The good news is:

• The first week of the new year got off to a good start.  

The Negatives

The market apparently realized that it was in the strongest month of the strongest year of the Presidential Cycle and moved up appropriately. 

The Positives

Last week, new highs rose while new lows declined significantly.

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.  Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral level (equal numbers of new highs and new lows).

OTC HL Ratio rose above the neutral line for the first time since August. 

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 jumped into positive territory.

The next chart covers the past 6 months showing the 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 numbers of New Lows move the indicator upward (up is good).  

OTC NL moved sharply upward last week.

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

NY NL moved upward with new low numbers at comfortable levels.

The next chart covers the last 6 months showing the OTC in blue and a 10% trend (19 day EMA) of Nasdaq new highs (OTC NH) in green. 

OTC NH moved upward while the index performance was lackluster.

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

NY NH also moved upward.

Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of January 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 2021 while SPX data runs from 1953 to 2021.  There are summaries for both the 3rd 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 and stronger during the 3rd year of the Presidential Cycle than other years.. 

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 3 (PY3)

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1963-3  -0.42%  -0.03%  -0.03%   0.42%  -0.93%  -1.00%

 1967-3   0.76%   0.50%  -0.24%   1.72%   0.61%   3.35%

 1971-3   0.59%   0.36%   1.40%   0.13%   1.07%   3.55%

 1975-3   0.83%   0.24%  -0.63%   1.41%   2.12%   3.98%

 1979-3  -0.11%   0.61%  -0.31%   0.39%   0.80%   1.38%


 Avg      0.33%   0.34%   0.04%   0.82%   0.73%   2.25%


 1983-3   3.10%  -2.09%   0.86%   0.23%   0.88%   2.98%

 1987-3   2.24%   1.34%   1.77%   1.36%   0.82%   7.53%

 1991-3  -1.91%  -0.34%  -0.43%   1.25%  -0.03%  -1.46%

 1995-3   0.32%   0.59%  -0.10%  -0.01%   0.86%   1.66%

 1999-3   1.72%  -2.68%  -0.17%  -1.73%   3.14%   0.28%


 Avg      1.10%  -0.64%   0.38%   0.22%   1.13%   2.20%


 2003-3   2.47%   0.72%  -2.13%   2.67%   0.64%   4.37%

 2007-3   0.16%   0.23%   0.63%   1.04%   0.72%   2.79%

 2011-3   0.17%   0.33%   0.75%  -0.07%   0.73%   1.92%

 2015-3  -1.57%  -1.29%   1.26%   1.84%  -0.68%  -0.43%

 2019-3   1.26%   1.08%   0.87%   0.42%  -0.21%   3.41%


 Avg      0.50%   0.22%   0.28%   1.18%   0.24%   2.41%


 OTC summary for PY3 1963 - 2019

 Avg      0.64%  -0.03%   0.23%   0.74%   0.70%   2.29%

 Win%       73%     67%     47%     80%     73%     80%


OTC summary for all years 1963 - 2022

 Avg      0.30%  -0.02%  -0.02%   0.46%   0.12%   0.83%

 Win%       65%     57%     55%     72%     65%     63%


SPX PY3

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1955-3   1.30%  -0.31%  -0.28%  -0.42%  -0.42%  -0.13%

 1959-3   0.40%  -0.13%  -1.26%   0.93%   0.67%   0.61%


 1963-3  -0.02%   0.97%  -0.23%   0.19%   0.22%   1.12%

 1967-3   0.77%   0.00%   0.80%   0.53%   0.74%   2.83%

 1971-3  -0.23%   0.80%  -0.17%   0.26%   0.25%   0.91%

 1975-3   0.51%  -0.07%  -1.38%   1.61%   2.02%   2.70%

 1979-3  -0.33%   0.54%  -0.56%   0.33%   0.84%   0.81%


 Avg      0.14%   0.56%  -0.31%   0.58%   0.81%   1.67%


 1983-3   1.10%  -0.68%   0.62%  -0.65%   0.63%   1.02%

 1987-3   2.33%   0.23%   1.01%   0.76%   0.56%   4.90%

 1991-3  -1.73%  -0.17%  -1.08%   0.98%   0.22%  -1.79%

 1995-3   0.03%   0.18%   0.00%  -0.01%   0.94%   1.15%

 1999-3  -0.88%  -1.93%  -0.41%  -1.80%   2.57%  -2.45%


 Avg      0.17%  -0.47%   0.03%  -0.14%   0.98%   0.57%


 2003-3   2.25%  -0.65%  -1.41%   1.94%   0.00%   2.12%

 2007-3   0.22%  -0.05%   0.19%   0.63%   0.49%   1.48%

 2011-3  -0.14%   0.37%   0.90%  -0.17%   0.74%   1.70%

 2015-3  -1.83%  -0.89%   1.16%   1.79%  -0.84%  -0.61%

 2019-3   0.70%   0.97%   0.41%   0.45%  -0.01%   2.52%


 Avg      0.24%  -0.05%   0.25%   0.93%   0.07%   1.44%


SPX summary for PY3 1955 - 2019 

 Avg      0.26%  -0.05%  -0.10%   0.43%   0.56%   1.11%

 Win%       59%     44%     41%     71%     76%     76%


SPX summary for all years 1963 - 2022

 Avg      0.07%  -0.12%  -0.20%   0.27%   0.00%   0.02%

 Win%       56%     44%     47%     71%     51%     51%

Presidential Year 3 (PY3)

PY3 is, on average, the strongest of the 4 years in the Presidential Cycle and most of that strength occurs in the 1st 6 months.

Since 1963, over all years, the OTC has been up 73% of the time with an average yearly gain of 13.4%.  During PY3 the OTC has been up 87% time with an average gain of 30.1%.  The best PY3 ever for the OTC was 1999 (+85.6%), the worst 2011 (-1.8%).

The charts below show the average daily return over all years and for PY3.  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 PY3 over the same period.

Since 1928, over all years, the SPX has been up 67% of the time with an average yearly gain of 7.8%.  During PY3 the SPX has been up 82% of the time with an average yearly gain of 14.1%.  The best PY3 ever for the SPX was 1935 (+41.4%), the worst 1931 (-47.1%).

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 PY3 in black.

Since 1979, over all years, the Russell 2000 (R2K) has been up 70% of the time with an average yearly gain of 10.7%.  During PY3 the R2K has been up 64% time with an average gain of 17.8%.  The best PY3 ever for the R2K was 2003 (+45.4%), the worst 1987 (-10.3%).

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 PY3 in black.

Since 1885, over all years, the Dow Jones Industrial Average (DJIA) has been up 66% of the time with an average yearly gain of 7.3%.  During PY3 the DJIA has been up 79% time with an average yearly gain of 11.2%.  The best PY3 ever for the DJIA was 1915 (+81.7%), 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  PY3 in black.

Conclusion

The first week of the first month of the third year of the Presidential Cycle got off to a good start.  All of the major indices got off to a strong start, new highs increased and new lows decreased.

The strongest sectors last week were Precious Metals and Leisure while the weakest were Biotech and Energy.

I expect the major averages to be higher on Friday, January 13 than they were on Friday, January 6

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