The good news is:
• The small cap Russell 2000 (R2K), Wilshire 5000 and S&P Mid cap indices all hit all time highs last week and the S&P 500 (SPX) hit a multi year high.
Short Term
Momentum of downside volume is an indicator that works pretty well from time to time. The chart below is an update from last week covering the past 9 months showing the NASDAQ composite (OTC) in magenta and momentum of NASDAQ downside volume in green. Dashed vertical grey lines have been drawn on the 1st trading day of each month. The indicator has been plotted on an inverted Y axis so increasing downside volume pushes the indicator downward (up is good).
Since this rally began prices have moved up sharply when the indicator was moving upward and have continued to move upward, but not as quickly when the indicator was moving downward.
The indicator is currently moving downward so prices are unlikely to rise very quickly until the indicator changes direction.
Intermediate term
Prices for all of the broad based indices have been moving upward in a very narrow channel since the July lows at some point there will be a break.
The chart below shows the SPX in red and a 10% trend (19 day EMA) of new highs of the component issues of the SPX in green (NH). New highs have been calculated over the trailing 6 weeks rather than 52 weeks as reported by the exchanges.
NH peaked about 2 months ago so successive new highs in the index have been made with progressively fewer of the component issues making new highs.
The next chart is similar to the one above except it covers the period from September 2003 to March 2004. After a multi month run up in prices, NH peaked about 2 months before a sharp break that took the index down about 5% in a few days.
The next chart shows the SPX in red and an indicator showing the percentage of the component issues of the SPX that are above their 50 day EMA in green. There are dashed horizontal lines drawn at the 25%, 50% and 75% levels.
After holding above 75% for over a month the indicator has been falling for the past 6 weeks while the index has continued to rise.
The next chart is similar to the one above except is shows the period ending in March 2004. Both periods were very strong with the indicator remaining above the 75% level for more than a month. In 2004 the indicator declined for about 2 months while the index rose, similar to the current period. A brief sharp break in the index followed.
The chart below is similar to the above 2 charts except it covers the past 3 years continuously to help give you a perspective on how the indicator has worked over time.
The SPX has been making new highs over the past 2 months with the help of progressively fewer of its components. In the past similar deterioration in the indicators has preceded a sharp but brief decline in the index.
Seasonality
Next Friday is the third Friday of December, one of 4 Triple Witching Fridays during the year when options and futures contracts expire. The tables below show how the OTC and SPX have performed during the week prior to the 3rd Friday in December during the 2nd year of the Presidential Cycle.
OTC data covers the period from 1966 - 2002 and SPX data from 1954 – 2002 during the 2nd year of the Presidential Cycle. There are summaries for both the 2nd year of the Presidential Cycle and all years combined beginning with 1963 for the OTC and 1953 for the SPX. Prior to 1953 the market traded 6 days a week so that data is been omitted.
The OTC has been up about 50% of the time with a very slight positive bias. The SPX has been up about 60% of the time with a stronger bias.
Report for the week before options expiration Friday during Dec
The number following the year is the position in the presidential cycle.
Break down by presidential year
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | 0.58% | 0.65% | 0.09% | 0.04% | -0.57% | 0.78% |
| 1970-2 | 0.35% | -0.74% | -0.14% | 0.11% | 0.28% | -0.13% |
| 1974-2 | -0.62% | 0.58% | 0.74% | -0.29% | -1.33% | -0.92% |
| 1978-2 | 0.32% | -0.55% | -0.31% | 0.02% | -0.63% | -1.15% |
| 1982-2 | -0.22% | -0.86% | -2.44% | -0.04% | 1.48% | -2.08% |
| 1986-2 | -0.73% | 0.13% | -0.42% | -0.26% | 0.24% | -1.04% |
| Avg | -0.18% | -0.29% | -0.51% | -0.09% | 0.01% | -1.06% |
| 1990-2 | -0.84% | 1.22% | 0.28% | 0.29% | 0.35% | 1.30% |
| 1994-2 | 0.01% | 0.05% | 0.86% | 0.69% | -0.22% | 1.39% |
| 1998-2 | -3.07% | 2.32% | -0.16% | 1.72% | 2.06% | 2.87% |
| 2002-2 | 2.78% | -0.59% | -2.19% | -0.54% | 0.66% | 0.11% |
| Avg | -0.28% | 0.75% | -0.30% | 0.54% | 0.71% | 1.42% |
| OTC summary for Presidential Year 2 1966 - 2002 | ||||||
| Avg | -0.15% | 0.22% | -0.37% | 0.17% | 0.23% | 0.11% |
| Win% | 50% | 60% | 40% | 60% | 60% | 50% |
| OTC summary for all years 1963 - 2005 | ||||||
| Avg | 0.07% | 0.00% | -0.05% | -0.03% | 0.12% | 0.11% |
| Win% | 51% | 51% | 48% | 58% | 56% | 56% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | 0.09% | -0.69% | 0.61% | 1.07% | 0.26% | 1.33% |
| 1958-2 | 0.28% | 0.37% | 0.65% | 0.43% | -0.15% | 1.59% |
| 1962-2 | -0.32% | -0.48% | 0.82% | 0.38% | -0.29% | 0.12% |
| 1966-2 | 1.05% | -0.33% | -0.11% | -1.21% | -0.07% | -0.67% |
| 1970-2 | -0.51% | -0.16% | 0.07% | 0.36% | 0.20% | -0.04% |
| 1974-2 | -0.91% | 1.69% | 0.47% | -0.37% | -1.09% | -0.21% |
| 1978-2 | 0.50% | -0.54% | -0.55% | -0.02% | -0.74% | -1.35% |
| 1982-2 | 0.27% | -1.83% | -1.56% | 0.04% | 1.62% | -1.46% |
| 1986-2 | 0.35% | 0.74% | -0.99% | -0.32% | 1.20% | 0.97% |
| Avg | -0.06% | -0.02% | -0.51% | -0.06% | 0.24% | -0.42% |
| 1990-2 | -0.24% | 1.24% | 0.05% | -0.02% | 0.49% | 1.51% |
| 1994-2 | 0.56% | 0.15% | 1.07% | 0.08% | 0.76% | 2.62% |
| 1998-2 | -2.17% | 1.89% | -0.07% | 1.55% | 0.68% | 1.88% |
| 2002-2 | 2.35% | -0.81% | -1.31% | -0.77% | 1.30% | 0.75% |
| Avg | 0.12% | 0.62% | -0.07% | 0.21% | 0.81% | 1.69% |
| SPX summary for Presidential Year 2 1954 - 2002 | ||||||
| Avg | 0.10% | 0.10% | -0.07% | 0.09% | 0.32% | 0.54% |
| Win% | 62% | 46% | 54% | 54% | 62% | 62% |
| SPX summary for all years 1953 - 2005 | ||||||
| Avg | 0.09% | 0.10% | 0.08% | -0.02% | 0.15% | 0.39% |
| Win% | 56% | 50% | 54% | 45% | 57% | 60% |
Conclusion
Seasonally next week is neutral and at some point the market will take break from its consistent upward move. Many of the breadth indicators have been deteriorating since mid October so next week would be a convenient time for a little adjustment. There has been no build up of new lows so any decline is likely to be brief.
I expect the major indices to be lower on Friday December 15 than they were on Friday December 8.
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Gordon Harms produces a PPT for our local timing group. You can get a copy at: http://www.stockmarket-ta.com/.
