The good news is that the NASDAQ composite (OTC), S&P 500 (SPX), and Dow Jones Industrial Average (DJIA) closed at all-time highs last Friday. The Russell 2000 (R2K) closed at an all-time high last Wednesday.

The Negatives

The market is overbought.

The first chart covers the past six months, showing the SPX in red and a 10% trend (19-day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the first trading day of each month. The NY NH failed to confirm Friday’s record high in the SPX, but it missed by only a little.

The Positives

The secondaries, as measured by the R2K, led the market up last week. The next chart is similar to the first one, except it shows the OTC in blue and the OTC NH in green. The information has been calculated with NASDAQ data. The OTC NH confirmed the record OTC high, implying higher prices ahead.

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. At 98%, it cannot get much better.

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. At 97%, ditto.

Seasonality

Next week includes the four trading days prior to the third Friday of February, all during the first year of the Presidential Cycle. The tables below show the daily change on a percentage basis for the five days prior to the third Friday of February. Monday is President's day, a market holiday. 

OTC data covers the period from 1963 to 2020, while SPX data runs from 1953 to 2020. There are summaries for both the first 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 mixed and worse during the first year of the Presidential Cycle than other years. The number following the year is the position in the Presidential Cycle.

OTC Presidential Year 1 (PY1)

•   Year      Mon      Tue      Wed      Thur      Fri      Totals
•  1965-1 0.43% -0.25% -0.40% 0.79% 0.21% 0.77%
•  1969-1 -1.88% -0.74% -0.90% 0.53% -0.82% -3.82%
•  1973-1 1.52% 1.06% -1.39% -0.79% 0.10% 0.50%
•  1977-1 0.04% 0.29% 0.22% -0.06% -0.19% 0.30%
•  1981-1 0.00% 0.05% 0.39% -1.02% -0.23% -0.82%
•  1985-1 -0.32% -0.30% 0.61% 0.01% -0.22% -0.22%
•  1989-1 -0.27% 0.19% 0.67% 0.24% 0.37% 1.19%
•  1993-1 0.00% -3.64% -0.90% 0.46% 0.18% -3.90%
•  1997-1 0.00% 0.00% -0.12% -1.33% -0.97% -2.42%
•  Avg --   -0.30% -0.93% 0.13% -0.33% -0.18% -1.23%
•  2001-1 0.76% -2.49% 2.62% 2.47% -4.99% -1.64%
•  2005-1 0.30% 0.30% -0.09% -1.25% -0.13% -0.86%
•  2009-1 0.00% -4.15% -0.18% -1.71% -0.11% -6.16%
•  2013-1 -0.06% -0.17% 0.33% 0.06% -0.21% -0.06%
•  2017-1 0.52% 0.32% 0.64% -0.08% 0.41% 1.81%
•  Avg --   0.38% -1.24% 0.66% -0.10% -1.01% -1.38%

OTC summary for PY1 1965 - 2017

•  Avg --  0.10% -0.73% 0.11% -0.12% -0.47% -1.09%
•  Win% --   60%    46%    50%    50%    36%    36%

OTC summary for all years 1963 - 2020

•  Avg --  0.14% -0.04% 0.15% 0.16% -0.14% 0.22%
•  Win% --  61%    53%    60%    62%    48%    60%

SPX PY1

•    Year      Mon      Tue      Wed      Thur      Fri      Totals
•  1953-1 -0.35% -0.58% -0.08% 0.35% 0.23% -0.43%
•  1957-1 -1.73% -0.42% 1.53% -0.12% 1.21% 0.47%
•  1961-1 -0.59% 0.44% 0.83% 0.61% -0.32% 0.98%
•  1965-1 -0.12% -0.46% 0.12% 0.33% 0.19% 0.05%
•  1969-1 -1.19% -0.63% 0.48% -0.31% -0.01% -1.67%
•  1973-1 1.20% 0.62% -1.44% -0.56% 0.46% 0.28%
•  1977-1 0.52% 0.30% 0.46% -0.57% -0.43% 0.27%
•  Avg --  -0.03% 0.05% 0.09% -0.10% -0.02% -0.02%
•  1981-1 0.00% 0.65% 0.52% -1.46% -0.02% -0.30%
•  1985-1 -0.92% 0.03% 1.55% -0.51% -0.44% -0.31%
•  1989-1 0.18% -0.25% 0.83% 0.19% 0.66% 1.62%
•  1993-1 0.00% -2.40% -0.14% -0.32% 0.54% -2.33%
•  1997-1 0.00% 0.97% -0.47% -1.19% -0.13% -0.82%
•  Avg --   -0.37% -0.20% 0.46% -0.66% 0.12% -0.43%
•  2001-1 1.18% -0.87% -0.22% 0.81% -1.89% -0.98%
•  2005-1 0.07% 0.33% 0.02% -0.79% 0.07% -0.30%
•  2009-1 0.00% -4.56% -0.10% 0.07% -2.39% -6.98%
•  2013-1 -0.06% 0.16% 0.06% 0.07% -0.10% 0.12%
•  2017-1 0.52% 0.40% 0.50% -0.09% 0.17% 1.51%
•  Avg --   0.43% -0.91% 0.05% 0.01% -0.83% -1.33%

SPX summary for PY1 1953 - 2017 

•  Avg --   -0.10% -0.37% 0.26% -0.21% -0.13% -0.52%
•  Win% --    46%    53%   65%    41%    47%    47%

SPX summary for all years 1953 - 2020

•  Avg --  0.10% 0.01% 0.21% 0.00% 0.00% 0.29%
•  Win% --   50%    57%    60%    49%    49%    60%

Money supply (M2) and Interest Rates

The following charts were supplied by Gordon Harms. M2 growth continued to level off.

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

• 2-year yield: 0.109%, down from 0.129%.
• 5-year yield: 0.487%, down from 0.448%.
• 10-year yield: 1.210%, up from 1.090%.
• 30-year yield: 2.014%, up from 1.837%.

A carefully managed yield curve.

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

Conclusion

Last week we saw all-time highs in all of the major indices as confirmed by the secondaries, as well as 52-week new highs. New lows are non-existent and lousy Seasonality doesn’t seem to play a major part.

The strongest sectors last week were banks and electronics (up from the bottom last week), while the weakest were biotech and precious metals. I expect the major averages to be higher on Friday, Feb. 19 than they were on Friday, Feb. 12. Last week's negative forecast was a miss.