The good news is:
- All of the major averages closed at all time highs last Monday.
The Negatives
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.
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 also failed to confirm the new index high.
The Positives
Seasonality for next week is positive.
Recently the secondaries have been outperforming the blue chips.
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 last week finishing the week at a comfortable 72%.
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 strong 82%.
Seasonality
Next week includes the last 4 trading days of 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 1928 to 2016. There are summaries for both the 1st year of the Presidential Cycle and all years combined.
Average returns for the coming week have been positive by all measures.
Report for the last 4 days of December.
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
Day4 Day3 Day2 Day1 Totals
1965-1 -0.23% 1 -0.70% 2 -0.07% 3 0.27% 4 -0.72%
1969-1 -0.41% 4 -0.01% 5 -0.27% 1 -1.01% 2 -1.71%
1973-1 0.15% 5 -0.08% 2 0.57% 3 1.36% 5 2.01%
1977-1 0.56% 2 0.07% 3 0.79% 4 0.86% 5 2.28%
1981-1 0.57% 5 -0.72% 1 0.31% 2 0.77% 3 0.93%
1985-1 0.10% 3 -0.17% 4 0.18% 5 0.52% 1 0.62%
1989-1 -0.19% 2 0.03% 3 0.61% 4 0.61% 5 1.07%
1993-1 0.06% 1 0.41% 2 0.42% 3 0.76% 4 1.65%
Avg 0.22% -0.07% 0.46% 0.70% 1.31%
1997-1 0.54% 4 -0.25% 5 -0.28% 1 0.25% 2 0.27%
2001-1 -0.93% 2 1.84% 3 0.72% 4 -3.41% 5 -1.78%
2005-1 1.07% 2 -0.01% 3 0.06% 4 -0.13% 5 0.99%
2009-1 0.35% 5 -1.30% 1 2.67% 2 1.70% 3 3.42%
2013-1 -0.74% 3 -0.14% 4 -0.86% 5 2.00% 1 0.26%
Avg 0.06% 0.03% 0.46% 0.08% 0.63%
OTC summary for Presidential Year 1 1965 - 2013
Averages 0.07% -0.08% 0.37% 0.35% 0.71%
% Winners 62% 31% 69% 77% 77%
MDD 12/30/2005 1.96% -- 12/31/2001 1.85% -- 12/29/1965 1.37%
OTC summary for all years 1963 - 2016
Averages 0.18% 0.09% 0.22% 0.25% 0.77%
% Winners 68% 51% 60% 70% 68%
MDD 12/29/2000 3.41% -- 12/31/2002 2.69% -- 12/31/2007 2.65%
SPX Presidential Year 1
Day4 Day3 Day2 Day1 Totals
1929-1 0.85% 4 1.44% 5 0.29% 6 1.25% 1 3.83%
1933-1 -0.15% 3 2.27% 4 2.52% 5 -0.43% 6 4.21%
1937-1 -0.70% 1 0.41% 2 1.53% 3 -0.52% 4 0.72%
1941-1 0.48% 5 0.57% 6 0.67% 1 0.09% 2 1.82%
1945-1 -0.46% 3 1.00% 4 1.37% 5 0.00% 6 1.92%
1949-1 -0.72% 2 1.33% 3 0.00% 4 -0.52% 5 0.08%
1953-1 0.15% 5 0.57% 1 0.72% 2 -0.08% 3 1.37%
Avg -0.25% 0.78% 0.86% -0.21% 1.18%
1957-1 0.04% 3 -0.09% 4 0.45% 5 0.24% 1 0.65%
1961-1 0.14% 2 0.45% 3 0.47% 4 0.10% 5 1.16%
1965-1 -0.10% 1 -0.31% 2 0.58% 3 0.53% 4 0.71%
1969-1 0.10% 4 -0.39% 5 -0.90% 1 0.06% 2 -1.12%
1973-1 0.63% 5 0.41% 2 0.54% 3 0.96% 5 2.53%
Avg 0.16% 0.01% 0.23% 0.38% 0.79%
1977-1 0.67% 2 -0.40% 3 0.51% 4 0.54% 5 1.32%
1981-1 0.51% 5 -1.13% 1 0.22% 2 0.32% 3 -0.08%
1985-1 -0.17% 3 -0.43% 4 0.31% 5 0.59% 1 0.29%
1989-1 -0.37% 2 0.09% 3 0.84% 4 -0.60% 5 -0.05%
1993-1 -0.14% 1 -0.27% 2 0.19% 3 -0.71% 4 -0.92%
Avg 0.10% -0.43% 0.41% 0.03% 0.11%
1997-1 0.64% 4 0.13% 5 -0.39% 1 -1.74% 2 -1.36%
2001-1 0.71% 2 1.04% 3 0.40% 4 -1.04% 5 1.10%
2005-1 0.72% 2 -0.01% 3 0.01% 4 -0.13% 5 0.58%
2009-1 0.54% 5 -0.39% 1 2.44% 2 1.42% 3 4.00%
2013-1 -0.48% 3 -0.12% 4 -1.10% 5 1.69% 1 -0.01%
Avg 0.42% 0.13% 0.27% 0.04% 0.86%
SPX summary for Presidential Year 1 1929 - 2013
Averages 0.13% 0.28% 0.53% 0.09% 1.03%
% Winners 59% 55% 82% 55% 73%
MDD 12/28/1937 3.55% -- 12/30/2005 1.61% -- 12/31/2009 1.12%
SPX summary for all years 1929 - 2016
Averages 0.13% 0.27% 0.43% 0.17% 0.98%
% Winners 63% 59% 71% 63% 74%
MDD 12/28/1937 3.55% -- 12/29/1987 2.95% -- 12/28/1931 2.51%
Sell in May and go away
It is the 2nd year of the Presidential Cycle (PY2) that legitimizes that saying.
PY2 is, on average, the weakest of the 4 years in the Presidential Cycle and most of that weakness occurs between May and September.
Since 1963, over all years, the OTC has been up 74% of the time with an average yearly gain of 13.2%. During PY2 the OTC has been up 54% time with an average gain of 1.2%. The best PY2 ever for the OTC was 1998 (+39.6%), the worst 1974 (-35.1%).
The charts below show the average daily return over all years and for PY2. Dashed vertical lines have been drawn on the 1st trading day of each month.
In the chart below the blue line shows the average of the OTC over all years since 1963 while the grey line shows the average during PY2 over the same period.
Since 1928, over all years, the SPX has been up 67% of the time with an average yearly gain of 7.6%. During PY2 the SPX has been up 59% of the time with an average yearly gain of 4.8%. The best PY2 ever for the SPX was 1954 (+45.0%), the worst 1974 (-29.7%).
The chart below is similar to the one above except it shows the average daily performance over all years for the SPX in red and the performance during PY2 in grey.
Since 1979, over all years, the Russell 2000 (R2K) has been up 70% of the time with an average yearly gain of 11.5%. During PY2 the R2K has been up 56% time with an average gain of 2.3%. The best PY2 ever for the R2K was 2010 (+25.3%), the worst 2002 (-21.6%).
The chart below is similar to those above except it shows the daily performance over all years of the R2K in magenta and the performance during PY2 in grey.
Since 1985, over all years, the Dow Jones Industrial Average (DJIA) has been up 66% of the time with an average yearly gain of 7.2%. During PY2 the DJIA has been up 58% time with an average yearly gain of 4.1%. The best PY2 ever for the DJIA was 1954 (+44.0%), the worst 1930 (-33.8%).
The chart below is similar to those above except it shows the daily performance over all years of the DJIA in light grey and the performance during the PY2 in dark grey.
Conclusion
Seasonality is the only thing that matters next week.
Prices should drift upward on low volume.
I expect the major averages to be higher on Friday December 29 than they were on Friday December 22.
By Mike Burk
