The good news is:

• The market appears to be recovering from its hiccup early last week. 

The Negatives

New highs are an indication of the breadth of a move and new highs did not respond well to the strong rally of Thursday and Friday.

The first chart covers the past 6 months showing the Nasdaq composite (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 1^st trading day of each month. 

OTC NH has failed to confirm the rally of the past 6 weeks and deteriorated further as prices rose at the end of last week.

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).

OTC NL fell further to an uncomfortably high level of 105 last week. 

 

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

Not much of a recovery in NY NL and at 41 the level is getting uncomfortable.

 

The next chart covers the past 6 months showing the 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 horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral, level.

OTC HL Ratio fell below the neutral level, finishing the week at 44%.

The Positives

The blue chip record highs of a week ago were confirmed by a lot of 52 week highs on the NYSE.  That implies higher highs ahead for the blue chip indices.

The next chart is similar to the one above except it shows the SPX in red and NY HL ratio, in blue has been calculated with NYSE data.

NY HL Ratio held above the neutral level finishing the week at 64%. 

 

The next chart is similar to the first one except it shows the SPX in red and NY NH, in green, has been calculated with NYSE data.

It is a bit troubling that NY NH continued to fall while the SPX rose sharply at the end of last week; however, the level of the indicator at 274 is still at a comfortably high level.

 

Seasonality

Next week includes the 5 trading days prior to the 3rd Friday of May during the 1st 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 1953 to 2020.  There are summaries for both the 1^st 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 been mixed, but stronger during the 1st year of the Presidential Cycle.

Report for the week before the 4th Friday of May.

• The number following the year is the position in the Presidential Cycle.
• Daily returns from Monday through the 4th Friday.

OTC Presidential Year 1 (PY1)

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1965-1  -0.33%  -0.73%   0.60%  -0.83%  -0.36%  -1.65%

 1969-1  -0.53%  -0.40%  -0.15%   0.23%   0.54%  -0.31%

 1973-1  -2.07%   0.82%   0.49%   2.14%   0.86%   2.24%

 1977-1  -0.87%  -0.50%  -0.50%  -0.01%  -0.28%  -2.16%

 

 1981-1   0.20%  -0.38%   0.70%   0.33%   0.40%   1.25%

 1985-1   0.95%  -0.18%  -0.31%  -0.30%   0.00%   0.16%

 1989-1  -0.06%  -0.37%   0.30%   0.32%   0.52%   0.72%

 1993-1   0.06%   0.05%   1.30%   0.07%  -0.58%   0.90%

 1997-1   0.04%   1.69%   0.73%  -0.09%   1.25%   3.61%

 

 Avg      0.24%   0.16%   0.54%   0.07%   0.32%   1.33%

 

 2001-1   4.85%   0.36%  -3.04%   1.72%  -1.36%   2.53%

 2005-1   0.50%   0.24%  -0.56%   1.03%   0.22%   1.43%

 2009-1   3.11%   0.13%  -0.39%  -1.89%  -0.19%   0.77%

 2013-1  -0.07%   0.16%  -1.11%  -0.11%  -0.01%  -1.14%

 2017-1   0.82%   0.08%   0.40%   0.69%   0.08%   2.06%

 

 Avg      1.84%   0.19%  -0.94%   0.29%  -0.25%   1.13%

 

OTC summary for PY1 1965 - 2017 

 Avg      0.47%   0.07%  -0.11%   0.24%   0.08%   0.74%

 Win%       57%     57%     50%     57%     50%     71%

 

OTC summary for all years 1963 - 2020

 Avg     -0.03%  -0.15%   0.08%   0.11%   0.13%   0.15%

 Win%       47%     41%     59%     57%     63%     59%

 

SPX PY1

 Year       Mon     Tue     Wed    Thur    Fri    Totals

 1953-1  -0.36%  -0.20%   0.93%   0.52%  -0.12%   0.77%

 1957-1   0.25%   0.13%  -0.40%   0.02%   0.13%   0.13%

 

 1961-1  -0.62%  -0.25%  -0.63%  -0.38%   0.64%  -1.25%

 1965-1  -0.74%   0.58%  -0.34%  -0.52%   0.66%  -0.36%

 1969-1  -0.92%  -0.89%   0.41%   0.12%  -0.01%  -1.27%

 1973-1  -1.09%   0.83%   0.47%   2.95%   0.75%   3.91%

 1977-1  -1.31%  -0.49%  -0.92%   0.25%  -0.76%  -3.23%

 

 Avg     -0.94%  -0.04%  -0.20%   0.48%   0.25%  -0.44%

 

 1981-1   0.28%  -0.34%  -0.07%  -0.19%  -0.32%  -0.64%

 1985-1   1.23%  -0.04%  -0.57%  -0.51%   0.37%   0.47%

 1989-1   0.23%  -1.14%   0.26%   0.01%   0.76%   0.12%

 1993-1   0.48%   0.19%   1.02%  -0.23%  -0.49%   0.98%

 1997-1   0.42%   1.01%  -0.27%  -0.44%   1.36%   2.08%

 

 Avg      0.53%  -0.06%   0.07%  -0.27%   0.34%   0.60%

 

 2001-1   1.62%  -0.26%  -1.55%   0.32%  -1.18%  -1.06%

 2005-1   0.39%   0.02%  -0.34%   0.64%   0.10%   0.80%

 2009-1   3.04%  -0.17%  -0.51%  -1.68%  -0.15%   0.53%

 2013-1  -0.07%   0.17%  -0.83%  -0.29%  -0.06%  -1.07%

 2017-1   0.52%   0.18%   0.25%   0.44%   0.03%   1.42%

 

 Avg      1.10%  -0.01%  -0.60%  -0.11%  -0.25%   0.12%

 

SPX summary for PY1 1953 - 2017 

 Avg      0.20%  -0.04%  -0.18%   0.06%   0.10%   0.14%

 Win%       59%     47%     35%     53%     53%     59%

 

SPX summary for all years 1953 - 2020

 Avg     -0.03%  -0.11%  -0.06%   0.03%   0.08%  -0.10%

 Win%       47%     46%     51%     52%     62%     57%

 

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 0.153% down from 0.157%

5yr yield 0.814% down from 0.829%

10yr yield 1.626% up from 1.584%

30yr yield 2.347% up from 2.275%

 

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

 

Conclusion

It looks like we are in a developing top.  The secondaries have been underperforming the blue chips, new highs have been weakening on the NASDAQ and took a big hit on the NYSE last week and the number on new lows has been increasing.  

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

I expect the major averages to be higher on Friday May 21 than they were on Friday May 14.

Last week's positive forecast was a miss.