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We’ve looked at the S&P 500 index market breadth which is very strong and leading the market higher. Now let’s turn to another early warning system that is providing a slightly different picture of market internals right now.
The number of new 52 week highs is an important indication of the health of a cyclical bull market. After all, if stocks are now making new highs within a short time span of a year, can we really say that the market as a whole is trending higher?a
While the S&P 500 index has been hovering around its high for the year, the number of new 52 week highs has dropped off dramatically. When new 52 week highs peak and are unable to reach a new high, we have our very first signal for the end of a cyclical bull market. It is a bit too early to definitively say that is the case right now but this divergence between the market and the new 52 week highs is noteworthy nonetheless.
Usually when new highs do crest, we have on average an early warning system that provides about 34 weeks advance notice that the equity market indexes will follow suit. Of course, sometimes it is much less and sometimes the market trundles along much longer than most would expect.
Let’s take a look at probably the most common version of the new 52 week indicator:
As I’ve already mentioned more than a few times, the breadth data from the NYSE is suspect because of the number of non-operating company securities that trade on the Big Board. These include ETFs, municipal bonds, actual bonds, etc. that have really nothing to do with what we would normally associate with equity securities. And because they are for the most part interest rate sensitive, they can, at times, significantly skew the breadth statistics.
The fact that we are seeing a very similar picture in both indexes confirms that there is a divergence between the number of stocks making new highs and the market proxy (S&P 500 index). The key question is how long will this last?
We saw a total collapse of new 52 weeks highs at the February lows. But then, along with the market, this indicator tracked higher and actually reached a new high in mid-March. If we see this indicator return sharply higher, or even reach a new high, then the health of the cyclical bull market is intact.
As well, notice that the last time that we saw a similar divergence was during at the January highs. The S&P 500 was hovering between 1140 and 1150 but suddenly the number of new 52 week highs in both the NASDAQ and the NYSE fell dramatically. Not long after, the S&P 500 index followed suit.
Finally, here’s a slightly different version of the same indicator, the ratio of NASDAQ new 52 week highs vs. lows:
As you can see, similar to the number of new 52 week highs, it usually tracks the market under normal circumstances: falling and rising with the S&P 500. But for the past few weeks, even as the market has been consistently rising, there has been a rather surprising lack of new highs vs. new lows.
Perhaps I’m too jumpy but I consider this an early early warning signal.
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