Technical Market Report - Monday, September 2

The good news is:​ The market has moved into an upward trend.

The Negatives

New lows remained at threatening levels on both the NYSE and Nasdaq.

Hindenburg Omens were triggered on Tuesday and Wednesday last week. Hindenburg Omens are triggered when new highs and new lows both exceeded 2.8% of issues traded on the NYSE and the McClellan Oscillator is negative.

The 10% trends of the new high and new low components of Hindenburg omen have been above trigger levels for a month. This has never happened since 1978 when new highs and new lows began being calculated by their current methods.

The first chart 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 continued falling as the market rallied last week.

The next chart is similar to the 1st chart except it shows the S&P 500 (SPX) in red and NY NH has been calculated with NYSE data.

NY NH finished lower in spite of the strong rally.

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 remained negative in spite of the strong rally.

The Positives

An abrupt price decline from a cycle high that was confirmed by breadth is usually followed by a return to new highs. Typically cycle highs do not end until they are unconfirmed by breadth. The indices have about 2 weeks to hit their old highs before a nasty seasonal downturn begins. The SPX is 3.3% from its previous high and the Dow Jones Industrial Average is 3.5% off its previous high. Two more weeks like last week would do it.

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 took a quick dip into negative territory before rising to 66% on Friday.

The next chart covers the past 6 months showing OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in brown. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good)

OTC NL fell most of last week, but, headed back upward at the end of the week.

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

The pattern is similar to the chart above. 

Seasonality

Next week includes the first 4 trading days of September during the 3rd 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 1928 to 2018. There are summaries for both the 3rd year of the Presidential Cycle and all years combined.  

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

Report for the first 4 days of September.
The number following the year represents its position in the Presidential Cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 3 (PY3)
               Day1      Day2      Day3      Day4      Totals
 1963-3       0.28% 2   0.31% 3   0.34% 4   0.73% 5     1.66%
 1967-3       0.98% 5   0.51% 2   0.12% 3   0.30% 4     1.92%
 1971-3       0.21% 3   0.29% 4   0.94% 5   0.50% 2     1.93%
 1975-3      -1.42% 2   0.24% 3   0.06% 4  -0.45% 5    -1.56%

 1979-3      -1.30% 2  -1.66% 3   0.58% 4   0.82% 5    -1.56%
 1983-3       0.73% 4   1.12% 5   1.13% 2  -0.16% 3     2.83%
 1987-3      -0.54% 2  -0.79% 3  -0.13% 4  -0.42% 5    -1.88%
 1991-3      -0.91% 2  -0.57% 3  -0.19% 4   0.00% 5    -1.67%
 1995-3      -0.06% 5   1.94% 2   0.48% 3   0.65% 4     3.02%

 Avg         -0.42%     0.01%     0.37%     0.18%       0.15%

 1999-3       0.42% 3  -0.60% 4   3.98% 5  -0.12% 2     3.68%
 2003-3       1.71% 2   0.62% 3   0.87% 4  -0.57% 5     2.63%
 2007-3       1.30% 2  -0.92% 3   0.32% 4  -1.86% 5    -1.16%
 2011-3      -1.30% 4  -2.58% 5  -0.26% 2   3.04% 3    -1.10%
 2015-3      -2.94% 2   2.46% 3  -0.35% 4  -1.05% 5    -1.88%

 Avg         -0.16%    -0.21%     0.91%    -0.11%       0.43%

OTC summary for PY3 1963 - 2015
Averages     -0.20%     0.03%     0.56%     0.10%       0.49%
% Winners       50%       57%       71%       50%         50%
MDD  9/6/2011  4.10% --  9/1/2015  2.94% --  9/5/1979  2.93%

OTC summary for all years 1963 - 2018
Averages      0.02%     0.06%    -0.01%     0.18%       0.26%
% Winners       60%       61%       59%       61%         55%
MDD 9/7/2001  6.52% --  9/4/1974  5.48% --  9/6/2000  5.22%


SPX PY3
               Day1      Day2      Day3      Day4      Totals
 1931-3       0.43% 2  -1.87% 3  -2.27% 4  -0.45% 5    -4.15%
 1935-3      -0.97% 2   1.34% 3   0.97% 4   1.57% 5     2.90%

 1939-3       1.07% 5   2.04% 6   9.63% 2  -0.87% 3    11.87%
 1943-3       0.34% 3   0.00% 4  -0.17% 5   0.17% 6     0.34%
 1947-3       0.33% 2  -0.26% 3  -1.24% 4  -0.26% 5    -1.44%
 1951-3       0.00% 2   0.60% 3   0.21% 4   0.26% 5     1.07%
 1955-3       0.44% 4   0.53% 5   0.60% 2  -0.02% 3     1.54%

 Avg          0.44%     0.58%     1.81%    -0.15%       2.68%

 1959-3      -1.22% 2   0.08% 3  -1.12% 4   0.48% 5    -1.78%
 1963-3       0.22% 2  -0.03% 3   0.50% 4  -0.22% 5     0.47%
 1967-3       0.04% 5   0.57% 2   0.19% 3  -0.06% 4     0.74%
 1971-3       0.04% 3   0.22% 4   1.41% 5   0.46% 2     2.13%
 1975-3      -1.61% 2   0.64% 3   0.20% 4  -0.67% 5    -1.44%

 Avg         -0.51%     0.30%     0.23%     0.00%       0.02%

 1979-3      -1.72% 2  -0.97% 3   0.42% 4   0.76% 5    -1.51%
 1983-3      -0.10% 4   0.47% 5   1.75% 2   0.04% 3     2.16%
 1987-3      -1.94% 2  -0.53% 3  -0.46% 4  -1.10% 5    -4.03%
 1991-3      -0.83% 2  -0.56% 3  -0.21% 4  -0.01% 5    -1.61%
 1995-3       0.35% 5   0.95% 2   0.18% 3   0.02% 4     1.49%

 Avg         -0.85%    -0.13%     0.34%    -0.06%      -0.70%

 1999-3       0.81% 3  -0.90% 4   2.90% 5  -0.50% 2     2.30%
 2003-3       1.39% 2   0.42% 3   0.17% 4  -0.64% 5     1.33%
 2007-3       1.05% 2  -1.15% 3   0.43% 4  -1.69% 5    -1.37%
 2011-3      -1.19% 4  -2.53% 5  -0.74% 2   2.86% 3    -1.59%
 2015-3      -2.96% 2   1.83% 3   0.12% 4  -1.53% 5    -2.54%

 Avg         -0.18%    -0.47%     0.57%    -0.30%      -0.37%

SPX summary for PY3 1931 - 2015
Averages     -0.27%     0.04%     0.61%    -0.06%       0.31%
% Winners       55%       55%       68%       41%         55%
MDD  9/4/1931  4.53% --  9/6/2011  4.40% --  9/4/1987  3.97%

SPX summary for all years 1928 - 2018
Averages     -0.07%     0.12%     0.23%    -0.07%       0.21%
% Winners       62%       53%       58%       44%         56%
MDD 9/4/1946  7.15% --  9/4/1974  4.80% --  9/7/1933  4.72%

September

Since 1963, over all the years, the OTC in September has been up 59% of the time with, on average, no gain or loss. During the 3rd year of the Presidential Cycle September has been up 50% time with an average loss of -0.6%. The worst September ever, 2001 (-17.0%), the best 2010 (+12.0%)

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 September over all years since 1963 while the black line shows the average during the 3rd year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 46% of the time in September with an average loss of -1.0%. During the 3rd year of the Presidential Cycle, the SPX has been up 38% of the time with an average loss of -1.2%. The best September ever for the SPX was 1939 (+16.5%) the worst 1931 (-29.9%).

The chart below is similar to the one above except it shows the daily average performance over all years for the SPX in September in red and the performance during the 3rd year of the Presidential Cycle in black.

Since 1979 the Russell 2000 (R2K) has been up 55% of the time in September with an average loss of -0.4%. During the 3rd year of the Presidential Cycle, the R2K has been up 40% of the time with an average loss of -1.6%. The best September ever for the R2K, 2010 (+12.3%), the worst 2001 (-13.6%)

The chart below is similar to those above except it shows the daily performance overall years of the R2K in September in magenta and the performance during the 3rd year of the Presidential Cycle in black.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 44% of the time in September with an average loss of -0.9%. During the 3rd year of the Presidential Cycle, the DJIA has been up 42% of the time with an average loss of -1.2%. The best September ever for the DJIA 1939 (+13.5%), the worst 1931 (-30.7%).

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in September in grey and the performance during the 3rd year of the Presidential Cycle in black.

Conclusion

The market rallied last week with the blue chips leading and little support from breadth. This looks like a developing top. If the pattern follows the book there will be a new all-time high by the SPX or DJIA or both in the next week or two that will be unconfirmed by breadth.

I expect the major averages to be higher on Friday, September 6 than they were on Friday, August 30.