The good news is:
- All of the major averages except the Russell 2000 (R2K) closed at all time highs last Friday.
The Negatives
The market is overbought.
The secondaries are underperforming the blue chips.
52 week new highs have not been confirming the all time new index highs.
The first chart covers the past 6 months showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.
The new high for the SPX was unconfirmed by NY NH.
This chart looks about the same as last weeks chart.
The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC NH, in green, has been calculated using NASDAQ data.
OTC NH has been weaker than NY NH and like NY NH both are falling.
The Positives
Seasonality for the next 2 weeks is very positive.
Friday there were over 2.2 billion upside volume shares traded on the NASDAQ and over 1.8 billion on the NYSE. Those are the highest daily upside volume numbers in over 2 years.
The next chart covers the past 6 months showing the 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 horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral, level.
OTC HL Ratio rose a little last week.
The next chart is similar to the one above one except it shows the SPX in red and NY HL Ratio, in blue, has been calculated with NYSE data.
NY HL Ratio finished the week at a comfortable 75%.
Seasonality
Next week includes the 5 trading days prior to Christmas during the 1st 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 2016 while SPX data runs from 1953 to 2016. There are summaries for both the 1st 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 modestly positive by all measures and a little weaker during the 1st year of the Presidential Cycle than other years.
Report for the 5 days before Christmas.
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 1
Day5 Day4 Day3 Day2 Day1 Totals
1965-1 -0.07% 5 0.00% 1 -0.49% 2 -0.63% 3 -0.03% 4 -1.23%
1969-1 -0.66% 4 1.28% 5 0.33% 1 0.03% 2 -0.42% 3 0.56%
1973-1 1.60% 2 -0.35% 3 0.03% 4 -0.83% 5 -0.95% 1 -0.50%
1977-1 -0.72% 1 -0.77% 2 0.52% 3 0.37% 4 0.51% 5 -0.10%
1981-1 0.67% 5 -0.32% 1 -0.37% 2 -0.10% 3 0.13% 4 0.00%
1985-1 -0.24% 3 0.06% 4 0.14% 5 -0.48% 1 -0.38% 2 -0.89%
1989-1 -1.76% 1 -0.39% 2 0.60% 3 0.95% 4 0.79% 5 0.19%
1993-1 0.49% 5 0.12% 1 -0.59% 2 0.06% 3 0.35% 4 0.42%
Avg -0.31% -0.26% 0.06% 0.16% 0.28% -0.07%
1997-1 -1.56% 4 0.10% 5 0.49% 1 -1.45% 2 -0.69% 3 -3.12%
2001-1 0.87% 2 -1.09% 3 -3.25% 4 1.42% 5 -0.07% 1 -2.11%
2005-1 -1.32% 1 -0.01% 2 0.42% 3 0.66% 4 0.13% 5 -0.12%
2009-1 1.45% 5 1.17% 1 0.67% 2 0.75% 3 0.71% 4 4.76%
2013-1 1.15% 3 -0.29% 4 1.15% 5 1.08% 1 0.16% 2 3.24%
Avg 0.12% -0.03% -0.11% 0.49% 0.05% 0.53%
OTC summary for Presidential Year 1 1965 - 2013
Averages -0.01% -0.04% -0.03% 0.14% 0.02% 0.09%
%Winners 46% 38% 69% 62% 54% 46%
MDD 12/20/2001 4.30% -- 12/24/1997 3.10% -- 12/19/1989 2.14%
OTC summary for all years 1963 - 2016
Averages 0.12% 0.11% -0.04% 0.26% 0.30% 0.74%
% Winners 57% 51% 57% 65% 67% 63%
SPX Presidential Year 1
Day5 Day4 Day3 Day2 Day1 Totals
1953-1 0.20% 5 -0.16% 1 -0.76% 2 -0.28% 3 0.45% 4 -0.56%
1957-1 -0.10% 3 1.07% 4 -0.80% 5 0.00% 1 0.10% 2 0.26%
1961-1 -0.35% 1 -0.70% 2 -0.20% 3 -0.37% 4 0.07% 5 -1.54%
1965-1 -0.04% 5 -0.47% 1 0.39% 2 0.30% 3 -0.11% 4 0.08%
1969-1 1.58% 4 0.85% 5 -0.88% 1 -0.39% 2 1.05% 3 2.22%
1973-1 2.15% 2 0.08% 3 -0.28% 4 -1.07% 5 -0.68% 1 0.19%
Avg 0.65% 0.17% -0.35% -0.30% 0.09% 0.24%
1977-1 -0.76% 1 -0.20% 2 0.59% 3 0.81% 4 0.95% 5 1.38%
1981-1 0.71% 5 -0.53% 1 -0.37% 2 -0.46% 3 0.19% 4 -0.47%
1985-1 -0.40% 3 0.10% 4 0.44% 5 -1.12% 1 -0.69% 2 -1.67%
1989-1 -1.84% 1 -0.36% 2 0.11% 3 0.57% 4 0.77% 5 -0.76%
1993-1 0.66% 5 -0.11% 1 -0.12% 2 0.43% 3 0.01% 4 0.87%
Avg -0.33% -0.22% 0.13% 0.04% 0.25% -0.13
1997-1 -1.06% 4 -0.89% 5 0.73% 1 -1.53% 2 -0.68% 3 -3.43%
2001-1 0.75% 2 0.58% 3 -0.84% 4 0.44% 5 -0.02% 1 0.91%
2005-1 0.00% 1 -0.61% 2 0.25% 3 0.42% 4 0.04% 5 0.11%
2009-1 0.58% 5 1.05% 1 0.36% 2 0.23% 3 0.53% 4 2.75%
2013-1 1.66% 3 -0.06% 4 0.48% 5 0.53% 1 0.29% 2 2.91%
Avg 0.39% 0.01% 0.20% 0.02% 0.03% 0.65%
SPX summary for Presidential Year 1 1953 - 2013
Averages 0.23% -0.02% -0.06% -0.09% 0.14% 0.20%
%Winners 50% 38% 50% 50% 69% 63%
MDD 12/24/1997 3.40% -- 12/19/1989 2.19% -- 12/24/1973 2.02%
SPX summary for all years 1953 - 2016
Averages 0.15% 0.10% 0.10% 0.01% 0.26% 0.60%
% Winners 54% 45% 58% 50% 67% 69%
Money supply (M2) and Interest Rates
The following charts were supplied by Gordon Harms.
M2 growth appears to have stabilized at its elevated trend.
Long term rates continued to decline slowly while short term rates rose sharply accelerating the rate compression. We are on track for a rate inversion which has been a reliable predictor of a recession.
Conclusion
The Santa Clause rally is scheduled to begin next Thursday and run to the end of the year, Seasonality will be the dominant force in the market characterized by an upward drift in prices on low volume
I expect the major averages to be higher on Friday December 22 than they were on Friday December 15.
Last weeks negative forecast was a miss.
By Mike Burk
