Technical Market Report for Saturday, July 31, 2021

The good news is that the Nasdaq composite (OTC), S&P 500 (SPX), and Dow Jones Industrial Average (DJIA) all closed at all-time highs last Monday.

The Negatives

New highs continued to deteriorate, while new lows are at threatening levels on both the Nasdaq and NYSE.

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 is at its lowest level since last November.

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. Similar action was seen in the NY NH and SPX.

The next chart covers the past six months, showing the OTC in blue and a 10% trend (19-day EMA) of Nasdaq new lows (OTC NL) in brown. The OTC NL has been plotted on an inverted Y axis, so decreasing numbers of new lows move the indicator upward (up is good). New lows declined a bit in the later days of last week, but the trend has been down.

The next chart is similar to the one above, except is shows the SPX in red and the NY NL in blue. The information has been calculated with NYSE data. Similar action was seen in the NY NL and SPX.

Advance – Decline Lines (ADL) are running totals of daily declining issues subtracted from advancing issues. They have lost some of their relevance in recent years from the inclusion of fixed income funds that are traded like equities on the exchanges (mostly the NYSE). 

The problem is that when interest rates are stable, fixed income funds gain in value slightly every day from accumulated interest. They have a down day when they pay their monthly or quarterly dividend. This has given the NYSE ADL a strong positive bias.

The next chart covers the past six months, showing the SPX in red and an ADL calculated from NYSE data in blue. There has been a modest non-confirmation of the recent all-time highs for the SPX demonstrated by the NYSE ADL.

The next chart is similar to the one above, except it shows the OTC in blue and the OTC ADL has been calculated with Nasdaq data, which has a much lower percentage of fixed income issues than the NYSE. The OTC ADL has always had a more negative bias than the NYSE ADL, but what caught my eye was the sharp downward move in early July.

The Positives

New highs increased enough last week to stay ahead of new lows.

The next chart covers the past six months, showing the OTC in blue, and a 40% trend (four-day EMA) of Nasdaq new highs divided by new highs + new lows (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral level.

The OTC HL Ratio has been dancing around the neutral level for the past several weeks. The numbers making up the indicator have been unusually high.

The next chart is similar to the previous one, except it shows the SPX in red and the NY HL ratio in blue. The information has been calculated with NYSE data. The NY HL Ratio advanced to a comfortable 81% with relatively high numbers on both sides of the equation. 

Seasonality

Next week includes the first five trading days of August during the first 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 2020, while SPX data runs from 1928 to 2020. There are summaries for both the 1^st 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       1.34% 1  -0.02% 2   0.02% 3   0.14% 4   0.33% 5     1.81%

 1969-1       1.09% 5   1.52% 1  -0.42% 2   0.56% 3   0.08% 4     2.83%

 1973-1      -1.39% 3  -0.14% 4  -0.15% 5   0.37% 1   0.08% 2    -1.23%

 1977-1       0.11% 1  -0.36% 2  -0.38% 3   0.37% 4   0.47% 5     0.21%

 1981-1      -0.58% 1  -0.15% 2   0.45% 3   0.30% 4  -0.15% 5    -0.12%

 1985-1       0.90% 4   0.17% 5  -0.78% 1  -0.64% 2  -0.67% 3    -1.02%

 1989-1      -0.12% 2   0.17% 3   0.63% 4   0.11% 5   0.94% 1     1.73%

 1993-1       0.42% 1   0.19% 2   0.67% 3   0.24% 4   0.36% 5     1.89%

 1997-1       0.03% 5   0.70% 1   1.00% 2   0.55% 3  -0.38% 4     1.90%

   Avg:          0.13%      0.22%      0.39%      0.11%      0.02%        0.87%

 2001-1       2.03% 3   0.92% 4  -1.01% 5  -1.55% 1  -0.32% 2     0.07%

 2005-1       0.48% 1   1.04% 2  -0.06% 3  -1.15% 4  -0.61% 5    -0.30%

 2009-1       1.52% 1   0.13% 2  -0.91% 3  -1.00% 4   1.37% 5     1.12%

 2013-1       1.36% 4   0.38% 5   0.09% 1  -0.74% 2  -0.32% 3     0.77%

 2017-1       0.23% 2   0.00% 3  -0.35% 4   0.18% 5   0.50% 1     0.56%

   Avg:          1.13%      0.49%    -0.45%     -0.85%      0.13%        0.45%

OTC Summary for PY1 1965 - 2017

• Averages:      0.53%     0.33%    -0.09%    -0.16%     0.12%       0.73%
• % Winners:       79%       64%       43%       64%       57%         71%
• MDD  8/7/2001:  2.85% --  8/7/1985:  2.08% --  8/6/2009:  1.90%

OTC Summary for All Years 1963 - 2020

• Averages:      0.01%    -0.16%    -0.11%     0.04%     0.13%      -0.09%
• % Winners:       54%       40%       52%       66%       59%         53%
• MDD 8/5/2002:  9.20% --  8/6/1990:  8.72% --  8/5/2011:  8.13%

SPX PY1

   Year          Day1        Day2        Day3        Day4        Day5        Totals

 1929-1       0.69% 4   1.65% 5   0.85% 6  -0.91% 1  -0.37% 2     1.91%

 1933-1       3.02% 2   2.34% 3  -1.24% 4  -2.22% 5  -0.79% 1     1.11%

 1937-1       0.53% 1  -0.82% 2   0.53% 3  -0.65% 4  -0.35% 5    -0.76%

 1941-1      -0.48% 5  -0.19% 6   0.39% 1   0.00% 2   0.00% 3    -0.29%

 1945-1       0.14% 3  -0.41% 4   0.41% 5   0.27% 1  -1.36% 2    -0.95%

 1949-1       0.53% 1   0.26% 2  -0.07% 3  -0.13% 4   1.45% 5     2.05%

 1953-1       0.36% 1  -0.24% 2  -0.40% 3   0.49% 4  -0.08% 5     0.12%

 1957-1      -0.25% 4  -0.23% 5  -0.88% 1  -1.25% 2   0.77% 3    -1.84%

   Avg:          0.06%     -0.16%     -0.11%     -0.12%      0.16%       -0.18%

 1961-1       0.91% 2  -0.64% 3   0.52% 4   0.58% 5  -0.01% 1     1.36%

 1965-1       0.20% 1   0.05% 2   0.39% 3   0.00% 4   0.33% 5     0.96%

 1969-1       1.79% 5  -0.51% 1   0.45% 2   0.55% 3   0.07% 4     2.34%

 1973-1      -1.28% 3  -0.15% 4  -0.17% 5   0.23% 1  -0.17% 2    -1.55%

 1977-1       0.27% 1  -0.63% 2  -0.13% 3   0.38% 4   0.02% 5    -0.09%

   Avg:          0.38%     -0.38%      0.21%      0.35%      0.05%        0.61%

 1981-1      -0.34% 1   0.54% 2   1.14% 3  -0.02% 4  -0.67% 5     0.64%

 1985-1       0.62% 4  -0.33% 5  -0.45% 1  -1.41% 2  -0.13% 3    -1.70%

 1989-1      -0.67% 2   0.17% 3   0.12% 4  -0.24% 5   1.60% 1     0.97%

 1993-1       0.45% 1  -0.20% 2  -0.16% 3  -0.09% 4   0.12% 5     0.12%

 1997-1      -0.75% 5   0.33% 1   0.22% 2   0.83% 3  -0.95% 4    -0.31%

   Avg:         -0.14%      0.10%      0.17%     -0.19%     -0.01%       -0.05%

 2001-1       0.39% 3   0.40% 4  -0.52% 5  -1.14% 1   0.33% 2    -0.56%

 2005-1       0.09% 1   0.71% 2   0.07% 3  -0.74% 4  -0.76% 5    -0.62%

 2009-1       1.53% 1   0.30% 2  -0.29% 3  -0.56% 4   1.34% 5     2.33%

 2013-1       1.25% 4   0.16% 5  -0.15% 1  -0.57% 2  -0.38% 3     0.32%

 2017-1       0.24% 2   0.05% 3  -0.22% 4   0.19% 5   0.16% 1     0.43%

   Avg:          0.70%      0.32%     -0.22%     -0.57%      0.14%       0.38%

SPX Summary for PY1 1929 - 2017

• Averages:      0.40%     0.11%     0.02%    -0.28%     0.01%       0.26%
• % Winners:       74%       52%       48%       35%       43%         57%
• MDD  8/7/1933:  4.19% --  8/6/1957:  2.59% --  8/7/1985:  2.31%

SPX Summary for All Years 1928 - 2020

• Averages:      0.10%    -0.03%     0.09%    -0.13%     0.14%       0.16%
• % Winners:       52%       49%       53%       49%       55%         49%
• MDD  8/5/2002:  8.45% --  8/5/2011:  7.19% --  8/6/1990:  6.10%

August

Since 1963, the OTC in August has been up 60% of the time with an average gain of 0.5%. During the first year of the Presidential Cycle, the OTC in August has been up 43% of the time with an average loss of -0.2%. The best August ever for the OTC was 2000 (+11.7%), while the worst was 1998 (-19.9%).

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

In months where there were more than 21 trading days, some of the days in the middle were not counted. In 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-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 August over all years since 1963, 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 59% of the time in August with an average gain of 0.7%. During the first year of the Presidential Cycle, the SPX has been up 48% of the time with an average loss of -0.1%. The best August ever for the SPX was 1932 (+37.5%), while the worst was 1998 (-14.6%).

The chart below is similar to the one above, except it shows the average daily performance over all years since 1928 for the SPX in August 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 August with an average gain of 0.3%. During the first year of the Presidential Cycle, the R2K has been up 40% of the time with an average loss of -0.8%. The best August ever for the R2K was 1984 (+11.5%), while the worst was 1998 (-19.5%).

The chart below is similar to those above, except it shows the average daily performance of the R2K over all years since 1979 in August 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 64% of the time in August with an average gain of 1.2%. During the first year of the Presidential Cycle, the DJIA has been up 56% of the time in August with an average gain of 0.8%. The best August ever for the DJIA was 1932 (+34.8%), while the worst was 1998 (-15.1%).

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

Conclusion

There has been talk of the Fed reducing its purchases of mortgage-backed securities to reduce inflation. If the equities market reacts badly to that, I think the Fed will drop that idea in a heartbeat. The equities market is more visible.

The strongest sectors last week were precious metals (up from the bottom last week) and basic materials (near the bottom for the last six months), while the weakest were biotech and energy services (both bottom dwellers for quite a while).

I expect the major averages to be higher on Friday, Aug. 6 than they were on Friday, July 30. Last week all of the major averages were down a little, except the R2K which was up a little, so I am calling last week's negative forecast a tie.