The good news is that the NASDAQ composite (OTC) and S&P 500 (SPX) closed at confirmed all-time highs last Monday, Jan. 25.

The Negatives

Most analysts recoil at the statement “Things are different this time.” This is sometimes true, and the following 2 charts illustrate an example of such. Both charts cover the past 15 years, with dashed vertical lines drawn on the first trading day of each year.

The first chart shows the OTC in blue and a 5% trend (39-day EMA) of NASDAQ volume of advancing issues (OTC UV) in green. You can see how upside volume exploded in 2020.

The next chart is similar to the first one, except it shows a 5% trend of volume of declining issues in (OTC DV) in orange. OTC DV has been plotted on an inverted Y axis, so decreasing OTC DV shifts the indicator upward (and up is good).

As you can see, since the COVID-19 crash in March, OTC DV has remained at a higher level than it was at its peak in 2008. It is different this time.

This is the result of free money.

The Positives

New highs confirmed the OTC all-time high last Monday.

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. Dashed vertical lines have been drawn on the first trading day of each month. The OTC NH confirmed the OTC high, which implies higher prices ahead.

The next chart is similar to the first one, except it shows the SPX in red and the NY NH in green. The information has been calculated with NYSE data. The NY NH failed to confirm Monday’s SPX all-time high, but not by much.

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.

New highs fell significantly last week, but there has been no buildup of new lows.

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. New highs also collapsed on the OTC, while new lows picked up a little. However, the number of new lows did not exceed new highs on either market last week.

Seasonality

Next week includes the first five trading days of February during the first year of the Presidential Cycle. The tables below show the daily change on a percentage basis for that period. 

The OTC data covers the period from 1963 to 2020, while the SPX data runs from 1928 to 2020. There are summaries for both the first year of the Presidential Cycle and all years combined. Average returns for the coming week have been modestly positive.

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 1 (PY1)

•    Year    Day1      Day2       Day3        Day4       Day5     Totals
•  1965-1 0.23% 1 0.15% 2 0.50% 3 -0.08% 4 0.15% 5 0.95%
•  1969-1 0.67% 1 0.01% 2 0.41% 3 -0.24% 4 0.21% 5 1.06%
•  1973-1 0.14% 4 -1.14% 5 -0.36% 1 -0.38% 2 0.21% 3 -1.52%
•  1977-1 0.80% 2 0.17% 3 -0.13% 4 0.43% 5 -0.13% 1 1.12%
•  1981-1 -2.39% 1 0.24% 2 0.52% 3 0.88% 4 0.80% 5 0.07%
•  1985-1 -0.10% 5 0.84% 1 0.69% 2 0.62% 3 0.96% 4 3.02%
•  1989-1 0.48% 3 0.48% 4 0.29% 5 -0.09% 1 0.79% 2 1.95%
•  1993-1 0.78% 1 0.48% 2 0.50% 3 0.03% 4 -1.11% 5 0.68%
•  1997-1 -0.28% 1 -0.17% 2 -1.85% 3 -0.15% 4 0.84% 5 -1.60%
•  Avg --    -0.30%    0.37%    0.03%    0.26%    0.46%    0.82%
•  2001-1 0.36% 4 -4.39% 5 -0.65% 1 0.81% 2 -2.13% 3 -6.00%
•  2005-1 0.30% 2 0.31% 3 -0.84% 4 1.41% 5 -0.22% 1 0.96%
•  2009-1 1.22% 1 1.46% 2 -0.08% 3 2.06% 4 2.94% 5 7.60%
•  2013-1 1.18% 5 -1.51% 1 1.29% 2 -0.10% 3 -0.11% 4 0.76%
•  2017-1 0.50% 3 -0.11% 4 0.54% 5 -0.06% 1 0.19% 2 1.06%
•  Avg --   0.71%    -0.85%    0.05%    0.82%    0.13%    0.87%

OTC summary for PY1 1965 - 2017

• Averages --    0.28% -0.23% 0.06% 0.37% 0.24% 0.72%
• % Winners --    79%    64%    57%    50%    64%    79%
• MDD 2/7/2001:  6.29% -- 2/6/1997: 2.43% -- 2/2/1981: 2.39%

OTC summary for all years 1963 - 2020

• Averages --  0.27% -0.04% 0.07% 0.09% 0.04% 0.43%
• % Winners --    69%    66%    58%    59%    60%    66%
• MDD 2/7/2002:  7.86% -- 2/7/2001: 6.29% -- 2/5/2018: 5.97%

SPX PY1

•    Year     Day1       Day2      Day3      Day4      Day5      Totals
•  1929-1 0.39% 5 -0.15% 6 -0.62% 1 0.23% 2 -0.82% 3 -0.97%
•  1933-1 -3.89% 3 -1.80% 4 -0.31% 5 -1.23% 6 0.47% 1 -6.75%
•  1937-1 0.28% 1 0.67% 2 0.72% 3 0.11% 4 -1.60% 5 0.19%
•  1941-1 -0.70% 6 -0.40% 1 0.10% 2 1.81% 3 0.39% 4 1.20%
•  1945-1 0.22% 4 0.74% 5 0.37% 6 0.37% 1 0.22% 2 1.92%
•  1949-1 0.79% 2 0.07% 3 -0.20% 4 -1.50% 5 -1.59% 6 -2.43%
•  1953-1 0.49% 1 0.11% 2 -0.45% 3 -1.02% 4 -1.30% 5 -2.17%
•  1957-1 -0.22% 5 -0.20% 1 -1.44% 2 -0.16% 3 -0.46% 4 -2.48%
•  Avg --   0.12%    0.06%    -0.32%    -0.10%    -0.55%    -0.79%
•  1961-1 0.19% 3 0.65% 4 -0.13% 5 -0.74% 1 -0.18% 2 -0.21%
•  1965-1 0.02% 1 -0.03% 2 0.09% 3 -0.07% 4 -0.32% 5 -0.31%
•  1969-1 -0.12% 1 0.03% 2 0.27% 3 0.33% 4 -0.01% 5 0.50%
•  1973-1 -1.09% 4 -0.36% 5 -0.10% 1 0.19% 2 -0.69% 3 -2.05%
•  1977-1 0.50% 2 -0.18% 3 -0.50% 4 0.03% 5 0.01% 1 -0.13%
•  Avg --  -0.10%    0.02%    -0.07%    -0.05%    -0.24%    -0.44%
•  1981-1 -2.04% 1 1.22% 2 0.10% 3 0.81% 4 0.75% 5 0.84%
•  1985-1 -0.56% 5 0.96% 1 0.14% 2 -0.10% 3 0.77% 4 1.22%
•  1989-1 -0.13% 3 -0.08% 4 0.04% 5 -0.31% 1 1.21% 2 0.73%
•  1993-1 0.85% 1 0.01% 2 1.05% 3 0.53% 4 -0.14% 5 2.30%
•  1997-1 0.07% 1 0.32% 2 -1.39% 3 0.24% 4 1.21% 5 0.45%
•  Avg --   -0.36%    0.49%    -0.01%    0.23%    0.76%    1.11%
•  2001-1 0.55% 4 -1.75% 5 0.36% 1 -0.15% 2 -0.84% 3 -1.83%
•  2005-1 0.69% 2 0.32% 3 -0.28% 4 1.10% 5 -0.11% 1 1.73%
•  2009-1 -0.05% 1 1.58% 2 -0.75% 3 1.64% 4 2.69% 5 5.11%
•  2013-1 1.01% 5 -1.15% 1 1.04% 2 0.05% 3 -0.18% 4 0.77%
•  2017-1 0.03% 3 0.06% 4 0.73% 5 -0.21% 1 0.02% 2 0.62%
•  Avg --   0.44%    -0.19%    0.22%    0.49%    0.32%    1.28%

SPX summary for PY1 1929 - 2017

• Averages --   -0.12% 0.03% -0.05% 0.08% -0.02% -0.08%
• % Winners --   61%    57%    52%    57%    43%    57%
• MDD 2/4/1933: 7.06% -- 2/5/1949: 3.26% -- 2/6/1953: 2.75%

SPX summary for all years 1928 - 2020

• Averages --  0.19% 0.06% -0.13% 0.05% -0.04% 0.12%
• % Winners --   64%    60%    48%    52%    50%    65%
• MDD 2/4/1933: 7.06% -- 2/5/2018: 6.19% -- 2/5/1932: 5.47%

February

Since 1963, over all years, the OTC in February has been up 55% of the time with an average gain of 0.6%. During the first year of the Presidential Cycle, February has been up only 36% time with an average loss of 3.1% (helped considerably by a 22.4% loss in 2001). On average, February has been the worst month of the first year of the Presidential Cycle. The best February ever for the OTC was 2000 (+19.2%), and the worst was 2001 (-22.4%).

The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change for each of the first 11 trading days and each of the last 10. 

For months where there were more than 21 trading days, some of the days in the middle were not counted. For months where there were less than 21 trading days, some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the first trading day and at five trading day intervals after that. The line is solid on the eleventh trading day, the dividing point.

In the chart below, the blue line shows the average daily performance of the OTC in February over all years since 1963 in blue, while the green line shows the average during the first year of the Presidential Cycle over the same period.

Since 1928, the SPX has been up 53% of the time in February and has, on average, lost -0.1%. During the first year of the Presidential Cycle, the SPX has been up 43% of the time with an average loss of -1.9%. The best February for the SPX was 1931 (+11.4%), and the worst was 1933 (-18.4%).

The chart below is similar to the one above, except it shows the average daily average performance over all years since 1928 for the SPX in February in red, and the average daily performance during the first year of the Presidential Cycle, over the same period in green.

Since 1979, the Russell 2000 (R2K) has been up 57% of the time in February with an average gain of 1.0%. During the first year of the Presidential Cycle, the R2K has been up 60% of the time with an average loss of -1.6%. The best February for the R2K was 2000 (+16.4%), and the worst was 2009 (-12.3%).

The chart below is similar to those above, except it shows the average daily performance of the R2K, over all years since 1979, in February in magenta, and the average daily performance during the first year of the Presidential Cycle in green.

Since 1885, the Dow Jones Industrial Average (DJIA) has been up 52% of the time in February with an average loss of -0.1%. During the first year of the Presidential Cycle, the DJIA has been up 38% of the time in February with an average loss of -1.3%. The best February for the DJIA was 1931 (+13.2%), and the worst was 1933 (-15.6%).

The chart below is similar to those above, except it shows the average daily performance, over all years, for the DJIA in February in grey, and the average performance during the first year of the Presidential Cycle in green.

Conclusion

All-time highs confirmed by breadth are usually followed by additional new highs in the following six weeks. On average, during the first year of the Presidential Cycle, the first week of February has been modestly positive followed by the worst two weeks of the year. I will go with that as my forecast for the next three weeks.

The strongest sectors last week were Retail and Internet, while the weakest were Electronics and Banks. I expect the major averages to be higher on Friday, Feb. 5 than they were on Friday, Jan. 29. Last week's positive forecast was a miss.