The good news is:
• The blue chip indices closed at all time highs last week.
The Negatives
The market is overbought.
Treasury yields, although still absurdly low, increased by nearly 10% last week.
The positives
New highs increased dramatically while new lows remained insignificant.
The first chart 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 finished the week at its highest level in over 2 years.
The next chart is similar to the 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 finished the week at its highest level in over 3 years.
The next chart shows the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.
OTC NH hit its highest level in over a year.
The next chart is similar to the one above except is shows the SPX in red and NY NH has been calculated from NYSE data.
NY NH is also at its highest level in over a year.
Seasonality
Next week includes the 5 trading days prior to the 4th Friday of July 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 for the coming week have been mostly negative and weaker during the 4th year of the Presidential Cycle than other years.
Report for the week before the 4th Friday of July.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | -0.02% | -0.34% | 0.02% | 0.05% | 0.10% | -0.19% |
| 1968-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1972-4 | 0.89% | -0.23% | 0.14% | -0.23% | -0.16% | 0.41% |
| 1976-4 | -0.35% | -0.43% | -0.16% | 0.14% | -0.07% | -0.87% |
| 1980-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1984-4 | -1.01% | -0.59% | -0.19% | 0.78% | 0.99% | -0.02% |
| 1988-4 | 0.05% | -0.88% | 0.09% | -0.71% | -0.39% | -1.84% |
| 1992-4 | -0.16% | 1.22% | 1.03% | 0.23% | 0.35% | 2.67% |
| Avg | -0.37% | -0.17% | 0.19% | 0.11% | 0.22% | -0.01% |
| 1996-4 | -1.48% | -2.99% | -0.64% | 1.92% | 1.60% | -1.59% |
| 2000-4 | -2.76% | 1.21% | -1.04% | -3.65% | -4.66% | -10.90% |
| 2004-4 | 0.04% | 1.76% | -2.23% | 0.78% | -2.12% | -1.76% |
| 2008-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 2012-4 | -1.20% | -0.94% | -0.31% | 1.37% | 2.24% | 1.16% |
| Avg | -1.35% | -0.24% | -1.05% | 0.11% | -0.73% | -3.27% |
| OTC summary for Presidential Year 4 1964 - 2012 | ||||||
| Avg | -0.60% | -0.22% | -0.33% | 0.07% | -0.21% | -1.29% |
| Win% | 30% | 30% | 40% | 70% | 50% | 30% |
| OTC summary for all years 1963 - 2015 | ||||||
| Avg | -0.34% | -0.10% | 0.12% | 0.11% | -0.02% | -0.23% |
| Win% | 41% | 57% | 55% | 66% | 61% | 55% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -0.04% | 0.00% | 0.22% | 0.08% | -0.81% | -0.55% |
| Avg | -0.04% | 0.00% | 0.22% | 0.08% | -0.81% | -0.55% |
| 1960-4 | -0.62% | 0.00% | -0.16% | -0.92% | -0.69% | -2.39% |
| 1964-4 | -0.46% | -0.28% | 0.08% | 0.21% | 0.11% | -0.33% |
| 1968-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1972-4 | 1.18% | -0.30% | -0.07% | -0.23% | 0.09% | 0.68% |
| 1976-4 | -0.37% | -0.55% | 0.10% | 0.11% | 0.13% | -0.59% |
| Avg | -0.07% | -0.37% | -0.01% | -0.21% | -0.09% | -0.66% |
| 1980-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 1984-4 | -0.40% | -0.76% | 0.68% | 0.84% | 0.74% | 1.10% |
| 1988-4 | -0.57% | -0.75% | 0.57% | -1.24% | -1.19% | -3.17% |
| 1992-4 | -0.01% | 1.45% | 1.13% | 0.40% | 0.07% | 3.04% |
| 1996-4 | -0.78% | -1.09% | -0.04% | 0.72% | 0.75% | -0.43% |
| Avg | -0.44% | -0.29% | 0.59% | 0.18% | 0.09% | 0.13% |
| 2000-4 | -1.07% | 0.69% | -1.50% | -0.19% | -2.05% | -4.12% |
| 2004-4 | -0.04% | 0.71% | -1.33% | 0.27% | -0.97% | -1.37% |
| 2008-4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| 2012-4 | -0.89% | -0.90% | -0.03% | 1.65% | 1.91% | 1.74% |
| SPX summary for Presidential Year 4 1956 - 2012 | ||||||
| Avg | -0.34% | -0.18% | -0.03% | 0.14% | -0.16% | -0.53% |
| Win% | 08% | 30% | 50% | 67% | 58% | 33% |
| SPX summary for all years 1953 - 2015 | ||||||
| Avg | -0.19% | -0.10% | 0.31% | 0.19% | -0.01% | 0.20% |
| Win% | 32% | 53% | 60% | 65% | 61% | 57% |
Money supply (M2) and interest rates
The money supply and interest rate charts were provided by Gordon Harms. Several years ago the regression line of M2 turned noticeably upward. The rate of increase appears to have accelerated again.
With the shortest end of the yield curve held artificially at or near 0% it is nearly impossible for the yield curve to invert, but it appears to be flattening.
Conclusion
The major indices have been up 8% - 10% in the last 12 trading days.
Central Banks have been using BREXIT as an excuse to flood their deteriorating economies with even more liquidity. All of the financial markets may be in a blow off. I cannot imagine how this can end well.
The technical indicators are strong while seasonality has been weak.
I expect the major averages to be lower on Friday July 22 than they were on Friday July 15.
Last weeks negative forecast was a miss.
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Good Luck,
YTD W 12 / L 13 / T 3
