Technical market report for October 17, 2020

The good news is that new highs continued their expansion, while new lows remained insignificant.

The Negatives

The seasonality estimates for next week have been historically very bad.

The Positives

The first chart covers the past six 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 first trading day of each month. The OTC NH continued its upward move, faltering a bit at the end of the week.

The next chart is similar to the first one, except it shows the S&P 500 (SPX) in red and the NY NH in green. The information has been calculated with NYSE data. Last week, the NY NH hit its highest level in the past six months.

The next chart covers the past six months, showing the SPX in red and a 40% trend (four-day EMA) of NYSE new highs divided by new highs + new lows (NY HL Ratio) in blue. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral level. The NY HL Ratio fell slightly to a very strong 87%.

The next chart is similar to the one above, except it shows the OTC in blue and the OTC HL Ratio in red. The information has been calculated with NASDAQ data. The OTC HL Ratio also declined a bit to 82%, which is still very strong.

Seasonality

Next week includes the five trading days prior to the fourth Friday of October, all during the fourth year of the Presidential Cycle. The tables below show the daily change on a percentage basis for that period.

The OTC data covers the period from 1963 to 2019, while the SPX data runs from 1953 to 2019. There are summaries for both the fourth year of the Presidential Cycle, and all years combined. Prior to 1953, the market traded six days a week, so that data has been ignored.

Average returns for the coming week have been negative by all measures. Next week includes the 1987 crash, which was in the third year of the Presidential Cycle. However, on average, the fourth year has been the worst.

The number following the year is the position in the Presidential Cycle. Daily returns from Monday through the fourth Friday:

OTC Presidential Year 4 (PY4)

•     Year      Mon     Tue      Wed    Thur      Fri      Totals
•  1964-4 -0.43% 0.25% -0.18% -0.23% 0.44% -0.16%
•  1968-4 0.71% -0.65% 0.00% -0.63% -0.76% -1.33%
•  1972-4 0.52% 0.19% -0.02% 0.37% 0.12% 1.19%
•  1976-4 0.45% -0.01% 0.20% -0.16% -0.26% 0.23%
•  1980-4 -0.05% -0.35% 0.73% -1.06% 0.18% -0.53%
•  1984-4 -0.25% 0.02% 0.09% -0.73% -0.65% -1.52%
•  1988-4 -0.35% -0.29% -0.24% -0.89% 0.27% -1.50%
•  1992-4 1.38% 0.34% 0.75% -0.01% 0.03% 2.50%
•  1996-4 -0.49% -1.33% 0.65% -0.07% -0.36% -1.60%
•  Avg   --  0.05% -0.32% 0.40% -0.55% -0.11% -0.53%
•  2000-4 -0.41% -1.41% -5.56% 1.32% 0.19% -5.88%
•  2004-4 1.31% -0.70% 0.52% 1.07% -1.97% 0.23%
•  2008-4 3.43% -4.14% -4.77% -0.73% -3.23% -9.45%
•  2012-4 0.38% -0.88% -0.29% 0.15% 0.06% -0.58%
•  2016-4 1.00% -0.50% -0.63% -0.65% -0.50% -1.28%
•  Avg  --   1.14% -1.53% -2.15% 0.23% -1.09% -3.39%

OTC summary for PY4 1964 - 2016 

•  Avg  --  0.51% -0.68% -0.67% -0.16% -0.46% -1.41%
•  Win%  --  57% 29% 46% 29% 50% 29%

OTC summary for all years 1963 - 2019

•  Avg  -- 0.11% -0.45% 0.00% 0.05% -0.04% -0.33%
•  Win% --  54% 37% 52% 53% 54% 51%

SPX PY4

•    Year       Mon     Tue      Wed      Thur     Fri     Totals
•  1956-4 -0.02% -0.24% -0.41% -0.17% 0.92% 0.07%
•  1960-4 -1.16% -0.76% 1.43% 1.07% -0.39% 0.20%
•  1964-4 0.12% 0.29% -0.09% -0.19% 0.24% 0.37%
•  1968-4 0.16% -0.40% 0.00% -0.70% 0.35% -0.59%
•  1972-4 1.02% 0.42% -0.08% 0.24% -0.33% 1.26%
•  1976-4 0.61% -0.02% 0.29% -0.95% -0.80% -0.88%
•  Avg  --   0.15% -0.09% 0.39% -0.10% -0.19% 0.07%
•  1980-4 0.83% -0.58% 0.06% -1.81% 0.25% -1.26%
•  1984-4 -0.36% -0.16% 0.07% -0.53% -0.61% -1.60%
•  1988-4 -0.49% 0.04% -0.35% -1.46% 0.45% -1.81%
•  1992-4 0.79% 0.12% 0.05% -0.19% -0.19% 0.58%
•  1996-4 -0.14% -0.46% 0.10% -0.70% -0.19% -1.40%
•  Avg   --   0.13% -0.21% -0.02% -0.94% -0.06% -1.10%
•  2000-4 -0.08% 0.17% -2.38% -0.03% 1.11% -1.21%
•  2004-4 0.53% -0.97% 0.04% 0.26% -0.97% -1.12%
•  2008-4 4.77% -3.08% -6.10% 1.26% -3.45% -6.60%
•  2012-4 0.04% -1.44% -0.31% 0.30% -0.07% -1.48%
•  2016-4 0.47% -0.38% -0.17% -0.30% -0.31% -0.69%
•  Avg --   1.15% -1.14% -1.78% 0.30% -0.74% -2.22%

SPX summary for PY4 1956 - 2016 

•  Avg --   0.44% -0.47% -0.52% -0.24% -0.25% -1.01%
•  Win% --    63% 31% 47% 31% 38% 31%

SPX summary for all years 1953 - 2019

•  Avg  --  -0.11% -0.11% 0.10% -0.08% -0.03% -0.24%
•  Win%   --   58% 42% 55% 43% 48% 48%

Money supply (M2) and Interest Rates

The following charts were supplied by Gordon Harms. M2 growth leveled off last month.

Interest rates at their close last Friday and their changes from last month:

• 2-year yield 0.145% up from 0.129%.
• 5-year yield 0.322% up from 0.245%.
• 10-year yield 0.746% up from 0.671%.
• 30-year yield 1.532% up from 1.416%.

A carefully managed yield curve is illustrated.

The next chart is a close up which shows just the past year from the chart above.

Conclusion

The market was strong in the early days of last week, faltering a bit at the end of the week. According to the seasonality, the upcoming week has been historically terrible. The strongest sectors last week were technology and utilities. The weakest sectors were finance and energy. 

I expect the major averages to be lower on Friday, October 23 than they were on Friday, October 16. Last week, the Russell 2000 was down slightly while the other major indices were up slightly. I am calling last week's positive forecast a tie.