77% | 0.51% | 0.79% |
| % Winners | 23% | 54% | 62% | 46% | 54% | 46% |
| MDD 10/28/1987 11.13% -- 10/27/1971 2.36% -- 10/25/2011 2.26% | ||||||
| OTC summary for all years 1963 - 2014 | ||||||
| Averages | -0.53% | 0.23% | -0.08% | 0.26% | 0.45% | 0.33% |
| % Winners | 39% | 44% | 62% | 56% | 67% | 52% |
| MDD 10/28/1987 11.13% -- 10/31/1978 8.29% -- 10/27/1997 7.01% | ||||||
| SPX Presidential Year 3 | ||||||
| Day5 | Day4 | Day3 | Day2 | Day1 | Totals | |
| 1931-3 | -2.16% 2 | -3.27% 3 | 0.40% 4 | 3.17% 5 | 0.96% 6 | -0.91% |
| 1935-3 | 0.97% 6 | -0.72% 1 | -0.08% 2 | -0.72% 3 | 0.81% 4 | 0.25% |
| 1939-3 | -0.98% 4 | -0.46% 5 | -0.31% 6 | -0.15% 1 | -1.00% 2 | -2.91% |
| 1943-3 | 0.34% 2 | 0.59% 3 | -0.25% 4 | -0.42% 5 | 0.08% 6 | 0.34% |
| 1947-3 | 0.06% 1 | 0.06% 2 | -0.32% 3 | -1.03% 4 | 0.65% 5 | -0.57% |
| 1951-3 | -0.65% 5 | -1.58% 6 | 1.07% 1 | -0.13% 2 | 1.24% 3 | -0.06% |
| Avg | -0.05% | -0.42% | 0.02% | -0.49% | 0.36% | -0.59% |
| 1955-3 | -0.65% 2 | -0.80% 3 | -0.35% 4 | 0.55% 5 | -0.07% 1 | -1.33% |
| 1959-3 | 0.67% 1 | 0.84% 2 | 0.07% 3 | -0.09% 4 | 0.19% 5 | 1.69% |
| 1963-3 | 1.00% 5 | 0.64% 1 | -0.03% 2 | -0.89% 3 | 0.28% 4 | 1.00% |
| 1967-3 | 0.11% 3 | 0.44% 4 | 0.02% 5 | -0.18% 1 | -0.94% 2 | -0.55% |
| 1971-3 | -0.43% 1 | -0.38% 2 | -1.00% 3 | 0.18% 4 | 0.29% 5 | -1.34% |
| Avg | 0.14% | 0.15% | -0.26% | -0.09% | -0.05% | -0.11% |
| 1975-3 | -0.11% 1 | 0.87% 2 | -1.24% 3 | -0.09% 4 | -0.30% 5 | -0.87% |
| 1979-3 | -0.44% 4 | 0.57% 5 | 0.14% 1 | 1.95% 2 | -0.83% 3 | 1.39% |
| 1983-3 | 0.29% 2 | -0.65% 3 | -0.33% 4 | -0.89% 5 | 0.11% 1 | -1.47% |
| 1987-3 | -8.28% 1 | 2.42% 2 | 0.04% 3 | 4.93% 4 | 2.87% 5 | 1.98% |
| 1991-3 | -0.23% 5 | 1.38% 1 | 0.50% 2 | 0.38% 3 | -0.13% 4 | 1.91% |
| Avg | -1.75% | 0.92% | -0.18% | 1.25% | 0.34% | 0.59% |
| 1995-3 | -0.70% 3 | -0.99% 4 | 0.52% 5 | 0.61% 1 | -0.30% 2 | -0.86% |
| 1999-3 | -0.61% 1 | -0.91% 2 | 1.15% 3 | 3.53% 4 | 1.53% 5 | 4.69% |
| 2003-3 | 0.22% 1 | 1.52% 2 | 0.13% 3 | -0.11% 4 | 0.36% 5 | 2.11% |
| 2007-3 | -0.10% 4 | 1.38% 5 | 0.37% 1 | -0.65% 2 | 1.20% 3 | 2.21% |
| 2011-3 | -2.00% 2 | 1.05% 3 | 3.43% 4 | 0.04% 5 | -2.47% 1 | 0.04% |
| Avg | -0.64% | 0.41% | 1.12% | 0.69% | 0.06% | 1.64% |
| SPX summary for Presidential Year 3 1931 - 2011 | ||||||
| Averages | -0.65% | 0.10% | 0.19% | 0.47% | 0.22% | 0.32% |
| % Winners | 38% | 57% | 57% | 43% | 62% | 52% |
| MDD 10/26/1987 8.28% -- 10/28/1931 5.36% -- 10/31/1939 2.88% | ||||||
| SPX summary for all years 1928 - 2014 | ||||||
| Averages | -0.50% | 0.15% | -0.04% | 0.39% | 0.22% | 0.20% |
| % Winners | 36% | 60% | 53% | 58% | 57% | 55% |
| MDD 10/29/1929 21.78% -- 10/26/1987 8.28% -- 10/31/1933 6.96% | ||||||
Money supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has had an inverse relationship to the stock market recently.
Conclusion
The weakness in the secondaries is troublesome, however, new highs are coming to life and the next 2 weeks are seasonally strong.
I expect the major averages to be higher on Friday October 30 than they were on Friday October 23.
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Good Luck,
YTD W 16 / L 15 / T 11
