The good news is:
• New highs on the NYSE hit sensational numbers early last week.
The Negatives
It appears everyone is searching for yield. With 10 year Treasuries yielding 1.7%, the strongest sectors are utilities, precious metals and corporate bonds. Bond funds traded on the NYSE are dominating the new high list. Apparently the belief the Fed will raise rates soon is fading.
NASDAQ new lows reached threatening levels last week.
NYSE new lows are near threatening levels.
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. Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the 50%, neutral level.
OTC HL Ratio fell deeper into negative territory last week
The next chart covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH), in green.
OTC NH appears to be turning downward.
In case you were thinking the chart above did not look too bad.
The next chart is similar to the one above except it covers the past year.
Assuming OTC NH does not turn around and head higher there is a long term pattern of lower highs and lower lows.
The positives
I have been complaining for years about the distortions in breadth data caused by the high percentage of interest rate sensitive issues in the NYSE.
Those distortions have never been more apparent than they are right now.
The chart below is similar to the first one above except it shows the S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.
NY HL Ratio declined a bit last week, but finished the week at a very strong 79%.
The next chart is similar to the second one above except is shows the SPX in red and NY NH in green has been calculated from NYSE data.
NY NH suggests a raging bull market.
To be consistent, the next chart is similar to the 3rd one above covering the past year showing the SPX in red and NY NH in green.
We are looking at a desperate scramble for yield.
Seasonality
Next week includes the 5 trading days prior to the 3rd Friday of May during the 4th 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 2015 while SPX data runs from 1953 to 2015. There are summaries for both the 4th 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 have been modestly negative by all measures for the coming week.
Report for the week before the 3rd Friday of May.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through 3rd Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.13% | -0.28% | 0.25% | -0.40% | -0.38% | -0.68% |
| 1968-4 | 0.67% | -0.38% | -0.53% | -0.07% | -0.30% | -0.62% |
| 1972-4 | 0.70% | 0.02% | -0.46% | 0.82% | 1.02% | 2.09% |
| 1976-4 | -0.32% | 0.04% | -0.31% | 0.31% | -0.16% | -0.43% |
| 1980-4 | -0.07% | 0.80% | 1.08% | 0.66% | 0.42% | 2.89% |
| 1984-4 | -0.68% | 0.05% | -0.13% | -1.03% | -0.61% | -2.40% |
| 1988-4 | 0.23% | -0.29% | -1.42% | -0.20% | -0.06% | -1.74% |
| 1992-4 | 0.23% | -0.54% | -0.27% | -1.02% | -0.35% | -1.95% |
| Avg | -0.12% | 0.01% | -0.21% | -0.25% | -0.15% | -0.72% |
| 1996-4 | 1.59% | 1.03% | -0.07% | 0.46% | 0.21% | 3.22% |
| 2000-4 | 2.23% | 3.05% | -1.95% | -2.92% | -4.19% | -3.79% |
| 2004-4 | -1.45% | 1.13% | 0.02% | -0.08% | 0.82% | 0.43% |
| 2008-4 | 1.76% | 0.27% | 0.06% | 1.48% | -0.19% | 3.38% |
| 2012-4 | -1.06% | -0.30% | -0.68% | -2.10% | -1.24% | -5.39% |
| Avg | 0.61% | 1.03% | -0.53% | -0.63% | -0.92% | -0.43% |
| OTC summary for Presidential Year 4 1964 - 2012 | ||||||
| Avg | 0.30% | 0.35% | -0.34% | -0.31% | -0.39% | -0.38% |
| Win% | 62% | 62% | 31% | 38% | 31% | 38% |
| OTC summary for all years 1963 - 2015 | ||||||
| Avg | -0.03% | 0.01% | 0.02% | -0.02% | -0.20% | -0.22% |
| Win% | 47% | 45% | 58% | 51% | 42% | 49% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -0.55% | -1.05% | -0.69% | 1.22% | -0.47% | -1.54% |
| 1960-4 | -0.09% | 0.38% | -0.04% | 0.43% | 0.27% | 0.96% |
| 1964-4 | -0.12% | 0.32% | -0.23% | -0.14% | 0.30% | 0.12% |
| 1968-4 | -0.31% | -0.07% | -0.05% | -0.48% | -0.72% | -1.63% |
| 1972-4 | 0.45% | -0.19% | 0.22% | 0.98% | 0.96% | 2.43% |
| Avg | -0.13% | -0.12% | -0.16% | 0.40% | 0.07% | 0.07% |
| 1976-4 | -0.25% | 0.17% | -0.08% | 0.81% | -0.73% | -0.07% |
| 1980-4 | 0.06% | 1.45% | 0.52% | 0.13% | 0.34% | 2.49% |
| 1984-4 | -0.62% | 0.32% | -0.01% | -0.90% | -0.51% | -1.72% |
| 1988-4 | 0.75% | -1.28% | -1.58% | 0.49% | 0.18% | -1.45% |
| 1992-4 | 0.59% | -0.53% | 0.04% | -0.79% | -0.74% | -1.43% |
| Avg | 0.10% | 0.03% | -0.22% | -0.05% | -0.29% | -0.44% |
| 1996-4 | 1.44% | 0.62% | -0.03% | -0.09% | 0.61% | 2.56% |
| 2000-4 | 2.21% | 0.94% | -1.24% | -0.73% | -2.10% | -0.93% |
| 2004-4 | -1.06% | 0.68% | -0.26% | 0.05% | 0.40% | -0.19% |
| 2008-4 | 1.10% | -0.04% | 0.40% | 1.06% | 0.13% | 2.65% |
| 2012-4 | -1.11% | -0.57% | -0.44% | -1.51% | -0.74% | -4.37% |
| Avg | 0.52% | 0.32% | -0.31% | -0.24% | -0.34% | -0.06% |
| SPX summary for Presidential Year 4 1956 - 2012 | ||||||
| Avg | 0.17% | 0.08% | -0.23% | 0.04% | -0.19% | -0.14% |
| Win% | 47% | 53% | 27% | 53% | 53% | 40% |
| SPX summary for all years 1953 - 2015 | ||||||
| Avg | -0.04% | 0.07% | 0.05% | -0.06% | -0.11% | -0.10% |
| Win% | 50% | 52% | 49% | 51% | 51% | 49% |
Money supply (M2) & Yield Curve
The charts below were provided by Gordon Harms. M2 has taken a big jump in the past month, the biggest in years.
An inverted yield curve has been the best predictor of a recession.
It is pretty hard for the yield curve to invert when the low end is at 0.
The chart below covers the past 15 years.
For the past 2 years rates have been converging.
Conclusion
NYSE breadth indicators look good because of what appears to be a panic into the safety of fixed income. NASDAQ breadth indicators are following a pattern of progressive deterioration.
I expect the major averages to be lower on Friday May 20 than they were on Friday May 13.
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Good Luck,
YTD W 9 / L 9 / T 1
