Technical Stock Market Report

The good news is:  All of the major indices closed at all time or multi-year highs on the day before New Years Eve. 

The negatives:  All of the major indices closed at multi-year or all-time highs last Tuesday, while the breadth indicators were mixed.  In spite of a strong year end rally new highs failed to confirm the record highs recorded by the indices.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.  Dashed vertical lines have been drawn on the 1st trading day of each month.

OTC NH has been making progressively lower highs for the past 6 months as the OTC has been making progressively higher highs.

The next chart is similar to the one above except it shows the S&P500 (SPX) in red and NY NH has been calculated from NYSE data.

NY NH has been stronger than OTC NH, but was off its recent high when the SPX hit its all time high.

Expanding new highs are a sign of strength that has been falling short recently.

The positives:  New highs have been falling short, but, nothing really bad happens without new lows expanding and that has not happened.

The chart below 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 neutral 50% level.

OTC HL Ratio held at a very strong 93%.

There are trading systems that impose a No Sell Filter when variations of this indicator are above 80%.

The next chart is similar to the one above except it shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio held above 80% last week.

Money Supply (M2):  The money supply chart was provided by Gordon Harms.

Money supply growth declined a bit last week.

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 72% of the time with an average yearly gain of 13.4%.  During PY2 the OTC has been up 50% time with an average gain of 0.1%.  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 green 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 57% of the time with an average yearly gain of 4.5%.  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 green.

Since 1979, over all years, the Russell 2000 (R2K)  has been up 71% of the time with an average yearly gain of 12.0%.  During PY2 the R2K has been up 50% time with an average gain of 2.2%.  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 green.

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 56% time with an average yearly gain of 4.0%.  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 cyan and the performance during the PY2 in green.

Conclusion:  The market has been following the seasonal pattern quite closely and the rest of this month has been weak seasonally.

I expect the major averages to be lower on Friday January 10 than they were on Friday January 3.

I got off to a bad start with my weekly forecasts.  All of the major averages were down slightly so my positive forecast was a miss.

It is easy to make the case that the market is likely to follow the average PY2 pattern.  Around mid April the effects of the Fed tapering will begin to show and the market will begin its seasonal decline.  Then, around October the Fed will get religion and announce the next round of QE and the market will rally into the end of the year.  I just made that up.

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Disclaimer: Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy.   Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) 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.

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