The good news is:

• We are experiencing seasonal weakness that should end in the next 2 – 3 weeks.

The Negatives

Breadth has been negative, but not overwhelmingly so.  The Fed is supposed to start tapering next week which could be a problem.

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 and dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral level.

OTC HL Ratio ratcheted downward last week finishing the week at a very weak 19%.   

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 popped up early in the week but then fell, finishing the week about where it began. 

The Positives

The major indices were down for the week, while the individual new high and new low indicators finished the week near where they began.

The next chart covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green.

Not the prettiest picture, but, at the end of the week it moved upward while the index moved downward.

The next chart is similar to the one above except it shows the OTC in blue and OTC NH, in green, has been calculated with NASDAQ data.

Ditto.  

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).

Like the new high indicators, the new low indicators finished the week near where they began.

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

Ditto.

Seasonality

Next week includes the 5 trading days prior to the 3rd Friday of January during the 2nd year of the Presidential Cycle.  The tables below show the daily change, on a percentage basis, for that period.  The market is closed on the Martin Luther King holiday which falls on the 3rd Monday of January.  

OTC data covers the period from 1963 to 2020 while SPX data runs from 1953 to 2020.  There are summaries for both the 2nd 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 not been very exciting by any measure, 

Report for the week before the 3rd Friday of January.

The number following the year is the position in the Presidential Cycle.

Daily returns from Monday through 3rd Friday.


OTC Presidential Year 2 (PY2)

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1966-2   0.56%   0.31%  -0.03%   0.41%   0.41%   1.65%

 1970-2   0.01%   0.65%   0.30%  -0.27%  -0.02%   0.67%

 1974-2   0.18%   0.73%   1.53%   1.55%  -0.66%   3.32%

 1978-2  -0.41%   0.62%   0.44%   0.16%   0.05%   0.86%


 1982-2   0.00%  -0.62%  -0.24%   0.37%  -0.31%  -0.80%

 1986-2   0.02%   0.19%   1.05%   0.58%   0.19%   2.02%

 1990-2  -0.70%   0.81%  -0.34%  -0.26%   0.77%   0.27%

 1994-2  -0.02%   0.11%  -0.47%   0.48%   0.16%   0.25%

 1998-2   0.29%   2.26%   0.43%  -0.07%   1.02%   3.93%


 Avg     -0.10%   0.55%   0.09%   0.22%   0.37%   1.13%


 2002-2  -1.57%   0.51%  -2.82%   2.13%  -2.79%  -4.55%

 2006-2   0.00%  -0.62%  -1.00%   0.97%  -2.35%  -3.00%

 2010-2   0.00%   1.42%  -1.26%  -1.12%  -2.67%  -3.62%

 2014-2  -1.47%   1.69%   0.76%   0.09%  -0.50%   0.58%

 2018-2   0.00%  -0.51%   1.03%  -0.03%   0.55%   1.04%


 Avg     -1.52%   0.50%  -0.66%   0.41%  -1.55%  -1.91%


OTC summary for PY2 1966 - 2018 

 Avg     -0.31%   0.54%  -0.04%   0.36%  -0.44%   0.19%

 Win%       50%     79%     50%     64%     50%     71%


OTC summary for all years 1963 - 2021

 Avg     -0.03%   0.25%   0.09%   0.23%   0.09%   0.64%

 Win%       58%     58%     61%     66%     61%     69%


SPX PY2

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1954-2   0.00%   0.98%   0.27%   0.16%   0.23%   1.64%

 1958-2   0.30%   0.44%   0.79%   0.17%   0.10%   1.80%


 1962-2  -0.20%  -0.58%  -1.09%   0.10%   0.53%  -1.23%

 1966-2   0.29%   0.19%  -0.28%  -0.35%   0.12%  -0.03%

 1970-2  -0.76%   0.10%  -0.15%   0.03%  -0.83%  -1.61%

 1974-2  -0.26%   0.87%   1.53%   1.70%  -1.79%   2.05%

 1978-2  -0.29%   0.50%   0.76%  -0.52%  -0.22%   0.23%


 Avg     -0.24%   0.22%   0.15%   0.19%  -0.44%  -0.12%


 1982-2   1.64%  -1.07%  -0.60%   0.42%  -0.32%   0.07%

 1986-2   0.37%  -0.04%   0.78%   0.44%  -0.35%   1.20%

 1990-2  -0.86%   1.11%  -0.98%   0.23%   0.28%  -0.21%

 1994-2  -0.34%   0.20%   0.01%   0.14%  -0.05%  -0.04%

 1998-2   1.24%   1.38%   0.61%  -0.75%   1.13%   3.61%


 Avg      0.41%   0.32%  -0.04%   0.10%   0.14%   0.92%


 2002-2  -0.63%   0.68%  -1.62%   1.00%  -0.99%  -1.56%

 2006-2   0.00%  -0.36%  -0.39%   0.56%  -1.83%  -2.03%

 2010-2   0.00%   1.25%  -1.06%  -1.89%  -2.21%  -3.92%

 2014-2  -1.26%   1.08%   0.52%  -0.13%  -0.39%  -0.18%

 2018-2   0.00%  -0.35%   0.94%  -0.16%   0.44%   0.87%


 Avg     -0.94%   0.46%  -0.32%  -0.13%  -1.00%  -1.36%


SPX summary for PY2 1954 - 2018 

 Avg     -0.06%   0.38%   0.00%   0.07%  -0.36%   0.04%

 Win%       38%     71%     53%     65%     41%     47%


SPX summary for all years 1953 - 2021

 Avg     -0.08%   0.12%  -0.02%   0.06%  -0.02%   0.07%

 Win%       44%     59%     57%     59%     57%     52%

Money supply (M2) and Interest Rates

The following charts were supplied by Gordon Harms.

M2 growth continued to level off.  Perhaps the Fed has quit calculating M2.

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

2yr yield 0.961% up from 0.634%

5yr yield 1.558% up from 1.170%

10yr yield 1.792% up from 1.407%

30yr yield 2.125% up from 1.814%

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

Conclusion

Seasonality has been weak for 2 – 3 weeks and the Fed is planning to quickly reduce its purchases before it begins to raise rates.  Not a happy scenario.

The strongest sectors last week were Banks and Energy (both same as last week) while the weakest were Internet and Retail.

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