The good news is:
- For a 2nd week in a row the secondaries outperformed the blue chips.
The Negatives
This time the markets were spooked by the prospect of war with Russia over Ukraine.
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 and dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral level.
OTC HL Ratio continued its downward move. It is getting near its limit.
The next chart is similar to the first one except it shows the S&P 500 (SPX) in red and NY HL ratio, in blue, has been calculated with NYSE data.
NY HL Ratio also confirmed its negative posture.
The next chart covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green.
The last time NY NH was this low was shortly after the Covid crash..
The next chart is similar to the one above except it shows the OTC in blue and OTC NH, in green, has been calculated with Nasdaq data.
Ditto OTC NH.
The Positives
The market is oversold and ripe for a rally. The excuse for that rally is likely to be Russia completing their military exercises on Ukraine’s border and going away. That will be sold as a foreign policy success for the President.
The next chart covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new lows (NY NL), in blue. NY NL has been plotted on an inverted Y axis so decreasing numbers of new lows move the indicator upward (up is good).
NY NL appears not to be confirming the recent downward move in prices.
The next chart is similar to the one above except it shows the OTC in blue and OTC NL, in brown, has been calculated with Nasdaq data.
OTC NL has been moving steadily upward. The value, however, is extreme.
Seasonality
Next week includes the 4 trading days prior to the 4th Friday of February during the 2nd 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 2020 while SPX data runs from 1953 to 2020. There are summaries for both the 2nd 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 modest and mixed.
Report for the week before the 4th Friday of February. The number following the year is the position in the Presidential Cycle. Daily returns from Monday through the 4th Friday. OTC Presidential Year 2 (PY2) Year Mon Tue Wed Thur Fri Totals 1966-2 0.97% 0.00% 0.03% -0.35% -0.40% 0.26% 1970-2 0.00% -0.31% -0.05% 0.82% -0.16% 0.30% 1974-2 0.00% -0.18% 0.81% 0.67% 0.82% 2.13% 1978-2 0.00% -0.25% 0.14% 0.03% 0.53% 0.44% 1982-2 -0.87% -0.88% 0.61% 0.48% -0.01% -0.67% 1986-2 -0.04% -0.17% 0.11% 0.94% 0.26% 1.09% 1990-2 0.00% -1.21% -0.55% 0.29% -0.76% -2.22% 1994-2 0.00% 0.29% -0.26% -1.23% 0.56% -0.63% 1998-2 1.37% -0.75% 1.60% 0.60% -0.37% 2.45% Avg 0.15% -0.54% 0.30% 0.22% -0.06% 0.00% 2002-2 0.00% -3.02% 1.43% -3.34% 0.48% -4.46% 2006-2 0.00% -0.85% 0.89% -0.17% 0.34% 0.21% 2010-2 -0.08% -1.28% 1.01% -0.08% 0.18% -0.24% 2014-2 0.69% -0.13% 0.10% 0.63% -0.25% 1.05% 2018-2 0.00% -0.07% -0.22% -0.11% 1.76% 1.35% Avg 0.31% -1.07% 0.64% -0.61% 0.50% -0.42% OTC summary for PY2 1966 - 2018 Avg 0.34% -0.68% 0.41% -0.06% 0.21% 0.08% Win% 50% 08% 71% 57% 57% 64% OTC summary for all years 1963 - 2021 Avg -0.38% -0.32% 0.18% -0.11% 0.15% -0.26% Win% 44% 38% 64% 58% 59% 59% SPX PY2 Year Mon Tue Wed Thur Fri Totals 1954-2 0.00% -0.35% 0.00% 0.31% 0.93% 0.89% 1958-2 -0.56% -0.10% 0.76% -0.59% 0.39% -0.09% 1962-2 -0.25% 0.36% -0.48% 0.00% -0.23% -0.61% 1966-2 -0.58% 0.00% -0.42% -0.64% 0.28% -1.38% 1970-2 0.00% -0.05% 1.55% -0.50% 0.67% 1.67% 1974-2 0.00% -0.16% 1.43% 1.36% 0.72% 3.35% 1978-2 0.00% -0.42% -0.03% 0.09% 0.97% 0.61% Avg -0.42% -0.07% 0.41% 0.08% 0.48% 0.73% 1982-2 -1.44% -0.07% 1.76% -0.23% -0.09% -0.07% 1986-2 -0.12% -0.25% 0.11% 1.22% 0.07% 1.03% 1990-2 0.00% -1.42% -0.10% -0.60% -0.48% -2.60% 1994-2 0.00% 0.81% -0.16% -1.37% 0.39% -0.33% 1998-2 0.38% -0.72% 1.19% 0.56% 0.06% 1.46% Avg -0.40% -0.33% 0.56% -0.08% -0.01% -0.10% 2002-2 0.00% -1.89% 1.35% -1.55% 0.82% -1.26% 2006-2 0.00% -0.33% 0.75% -0.38% 0.13% 0.17% 2010-2 -0.10% -1.21% 0.97% -0.21% 0.14% -0.41% 2014-2 0.62% -0.13% 0.00% 0.49% 0.28% 1.26% 2018-2 0.00% -0.58% -0.55% 0.10% 1.60% 0.57% Avg 0.26% -0.83% 0.51% -0.31% 0.59% 0.06% SPX summary for PY2 1954 - 2018 Avg -0.26% -0.41% 0.51% -0.12% 0.39% 0.25% Win% 25% 13% 63% 44% 82% 53% SPX summary for all years 1953 - 2021 Avg -0.27% -0.21% 0.14% -0.16% 0.10% -0.25% Win% 37% 44% 51% 46% 60% 48%
Money supply (M2) and Interest Rates
The following charts were supplied by Gordon Harms.
M2 growth continued to level off. Perhaps the Fed has quit calculating M2.
Treasury rates at their close last Friday and their changes from last month:
2yr yield 1.470% up from 0.961%
5yr yield 1.819% up from 1.558%
10yr yield 1.928% up from 1.792%
30yr yield 2.245% up from 2.125%
The next chart is a close up showing just the past year from the chart above.
Conclusion
The military games around Ukraine are providing a distraction that could end any day providing an excuse for a rally.
The strongest sectors last week were Precious metals (for the 2nd week in a row) and Energy while the weakest were Biotech and Utilities (for the 2nd week in a row).
I expect the major averages to be higher on Friday, February 25 than they were on Friday, February 18.
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