The good news is:
• Money supply is growing at the fastest rate in years.
Short Term
The market is over bought; many of the indicators are at or near extremes.
The chart below covers the past year showing the S&P 500 (SPX) in red and an indicator that shows the percentage of the past 5 trading days that the NYSE Advance - Decline line (ADL) has been up in black. The ADL is a running total of daily number of declining issues subtracted from advancing issues. Dashed vertical lines have been drawn on the 1st trading day of each month.
The indicator has hit the current level only 6 times in the past year when the market was at or near a short term high.
The next chart is similar to the one above except the indicator shows the percentage of the last 5 trading days NYSE On Balance Volume (OBV) has been up. The OBV is a running total of daily volume of declining issues subtracted from volume of advancing issues.
This indicator has hit its current level only 5 times in the past year and all but the 1st one were at a short term high.
Intermediate Term
Over the past 6 months there have been extremely high of numbers of new lows and extremely low numbers of new highs. You can picture this by calculating a ratio (NH / (NH + NL)).
In the charts below show a 10% trend (19 day EMA) of the HL ratio using NASDAQ data in black and the NASDAQ composite (OTC) in blue. Dashed vertical lines have been drawn on the 1st trading day of each month and dashed horizontal lines have been drawn at 10% levels of the indicator.
The following charts include every example of the indicator dropping below the 10% level since 1978.
The 1st chart shows the current period.
The last time the indicator dropped below the 10% level was in October 2002, the end of the last bear market.
The next chart shows the 1998 bottom.
The next chart shows the 1990 bottom.
The next chart shows the 1987 bottom.
The next chart covers 1.5 years showing the bottom of 1981 - 1982 bear market. The dashed vertical line has been drawn in red on the 1st trading day of 1982. The indicator hit its low in late September 1981 but prices did not bottom until August 1982.
The rapid decline in new lows suggest we should see a rally for the next several months.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday in April during the 4th year of the Presidential Cycle.
The tables show the daily change of the OTC and SPX for the 5 trading days prior to the 2nd Friday in April during the 4th year of the Presidential Cycle.
OTC data covers the period from 1963 - 2007 and SPX data from 1953 - 2007. Data prior to 1953 has been omitted because the market traded 6 days a week. There are summaries for both the 4th year of the Presidential Cycle and all years combined.
Historically, by most measures, next week has been weak. In April 2000 it was one of the worst weeks ever.
Report for the week before the 2nd Friday of Apr
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1964-4 | 0.37% | 0.47% | -0.31% | 0.50% | 0.08% | 1.10% |
| 1968-4 | 1.66% | 1.09% | 0.19% | 1.00% | -0.55% | 3.40% |
| 1972-4 | -0.03% | 0.54% | 0.53% | -0.08% | 0.62% | 1.57% |
| 1976-4 | 0.88% | 0.13% | -0.82% | -0.84% | -1.28% | -1.92% |
| 1980-4 | -0.78% | -0.20% | -0.46% | -0.89% | 0.08% | -2.26% |
| 1984-4 | -0.45% | 0.25% | -0.68% | 0.32% | 0.60% | 0.03% |
| Avg | 0.26% | 0.36% | -0.25% | -0.10% | -0.11% | 0.16% |
| 1988-4 | 0.18% | 0.22% | 0.01% | -2.32% | -0.17% | -2.07% |
| 1992-4 | 1.06% | -2.46% | -1.36% | 2.28% | -0.43% | -0.91% |
| 1996-4 | 0.86% | 1.31% | -0.36% | 1.37% | 0.21% | 3.40% |
| 2000-4 | -5.81% | -3.16% | -7.06% | -2.46% | -9.67% | -28.16% |
| 2004-4 | 0.61% | -1.71% | -0.26% | -1.12% | -0.32% | -2.80% |
| Avg | -0.62% | -1.16% | -1.81% | -0.45% | -2.07% | -6.11% |
| OTC summary for Presidential Year 4 1964 - 2004 | ||||||
| Avg | -0.13% | -0.32% | -0.96% | -0.20% | -0.98% | -2.60% |
| Win% | 64% | 64% | 27% | 45% | 45% | 45% |
| OTC summary for all years 1963 - 2007 | ||||||
| Avg | 0.02% | -0.05% | -0.11% | 0.15% | -0.19% | -0.19% |
| Win% | 62% | 53% | 53% | 56% | 58% | 62% |
| SPX Presidential Year 4 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1956-4 | -0.49% | -1.40% | 0.79% | -0.60% | -0.15% | -1.84% |
| 1960-4 | 0.20% | 0.59% | 1.15% | 0.02% | -0.23% | 1.73% |
| 1964-4 | 0.10% | -0.35% | 0.01% | -0.06% | 0.19% | -0.11% |
| 1968-4 | 0.06% | 0.03% | 0.20% | 0.28% | -1.27% | -0.70% |
| 1972-4 | -0.16% | 0.28% | 0.38% | -0.25% | -0.06% | 0.20% |
| 1976-4 | 1.23% | -0.14% | -1.11% | -0.91% | -0.92% | -1.85% |
| 1980-4 | -0.92% | -0.20% | -1.06% | -0.48% | -0.49% | -3.16% |
| 1984-4 | -0.02% | 0.27% | -0.56% | 1.76% | -0.27% | 1.19% |
| Avg | 0.04% | 0.05% | -0.43% | 0.08% | -0.60% | -0.86% |
| 1988-4 | 0.27% | 0.45% | 0.07% | -4.35% | 0.01% | -3.55% |
| 1992-4 | 1.01% | -1.86% | -0.89% | 1.56% | 0.91% | 0.72% |
| 1996-4 | 0.91% | 0.39% | -0.53% | 0.31% | 0.23% | 1.31% |
| 2000-4 | -0.78% | -0.26% | -2.23% | -1.82% | -5.78% | -10.87% |
| 2004-4 | 0.52% | -1.38% | -0.11% | 0.06% | 0.51% | -0.40% |
| Avg | 0.38% | -0.53% | -0.74% | -0.85% | -0.82% | -2.56% |
| SPX summary for Presidential Year 4 1956 - 2004 | ||||||
| Avg | 0.15% | -0.27% | -0.30% | -0.35% | -0.56% | -1.33% |
| Win% | 62% | 46% | 46% | 46% | 38% | 38% |
| SPX summary for all years 1953 - 2007 | ||||||
| Avg | 0.16% | 0.12% | 0.01% | -0.02% | -0.03% | 0.24% |
| Win% | 59% | 56% | 55% | 53% | 55% | 58% |
Money supply (M2)
The money supply chart below was provided by Gordon Harms. Money supply is growing at the fastest rate in years.
Conclusion
The market took off in the summer of 2006 when the banks were giving away money, now the fed is doing it. Short term the market is overbought, but with money supply exploding any pull back should be modest.
I expect the major indices to be lower on Friday April 11 than they were on Friday April 4.
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Gordon Harms produces a power point for our local timing group meetings. You can get a copy of that at: http://www.stockmarket-ta.com/.
