Technical Stock Market Report

The Good News is:  There is reason to believe the BREXIT calamity for the market will be just a brief transient.

The Negatives:  For a market rising and close to all-time highs, new highs have been in short supply for a long time.  There have been strong numbers of new highs on the NYSE, but they have been mostly fixed income, not equity related.

More importantly, new lows have remained at non-threatening levels. 

For decades I have considered several days with more than 40 NYSE and 70 NASDAQ new lows to be the threshold for "threatening".

Friday was the only day last week new lows surpassed the threatening threshold.

The effect of news events is transitory, especially when the reaction is counter to the trend.

The Positives:  New highs outnumbered new lows on the NYSE every day last week.

New highs outnumbered new lows on the NASDAQ 3 days last week.

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 managed to finish the week up and slightly positive.

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 also finished the week slightly higher than the week before.

The average month has 21 trading days.  The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10.  In months when there were more than 21 trading days some of the days in the middle were not counted.  In months when there were less than 21 trading days some of the days in the middle of the month were counted twice.  Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that.  The line is solid on the 11th trading day, the dividing point.

In the chart below the blue line shows the average of the OTC in July over all years since 1963 while the black line shows the average during the 4th year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 57% of the time in July with an average gain of 1.5%.  During the 4th year of the Presidential Cycle the SPX has been up 50% of the time with an average gain of 2.0% (helped by a 37.7% gain in 1932).  The best July ever for the SPX was 1932 (+37.7%) the worst 1934 (-11.5%).

The chart below is similar to the one above except it shows the daily average performance over all years for the SPX in July in red and the performance during the 4th year of the Presidential Cycle in black.

Since 1979 the Russell 2000 (R2K) has been up 46% of the time in July with an average loss of -0.5%.  During the 4th year of the Presidential Cycle the R2K has been up 38% of the time with an average loss of -1.0%.  The best July ever for the R2K, 1980 (+11.0%), the worst 2002 (-15.2%)

The chart below is similar to those above except it shows the daily performance over all years for the R2K in July in magenta and the performance during the 4th year of the Presidential Cycle in black.

Since 1885 the DJIA has been up 61% of the time in July with an average gain of 1.2%.  During the 4th year of the Presidential Cycle the DJIA has been up 56% of the time in July with an average gain of 1.7%.  The best July ever for the DJIA 1932 (+26.7%), the worst 1893 (-15.7%)

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in July in grey and the performance during the 4th year of the Presidential Cycle in black.

Conclusion

The market was in an uptrend when surprised by the BREXIT vote.  Under any circumstances the down move is likely to be transitory.  Central banks worldwide will be supplying whatever liquidity is required to arrest the decline.  Long-term, I have no idea what the outcome will be.  Short-term, the decline will be stopped.

I expect the major averages to be higher on Friday July 1 than they were on Friday June 24.

Last week’s positive forecast was a miss.

Disclaimer: Charts and figures presented herein are believed to be reliable but I cannot attest to their accuracy.  Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus and the Wall Street Journal (wsj.com).  Historical data is from Barron's and ISI price books.  The views expressed dare provided for information purposes only and should not be construed in any way as investment advice.  Furthermore, the opinions expressed may change without notice.