Technical Stock Market Report

The Good News Is:  All of the major indices hit all-time highs last week.

The Negatives: The market is overbought to an extreme.

The Russell 2000 (R2K) has been up for 15 consecutive trading days as has the NASDAQ AD line. These kinds of extremes usually occur near the beginning of long up moves, but, every now and then they occur at short term tops.

Bonds are oversold to an extreme.

Usually stocks and bonds move together. We are looking at extreme opposites.

The Positives

The First chart covers the past 6 months showing the NASDAQ composite (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 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.

OTC HL Ratio finished the week at 93%, extremely strong.

The next chart is similar to the one above except it covers the past 2 years so you can see how this indicator has worked in the recent past.

OTC HL Ratio is usually well below extremely high levels before prices begin a serious decline.

The next chart is similar to the first one except it shows the S&P 500 (SPX) in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio is also extremely strong at 89%.

The next chart is similar to the one above except it covers the past 2 years. The NYSE chart is similar to, but not as reliable as the NASDAQ chart. Probably caused by the high percentage of fixed income issues on the NYSE.

December

All years since 1963 the OTC in December has been up 60% of the time with an average gain of 1.9%. During the 4th year of the Presidential Cycle December has been up 69% time with an average gain of 1.2%. The best December ever for the OTC was 1999 (+22.0%), the worst 2002 (-9.7%).

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 December over all years since 1963 while the black line shows the average during the 4th year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 73% of the time in December with an average gain of 1.4%. During the 4th year of the Presidential Cycle the SPX has been up 77% of the time with an average gain of 1.4%. The best December ever for the SPX was 1991 (+11.1%), the worst 1931 (-14.5%).

The chart below is similar to the one above except it shows the average daily performance over all years for the SPX in December in red and the performance during the 4th year of the Presidential Cycle in black.

Since 1979 the Russell 2000 (R2K) has been up 78% of the time in December with an average gain of 2.6%. During the 4th year of the Presidential Cycle the R2K has been up 89% of the time (1980 has been its only down year) with an average gain of 3.0%. The best December ever for the R2K, 1999 (+11.2%), the worst 2002 (-5.7%)

The chart below is similar to those above except it shows the daily performance over all years of the R2K in December in magenta and the performance during the 4th year of the Presidential Cycle in black.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 69% of the time in December with an average gain of 1.2%. During the 4th year of the Presidential Cycle the DJIA has been up 59% of the time in December with an average gain of 0.9%. The best December ever for the DJIA, 1903 (+10.8%), the worst 1931 (-17.0%).

The chart below is similar to those above except it shows the daily performance over all years of the DJIA in December in grey and the performance during the 4th year of the Presidential Cycle in black.

Conclusion

Everything you look for in a bull market is happening to extremes…except bonds which are at extremes in the other direction.

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