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A Look At The Underlying Market Structure at Trader’s Narrative

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This is a tough market to navigate and the cross currents make things extra slippery. Perhaps it would be better to take a step back from the superficial index numbers and levels and look at the internal market structure. With that in mind, here is a chart for the New High New Low index for the Nasdaq:

nasdaq high low index june 2008

It is a lesser known indicator but basically it compares the number of stocks going up and down. You can get more background information here, in case you’re unfamiliar with the new high new low index.

It is surprising to see that this indicator has been stuck consistently below 60 for the longest duration of time since the 2002 bear market. As the chart shows, this indicator stays low when we are going through a bear market and high when we are going through a bull market (as in the green box in 2003).

By the way, I’m showing a chart for the Nasdaq as opposed to the NYSE because the ever increasing number of non-common stock securities traded on that exchange has made most internal analysis of it fairly worthless.

In any case the chart above confirms what most of us know on an intuitive level: it feels like a bear market out there. Doesn’t it? Well, even though technically we aren’t in one. That doesn’t seem to matter. The tape is sluggish and the advance decline numbers also bear that out:

nasdaq ad dec june 2008

Last Friday’s weak market took us down to negative 1788 - extreme low advance decline breadth levels which we last saw in the swing lows of March (green arrow). But even so, it takes more than just one spike like that to wring out the market and set it up for a rally.

And in case you are wondering why I use the raw advance decline data, instead of the cumulative breadth data like most, it is because cumulative breadth is misleading.

For a strong and healthy bull market, either the advance decline must remain above such lows or when it does fall so low, it is preferable for a bouquet of extreme low readings which serves to flush out the weak hands (green boxes).

NYSE adv dec june 2008

If you look closely, you can see what I mean about non-common stock securities ruining NYSE advance decline data. If you were only going by NYSE data, in June 2007, you would have mistakenly thought that the market was oversold.

So we seem to be in a bit of a limbo - not quite a bear market, not quite a bull market. Or maybe I’m projecting my own ambivalence onto the charts. What do you think?

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