Technical market report for January 5, 2020

The good news is:

• All of the major averages closed at or near all time highs at the end of 2019. 

The Negatives

The market has been going up for 3 consecutive months and is overbought.

The Russell 2000 (R2K) has been underperforming the blue chips for the past 3 weeks and ended down for the week last week.

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.

NY NH unambiguously failed to confirm the new SPX high Thursday.There is even a short term non confirmation from about a week earlier.  

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 with NASDAQ data.

For the very short term (1 week) OTC NH failed to confirm last Thursday’s all time index high.

 

The Positives

The non confirmations mentioned above are at very high levels for the new high indicators which make them less threatening.A minor short term pull back is likely

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 to its highest level since June 2018.

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 with NYSE data.

NY HL Ratio at 94% is very strong.

The high levels of the HL ratios imply higher prices before this cycle is over.

Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of January during the 4th 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 2018 while SPX data runs from 1953 to 2018.There are summaries for both the 4th year of the Presidential Cycle and all years combined.Prior to 1953 the market traded 6 days a week so that data has been ignored.

Average returns for the coming week have been positive by all measures.  

Report for the week before the 2nd Friday of January.

The number following the year is the position in the Presidential Cycle.

Daily returns from Monday to 2nd Friday.

OTC Presidential Year 4 (PY4)

 Year Mon Tue Wed Thur FriTotals

 1964-4 0.14% 0.41% 0.38% 0.19% 0.14% 1.26%

 1968-4 0.80% -0.06%-0.20% 0.29% 0.38% 1.22%

 1972-4 0.04% 0.47% 0.22% -0.41% 0.27% 0.60%

 1976-4 0.90% 1.92% 0.90% 0.81% 0.81% 5.33%

 1980-4 0.41% 1.39% 0.61% 1.00% 0.49% 3.89%

 1984-4-0.22% 0.13% 0.02% -0.02% -0.27%-0.36%

 1988-4-0.67% -1.26% 0.21% 0.47% 1.77% 0.52%

 1992-4 0.89% 0.73% 1.33% 1.55% -0.66% 3.85%

 1996-4-0.11% -3.25%-0.86% 2.13% -0.31%-2.40%

 Avg0.06% -0.45% 0.26% 1.03% 0.20% 1.10%

 2000-4 4.30% -3.17%-1.82% 2.78% 2.71% 4.81%

 2004-4 2.03% 0.49% 0.99% 1.09% -0.63% 3.95%

 2008-4-0.21% -2.36% 1.39% 0.56% -1.95%-2.56%

 2012-4 0.09% 0.97% 0.31% 0.51% -0.51% 1.36%

 2016-4-0.12% 1.03%-3.41% 1.96% -2.74%-3.28%

 Avg1.22% -0.61%-0.51% 1.38% -0.63% 0.86%

OTC summary for PY4 1964 - 2016 

 Avg0.59% -0.18% 0.01% 0.92% -0.04% 1.30%

 Win% 64% 64% 71% 86% 50% 71%

OTC summary for all years 1963 - 2019

 Avg0.33% -0.05%-0.05% 0.51% 0.13% 0.88%

 Win% 65% 56% 53% 74% 67% 65%

 

SPX PY4

 Year Mon Tue Wed Thur FriTotals

 1956-4-1.40% -0.79% 0.50% 0.83% -0.18%-1.03%

 1960-4-1.23% -0.61%-0.56% 0.55% -0.03%-1.89%

 1964-4 0.23% 0.03% 0.41% 0.37% -0.05% 0.98%

 1968-4 0.71% -0.12% 0.02% 0.10% 0.10% 0.81%

 1972-4-0.14% 0.32%-0.06% -0.58% 0.39%-0.07%

 1976-4 1.85% 1.03% 0.45% 0.67% 0.39% 4.39%

 Avg0.28% 0.13% 0.05% 0.22% 0.16% 0.84%

 1980-4 0.27% 2.00% 0.09% 0.77% 0.03% 3.17%

 1984-4-0.22% -0.56%-0.10% -0.02% -0.44%-1.34%

 1988-4 1.68% -0.84% 0.16% 0.03% 2.51% 3.54%

 1992-4-0.33% -0.13% 0.17% -0.12% -0.60%-1.01%

 1996-4 0.28% -1.46%-1.80% 0.70% -0.15%-2.42%

 Avg0.34% -0.20%-0.30% 0.27% 0.27% 0.39%

 2000-4 1.12% -1.30%-0.44% 1.21% 1.07% 1.66%

 2004-4 1.24% 0.13% 0.24% 0.50% -0.89% 1.21%

 2008-4 0.32% -1.84% 1.36% 0.79% -1.36%-0.72%

 2012-4 0.23% 0.89% 0.03% 0.23% -0.49% 0.88%

 2016-4 0.09% 0.78%-2.50% 1.67% -2.16%-2.12%

 Avg0.60% -0.27%-0.26% 0.88% -0.77% 0.18%

SPX summary for PY4 1956 - 2016 

 Avg0.29% -0.15%-0.13% 0.48% -0.12% 0.38%

 Win% 69% 44% 63% 81% 38% 50%

SPX summary for all years 1953 - 2019

 Avg0.08% -0.14%-0.22% 0.30% 0.01% 0.03%

 Win% 57% 43% 45% 73% 52% 52%

Presidential Year 4 (PY4)

Since 1963, over all years, the OTC has been up 73% of the time with an average annual gain of 13.5%.In the 4th year of the Presidential Cycle the OTC has been up 79% time with an average annual gain of 8.2% making it the 3rd best year of the 4 year cycle.The best ever 4th year for the OTC was 1999 (+85.6%), the worst 2008 (-40.5%).

The chart below has been calculated by averaging the daily percentage change of the OTC in a pattern similar to what I use to calculate the monthly charts.The monthly charts are then strung together to make an average year. 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 black line shows the average during the 4th year of the Presidential Cycle over the same period.

Since 1928, over all years, the SPX has been up 67% of the time with an average annual gain of 7.8%.In the 4th year of the Presidential Cycle the SPX has been up 74% time with an average gain of 7.1% making it the 2nd best year of the 4 year cycle.The best ever 4th year for the SPX was 1928 (+37.5%), the worst 2008 (-38.5%).

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

Since 1979, over all years, the Russell 2000 (R2K) has been up 70% of the time with an average annual gain of 11.3%.In the 4th year of the Presidential Cycle the R2K has been up 70% time with an average gain of 9.0% making it the 3rd best year of the 4 year cycle.The best ever 4th year for the R2K was 2003 (+45.4%), the worst 2008 (-34.8%).

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 the 4th year of the Presidential Cycle in black.

Since 1885, over all years, the Dow Jones Industrial Average (DJIA) has been up 66% of the time with an average annual gain of 7.3%.In the 4th year of the Presidential Cycle the DJIA has been up 70% time with an average gain of 7.1% making it the 2nd best year of the 4 year cycle.The best ever 4th year for the DJIA was 1928 (+48.2%), the worst 1931 (-52.7%).

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

Conclusion

The market did a good job of following the average seasonal pattern over the holiday season.The high Low ratio numbers are extremely high suggesting risk is low, however the non confirmations by the New High indicators suggest a short term pull back.

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

Last week the OTC was up slightly while everything else was down slightly so I am calling last weeks positive forecast a tie.