Technical Market Report For Saturday, Dec. 26
Technical market report for December 26, 2020
The good news is that the NASDAQ composite (OTC) and Russell 2000 (R2K) hit all time highs last week.
The Negatives
Negatives are minimal. Breadth has been strong, the secondaries have been leading the blue chips upward, and next week's seasonality is positive.
The Positives
New lows have been minimal.
The first 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. Dashed vertical lines have been drawn on the first trading day of each month. The OTC NH continued moving upward, confirming the new OTC high.
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. The NY NH also continued moving upward last week. Another new all time high for the SPX is expected.
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 continued holding above 90%.
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 held above 90%.
Seasonality
Next week includes the last four trading days of 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 1928 to 2019. There are summaries for both the fourth year of the Presidential Cycle, and all years combined. Average returns for the coming week have been positive by all measures.
Note that the dating in this report is a little confusing. When the report routine was written, it was intended to show both the old and new year. Since the last date was in the new year, that was the year used in the report. In every case, the year shown in the report is misidentified as the following year.
The report includes the last four days of December. December data is from the previous year. 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 4 (PY4)
- Year Day4 Day3 Day2 Day1 Totals
- 1965-1 -0.23% 1 -0.70% 2 -0.07% 3 0.27% 4 -0.72%
- 1969-1 -0.41% 4 -0.01% 5 -0.27% 1 -1.01% 2 -1.71%
- 1973-1 0.15% 5 -0.08% 2 0.57% 3 1.36% 5 2.01%
- 1977-1 0.56% 2 0.07% 3 0.79% 4 0.86% 5 2.28%
- 1981-1 0.57% 5 -0.72% 1 0.31% 2 0.77% 3 0.93%
- 1985-1 0.10% 3 -0.17% 4 0.18% 5 0.52% 1 0.62%
- 1989-1 -0.19% 2 0.03% 3 0.61% 4 0.61% 5 1.07%
- 1993-1 0.06% 1 0.41% 2 0.42% 3 0.76% 4 1.65%
- 1997-1 0.54% 4 -0.25% 5 -0.28% 1 0.25% 2 0.27%
- Avg -- 0.22% -0.14% 0.25% 0.58% 0.91%
- 2001-1 -0.93% 2 1.84% 3 0.72% 4 -3.41% 5 -1.78%
- 2005-1 1.07% 2 -0.01% 3 0.06% 4 -0.13% 5 0.99%
- 2009-1 0.35% 5 -1.30% 1 2.67% 2 1.70% 3 3.42%
- 2013-1 -0.74% 3 -0.14% 4 -0.86% 5 2.00% 1 0.26%
- 2017-1 0.45% 2 -0.89% 3 -0.12% 4 -0.90% 5 -1.46%
- Avg -- 0.04% -0.10% 0.50% -0.15% 0.28%
OTC summary for the last four trading days of PY4 1964-2016
- Averages -- 0.10% -0.14% 0.34% 0.26% 0.56%
- % Winners -- 64% 29% 64% 71% 71%
- MDD -- 12/30/2005 1.96% -- 12/31/2001 1.85% -- 12/29/1965 1.37%
OTC summary for the last four trading days of all years 1963 - 2019
- Averages -- 0.29% 0.09% 0.20% 0.25% 0.82%
- % Winners -- 68% 52% 61% 68% 66%
- MDD -- 12/29/2000 3.41% -- 12/31/2002 2.69% -- 12/31/2007 2.65%
SPX PY4
- Year Day 4 Day 3 Day 2 Day 1 Totals
- 1929-1 0.85% 4 1.44% 5 0.29% 6 1.25% 1 3.83%
- 1933-1 -0.15% 3 2.27% 4 2.52% 5 -0.43% 6 4.21%
- 1937-1 -0.70% 1 0.41% 2 1.53% 3 -0.52% 4 0.72%
- 1941-1 0.48% 5 0.57% 6 0.67% 1 0.09% 2 1.82%
- 1945-1 -0.46% 3 1.00% 4 1.37% 5 0.00% 6 1.92%
- 1949-1 -0.72% 2 1.33% 3 0.00% 4 -0.52% 5 0.08%
- 1953-1 0.15% 5 0.57% 1 0.72% 2 -0.08% 3 1.37%
- 1957-1 0.04% 3 -0.09% 4 0.45% 5 0.24% 1 0.65%
- Avg -- -0.10% 0.68% 0.64% -0.05% 1.17%
- 1961-1 0.14% 2 0.45% 3 0.47% 4 0.10% 5 1.16%
- 1965-1 -0.10% 1 -0.31% 2 0.58% 3 0.53% 4 0.71%
- 1969-1 0.10% 4 -0.39% 5 -0.90% 1 0.06% 2 -1.12%
- 1973-1 0.63% 5 0.41% 2 0.54% 3 0.96% 5 2.53%
- 1977-1 0.67% 2 -0.40% 3 0.51% 4 0.54% 5 1.32%
- Avg -- 0.29% -0.05% 0.24% 0.44% 0.92%
- 1981-1 0.51% 5 -1.13% 1 0.22% 2 0.32% 3 -0.08%
- 1985-1 -0.17% 3 -0.43% 4 0.31% 5 0.59% 1 0.29%
- 1989-1 -0.37% 2 0.09% 3 0.84% 4 -0.60% 5 -0.05%
- 1993-1 -0.14% 1 -0.27% 2 0.19% 3 -0.71% 4 -0.92%
- 1997-1 0.64% 4 0.13% 5 -0.39% 1 -1.74% 2 -1.36%
- Avg -- 0.09% -0.32% 0.23% -0.43% -0.42%
- 2001-1 0.71% 2 1.04% 3 0.40% 4 -1.04% 5 1.10%
- 2005-1 0.72% 2 -0.01% 3 0.01% 4 -0.13% 5 0.58%
- 2009-1 0.54% 5 -0.39% 1 2.44% 2 1.42% 3 4.00%
- 2013-1 -0.48% 3 -0.12% 4 -1.10% 5 1.69% 1 -0.01%
- 2017-1 0.22% 2 -0.84% 3 -0.03% 4 -0.46% 5 -1.10%
- Avg -- 0.34% -0.06% 0.34% 0.29% 0.92%
SPX summary for the last four trading days of PY4 1928 - 2016
- Averages -- 0.13% 0.23% 0.51% 0.07% 0.94%
- % Winners -- 61% 52% 78% 52% 70%
- MDD -- 12/28/1937 3.55% -- 12/30/2005 1.61% -- 12/31/2009 1.12%
SPX summary for the last four trading days of all years 1928 - 2019
- Averages -- 0.19% 0.27% 0.41% 0.17% 1.01%
- % Winners -- 63% 60% 69% 62% 73%
Year 1 of the Presidential Cycle
The Presidential Cycle is made up of four years which begin with the year the President is inaugurated.
I identify the cycle as the Presidential Cycle because I believe it is politically motivated. Prior to 1933, gold and silver were the medium of exchange and government had little control over money supply. Gold coins were removed from circulation by executive order in 1933 and the ability to redeem them was suspended.
Shortly after the confiscation of gold, the currency was devalued to $35 an ounce from $20 (a 40% tax). US citizens could not redeem their gold certificates for gold, but foreigners could until 1971 when Nixon closed the gold window, thus eliminating redeemability entirely and removing any intrinsic value from the currency.
With control of the currency, politicians are able to manipulate the money supply to their advantage. Assuming this hypothesis is correct, it is not surprising the Presidential Cycle has been changing over the past 80 years. In 2020, the US government created 25% of all of the money it has ever created.
On average, there are 21 trading days in a month. In the charts that follow, every month is defined as 21 trading days. If a month has more than 21 trading days, some of the days in the middle of the month are not counted. If there are less than 21 trading days, some of the days in the middle of the month are counted twice.
The charts below start with the shortest and most recent histories. The last chart is of the Dow Jones Industrial Average (DJIA), with data beginning in 1885. The first chart shows the Russell 2000 (R2K), with data beginning in 1979. The average of all years is shown in magenta while the average of the first year of the Presidential Cycle is shown in cyan.
The next chart shows the OTC with data beginning in 1963. Until the early 1990’s, the OTC was a small-cap index and its performance was nearly identical to the R2K. In the chart below, the average for all years is shown in blue while the average for the first year of the Presidential Cycle is shown in cyan.
The next chart shows the SPX with data beginning in 1928. In the chart below, the average for all years is shown in red while the average for the first year of the Presidential Cycle is shown in cyan.
The next chart shows the DJIA with data beginning in 1885. In the chart below, the average for all years is shown in grey while the average for the first year of the Presidential Cycle is shown in cyan.
Conclusion
The market has been following its seasonal pattern with an upward bias, and seasonality for next week is strong. The strongest sectors last week were technology and banks, while the weakest were energy and utilities.
I expect the major averages to be higher on Thursday, December 31 than they were on Thursday, December 24. Last week, the SPX was down slightly while everything else was up; so I am calling last week's positive forecast a tie.