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Technical Market Report for December 8, 2012

By: Mike Burk | Saturday, December 8, 2012

The good news is:
• Most of the major indices have managed to go up for 3 consecutive weeks.


The negatives

It was not surprising the rate of advance slowed last week. What is troubling is the number of new highs fell sharply. When the market is strong, the number of new highs will hold up on the down days.

The chart below 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 1st trading day of each month.

OTC_NH stalled at a low level last week.

OTC_NH stalled at a low level last week

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

NY NL declined while the SPX was up.

NY NL declined while the SPX was up

I typically do not deal with fixed income in this letter. But, last week, there was an article in the WSJ that pointed out that, for the first time ever, the average yield on SPX stocks is higher than it is on their bonds.

This reminds me of an article I read in Barron's in March of 2000 that pointed out there had never been a large cap issue with a PE greater than 100 and, at that time, there were over a dozen.

There used to be a rule of thumb that defined stocks as cheap when their yield was around 6% and expensive when their yield was around 2%.

Stocks are yielding around 2% now and their yield is higher than their bonds.

In the words of that famous philosopher Pogo "Things is getting curiouser and curiouser."

The chart below shows an average of all 566 corporate bond funds in the FastTrack database (www.fasttrack.net) in red. The green line shows a 10% trend of new highs, calculated over the trailing 21 trading days, of those funds.

The number of new highs has been falling as the index has been advancing.

This typically indicates a developing top.

The number of new highs has been falling as the index has been advancing


The positives

The market has been following its seasonal pattern quite closely and that pattern calls for some weakness over the next couple weeks. Usually that weakness manifests itself as a minor adjustment in prices. Hopefully that aspect of the pattern will hold up.

The chart below covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of NASDAQ new highs / (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 neutral 50% level.

OTC HL Ratio fell last week, but managed to hold above the neutral level.

OTC HL Ratio fell last week, but managed to hold above the neutral level

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

NY HL Ratio fell pretty sharply last week, but remains strong at 78%.

NY HL Ratio fell pretty sharply last week, but remains strong at 78%


Seasonality

Next week includes the 5 trading days prior to the 2nd Friday of December during the 4th year of the Presidential Cycle.

The tables below show the daily return on a percentage basis for the 5 trading days prior to the 2nd Friday of December during the 4th year of the Presidential Cycle.

OTC data covers the period from 1963 - 2011 and SPX data covers the period from 1953 - 2011. There are summaries for both the 4th 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 have been modestly positive by all measures, but they were helped by large gains in 2000.

Report for the week before the 2nd Friday of December.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1964-4 0.09% -0.23% -0.23% -0.34% 0.16% -0.55%
1968-4 -0.24% 0.11% 0.00% -0.04% -0.13% -0.30%
 
1972-4 0.15% 0.10% 0.30% 0.28% 0.07% 0.90%
1976-4 0.35% 0.41% 0.39% 0.78% 0.55% 2.48%
1980-4 -3.52% -0.41% -0.76% -2.50% 1.31% -5.88%
1984-4 -0.18% 0.12% -0.05% -0.25% 0.40% 0.04%
1988-4 0.40% 0.42% -0.17% -0.30% -0.01% 0.35%
Avg -0.56% 0.13% -0.06% -0.40% 0.47% -0.42%
 
1992-4 0.75% 0.09% -0.48% -0.75% -0.48% -0.87%
1996-4 2.22% -0.28% -0.27% -0.82% -1.03% -0.18%
2000-4 -1.12% 10.47% -3.23% -1.57% 5.98% 10.55%
2004-4 0.15% -1.70% 0.54% 0.14% -0.04% -0.91%
2008-4 4.14% -1.55% 1.17% -3.68% 2.18% 2.25%
Avg 1.23% 1.41% -0.45% -1.34% 1.32% 2.17%
 
OTC summary for Presidential Year 4 1964 - 2008
Avg 0.26% 0.63% -0.25% -0.75% 0.75% 0.66%
Win% 67% 58% 36% 25% 58% 50%
 
OTC summary for all years 1963 - 2011
Avg 0.16% 0.03% 0.02% -0.38% 0.28% 0.11%
Win% 61% 49% 54% 47% 57% 53%
 
SPX Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1956-4 -0.51% -0.68% -0.75% 0.80% 0.09% -1.06%
1960-4 -0.14% 0.29% 0.99% 0.23% 0.89% 2.26%
1964-4 -0.02% -0.39% -0.64% -0.01% 0.25% -0.82%
1968-4 -0.25% -0.25% 0.00% -0.07% 0.24% -0.32%
 
1972-4 0.33% -0.16% 0.37% 0.50% 0.22% 1.26%
1976-4 0.78% -0.07% 0.57% 0.41% 0.18% 1.88%
1980-4 -2.55% -0.10% -1.70% -0.70% 1.47% -3.59%
1984-4 0.07% 0.42% -0.27% -0.50% 0.54% 0.27%
1988-4 1.15% 0.97% 0.19% -0.56% 0.17% 1.92%
Avg -0.04% 0.21% -0.17% -0.17% 0.52% 0.35%
 
1992-4 0.75% 0.39% -0.31% -0.23% -0.21% 0.39%
1996-4 1.37% -0.30% -0.91% -1.54% -0.09% -1.47%
2000-4 0.74% 3.89% -1.82% -0.59% 1.96% 4.19%
2004-4 -0.08% -1.11% 0.49% 0.54% -0.10% -0.26%
2008-4 3.84% -2.31% 1.19% -2.85% 0.70% 0.57%
Avg 1.33% 0.11% -0.27% -0.93% 0.45% 0.68%
 
SPX summary for Presidential Year 4 1956 - 2008
Avg 0.39% 0.04% -0.20% -0.33% 0.45% 0.37%
Win% 57% 36% 46% 36% 79% 57%
 
SPX summary for all years 1953 - 2011
Avg 0.19% 0.00% 0.04% -0.31% 0.24% 0.16%
Win% 58% 47% 53% 41% 68% 56%


Money Supply (M2)

The money supply chart was provided by Gordon Harms. Money supply growth continued the drop that began 2 weeks ago.

M2


Conclusion

The breadth indicators have been weakening and the seasonal pattern calls for a couple weak weeks of weakness.

I expect the major averages to be lower on Friday December 14 than they were on Friday December 7.

Last week all of the major indices were up except the OTC so I am calling last weeks positive forecast a tie.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. Gordon Harms produces a Power Point for our local timing group meetings, you can get a copy of that at: http://www.stockmarket-ta.com/. If it is not for you, reply with REMOVE in the subject line.

In his current letter, Jerry Minton calls our current condition one of "Financial Repression". You can read about it and sign up for his letter at: http://alphaim.net/

Good Luck,

YTD W 18 /L 16/T 15

 

Author: Mike Burk

Mike Burk

Mike Burk independently publishes a weekly newsletter on the stock market from a technical perspective.

Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.

Copyright © 2003-2014 Mike Burk