Technical Stock Market Report

The good news is the market is oversold and due for a bounce. 

The negatives:

Most of the major indices were down for each of the last 4 days of last week and new lows increased during the week, but, decreased on Friday from Thursday.  This is a nuance suggesting a short term rally, not a turning point.

The first chart shows the S&P500 (SPX) in red and a 40% trend (4 day EMA) of NYSE new highs divided by new highs + new lows (NY HL Ratio), in blue.  Dashed vertical lines have been drawn on the 1st trading day of each month.  Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the 50%, neutral level.

NY HL Ratio can stay below the neutral level for a long time, however, it rarely remains below the 10% level for very long and only in the late stages of a bear market.  We may be in a bear market, but, if we are, it is in its early stages.

The next chart is similar to the one above except it shows the NASDAQ composite (OTC) in blue and OTC HL Ratio, in red, has been calculated from NASDAQ data.

OTC HL Ratio has been a little stronger than NY HL Ratio, however, it has been mostly below the neutral level for the past 3 months and at 19% is a bit oversold.

When the market hits bottom new lows disappear.  We have seen a decline in the number of new lows from the numbers seen a month ago, however, they remained at uncomfortably high levels for all but a few days and, last week, returned to significant levels.

The next chart covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new lows (NY NL) in blue.  NY NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

After moving sharply upward for nearly a month, NY NL turned downward last week.

The next chart is similar to the one above except is shows the OTC in blue and OTC NL, in orange, has been calculated from NASDAQ data.

The pattern of OTC NL is similar to that of NY NL.

The positives

The new low indicators shown in the last 2 charts above have been recovering, relatively, faster than prices so it is likely, if prices retest their August lows, the retest will be unconfirmed by the new low indicators.  Seasonality also suggests a bottom next month.

Money supply (M2)

The money supply chart was provided by Gordon Harms.

Money supply growth is about as far above its trend as it has been in the past 3 years.

October

Since 1963, over all years, the OTC in October has been up 56% of the time with an average gain of 0.8%.  During the 3rd year of the Presidential Cycle October has been up 54% time with an average loss of -0.7%, helped considerably by a 27.2% loss in October 1987.  The best October ever for the OTC was 1974 (+17.2%)

Because the crash of 1987 skews the data I have set the program up to limit daily moves to 2%.  In the 1987 crash the major indices were down over 20% on Monday then up about 10% on Tuesday.  In calculating the charts below those moves are only counted as 2%.

The average month has 21 trading days.  The chart below has been calculated by averaging the daily percentage change of the OTC for each of the 1st 11 trading days and each of the last 10.  In months when there were more than 21 trading days some of the days in the middle were not counted.  In months when 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 1st trading day and at 5 trading day intervals after that.  The line is solid on the 11th trading day, the dividing point.

In the chart below the blue line shows the average of the OTC in October over all years since 1963 while the black line shows the average during the 3rd year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 58% of the time in October with an average gain of 0.4%.  During the 3rd year of the Presidential Cycle the SPX has been up 52% of the time with an average gain of 0.4%.  The best ever October for the SPX was 1974 (+16.3%) the worst 1987 (-21.8%).

The chart below is similar to the one above except it shows the daily average performance over all years for the SPX in October in red and the performance during the 3rd year of the Presidential Cycle in black.

Since 1979 the Russell 2000 (R2K) has been up 56% of the time in October with an average loss of -0.3%.  During the 3rd year of the Presidential Cycle the R2K has been up 56% of the time with an average loss of -2.7%.  The best ever October for the R2K, 1982 (+14.2%), the worst 1987 (-30.7%)

The chart below is similar to those above except it shows the daily performance over all years of the R2K in October in magenta and the performance during the 3rd year of the Presidential Cycle in black.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 56% of the time in October with an average gain of 0.3%.  During the 3rd year of the Presidential Cycle the DJIA has been up 47% of the time with an average loss of -0.6%.  The best October ever for the DJIA 1885 up 12.3%, the worst 1987 (-23.2%).

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in October in Magenta and the performance during the 3rd year of the Presidential Cycle in black.

Conclusion

The market is oversold and the seasonal pattern is only modestly negative.

I expect the major averages to be higher on Friday October 2 than they were on Friday September 25.

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Disclaimer: : Charts and figures presented herein are believed to be reliable but I cannot attest to their accuracy.  Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus and the Wall Street Journal (wsj.com).  Historical data is from Barron’s and ISI price books.  The views expressed dare provided for information purposes only and should not be construed in any way as investment advice.  Furthermore, the opinions expressed may change without notice.