Technical market report for August 15, 2020

The good news is the number of new lows has remained insignificant.

The Negatives

Narrow leadership and minimal new highs for indices near their all time highs.

The Positives

Free money covers most problems.

The first chart covers the past six months, showing the S&P 500 (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 vertical lines have been drawn on the first trading day of each month and dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solidly at the 50% neutral level.

The NY HL Ratio, at 92%, is extremely strong. 

The next chart is similar to the one above, except it shows the NASDAQ composite (OTC) in blue and the OTC HL Ratio in red. The information has been calculated with NASDAQ data. The OTC HL Ratio declined to a still-strong 84% last week.

The next chart covers the past six months, showing the OTC in blue and a 10% trend (19-day EMA) of NASDAQ new highs (OTC NH) in green. New highs tumbled last week

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

Narrowing leadership is a sign of a mature market. Money is going into large cap issues, which can be exited quickly.  

Seasonality

Next week includes the five trading days prior to the third Friday of August during the fourth 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 2019, while 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. Returns for next week have been positive by all measures.

Report for the week before the third Friday of August.

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

OTC Presidential Year 4 (PY4):

•  Year     Mon    Tue     Wed   Thur     Fri     Totals
•  1964-4 0.22% 0.05% 0.17% 0.00%-0.22% 0.22%
•  1968-4 0.21% 0.46% 0.00% 0.65% 0.46% 1.78%
•  1972-4 0.02%-0.17%-0.01%-0.50% 0.48%-0.19%
•  1976-4-0.04% 0.26%-0.17%-1.21%-0.61%-1.77%
•  1980-4 0.70%-0.28% 0.23% 0.98% 0.63% 2.26%
•  1984-4-0.43%-0.29%-0.37% 0.25% 0.02%-0.82%
•  1988-4-1.29% 0.43% 0.15% 0.27% 0.05%-0.39%
•  1992-4-0.12%-0.28%-0.57% 0.04%-0.73%-1.66%
•  1996-4 0.09%-1.06% 0.65% 0.11%-0.09%-0.31%
•  Avg - -0.21% -0.30% 0.02% 0.33%-0.02%-0.18%
•  2000-4 1.59% 0.05% 0.25% 2.06%-0.27% 3.68%
•  2004-4 1.46% 0.70% 2.01%-0.63% 1.00% 4.54%
•  2008-4 1.07%-0.38%-0.08% 1.03%-0.05% 1.59%
•  2012-4 0.05%-0.18% 0.46% 1.04% 0.46% 1.84%
•  2016-4 0.56%-0.66% 0.03% 0.22%-0.03% 0.11%
•  Avg  -  0.95%-0.10% 0.53% 0.75% 0.22% 2.35%

OTC summary for PY4 1964 - 2016:

•  Avg  -  0.29%-0.10% 0.21% 0.33% 0.08% 0.78%
•  Win%  - 71%    43%     62%   77%   50%    57%

OTC summary for all years 1963 - 2019:

•  Avg -  0.23% 0.01% 0.13%-0.17%-0.09% 0.11%
•  Win%  - 67%  48%    60%     52%   54%   53%

SPX PY4:

•  Year       Mon    Tue     Wed    Thur      Fri     Totals
•  1956-4-1.04% 0.66% 0.18%-0.22%-0.12%-0.54%
•  1960-4-0.09% 0.19% 0.21%-0.05% 0.35% 0.62%
•  1964-4 0.01% 0.05%-0.10%-0.46% 0.16%-0.34%
•  1968-4 1.03% 0.53% 0.00%-0.47% 0.62% 1.72%
•  1972-4 0.54%-0.44%-0.36%-0.29% 0.38%-0.17%
•  1976-4 0.17% 0.35%-0.23%-1.12%-0.99%-1.81%
•  Avg -  0.33% 0.14%-0.12%-0.48% 0.10% 0.00%
•  1980-4 0.95%-0.79%-0.41% 1.60% 0.38% 1.71%
•  1984-4 0.01%-0.61%-0.99% 0.60% 0.23%-0.77%
•  1988-4-0.88% 0.12% 0.08% 0.10%-0.30%-0.88%
•  1992-4 0.20% 0.14%-0.75% 0.02%-0.82%-1.21%
•  1996-4 0.55%-0.84% 0.28% 0.04% 0.44% 0.47%
•  Avg -  0.16%-0.39%-0.36% 0.47%-0.02%-0.13%
•  2000-4 1.34%-0.48%-0.31% 1.10%-0.29% 1.36%
•  2004-4 1.37% 0.22% 1.24%-0.36% 0.65% 3.12%
•  2008-4 0.69%-1.21%-0.29% 0.55% 0.41% 0.16%
•  2012-4-0.13%-0.01% 0.11% 0.71% 0.19% 0.87%
•  2016-4 0.28%-0.55% 0.19% 0.22%-0.14%-0.01%
•  Avg -  0.71%-0.40% 0.19% 0.44% 0.16% 1.10%

SPX summary for PY4 1956 - 2016:

•  Avg -  0.31%-0.17%-0.08% 0.12% 0.07% 0.27%
•  Win% -  75%   50%    47%    56%    63%    50%

SPX summary for all years 1953 - 2019:

•  Avg -  0.16% 0.02%-0.06%-0.09% 0.03% 0.05%
•  Win% -  64%  49%   56%    51%    58%    51%

Money supply (M2) and Interest Rates

The following charts were supplied by Gordon Harms. M2 continues to level off at its substantially elevated level.

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

• 2yr yield 0.149% up from 0.145%.
• 5yr yield 0.294% up from 0.276%.
• 10yr yield 0.709% up from 0.634%.
• 30yr yield 1.448% up from 1.330%.

A carefully managed yield curve.

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

Conclusion

When there is free money, nothing else matters. The strongest sectors last week were banks and transportation, the weakest were biotech and precious metals; energy was off the bottom for the first time in a long time. 

I expect the major averages to be higher on Friday, August 21, than they were on Friday, August 14.