Technical Stock Market Report

The good news is:  It looks like traders closed out their positions Friday ahead of a 2 week vacation.  Nearly 10 billion shares were traded on Friday.  Seasonally the 4 trading days before Christmas during the 3rd year of the Presidential Cycle, the NASDAQ composite (OTC) has not had a down year since 1967 and the S&P 500 (SPX) has not had a down year since 1979.

The negatives:  On average the market sells off into middle-late December then rallies for the rest of the month on low volume.  So far the sell off has lasted 1 day longer than average, but that coincided with the end of the week before Christmas.  Nothing surprising.  The huge volume on Friday suggests positions were cleared prior to a vacation.  All of this suggests the extremely negative breadth of the recent past was just part of the seasonal pattern.

The chart below covers the past 6 months showing the 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 at 13% is at an extreme, but, if you are a determined optimist, you can see a non confirmation in the past week.

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

The non confirmation is also visible in this chart.

The positives:  The overriding positive is Seasonality, but, for the past week there have been breadth non confirmations.  Typically I would be cautious as the improvement might be called going from worse to bad, but this is happening at a seasonal shift point.

Advance – decline lines (ADL) are running totals of declining issues subtracted from advancing issues.  Their characteristics vary and change and it is changes we look for to give us hints as to what is going to happen.

The chart below covers the past 6 months showing the OTC in blue and an AD line calculated from NASDAQ data, OTC ADL in green.

The OTC ADL has been weak for the duration of this chart, but, for the past week it has hinted at strength.

The next chart is similar to the one above except it shows the SPX in red and NYSE ADL has been calculated from NYSE data.

The NYSE ADL has been stronger than the OTC ADL and the non confirmation of the past week is easier to spot.

Money supply (M2)

The money supply chart was provided by Gordon Harms.

Money supply continued its collapse along with the equity market.

Conclusion

The market is oversold giving us a perfect setup for the seasonally strong period that runs to the end of the year.

I expect the major averages to be higher on Thursday December 24 than they were on Friday December 18.

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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.