Trader’s Narrative

Like other times of inflection in the stock market, we are seeing technical studies and indicators light up like a Christmas tree. So why not throw another couple stats on the pile? Below are the charts of new 52 week lows for the Nasdaq and the NYSE.

Similar to other indicators I’ve mentioned recently, this one spiked to a multi-year high last Tuesday (January 22nd 2008). In fact, you’d have to go back to the market turmoil we saw in 1998 to find a higher number of new lows!

The NYSE graph looks different mainly because a significant portion of the securities traded there are non-common stock but rather bonds, municipal bond funds and structured funds which are sensitive to interest rates. Nevertheless, we can see the same pattern.

As with the weight of all the indicators that I’ve looked at, this one is saying that it is time to look for buying opportunities, rather than selling or selling short.

I’ve mentioned several times that I prefer to look at Nasdaq numbers when it comes to breadth (in a non-cumulative way) because NYSE breadth numbers are “polluted” with non-common stock securities.

These are usually interest rate sensitive. They are municipal bond funds, bonds (yes actual bonds trade on the NYSE), CEF’s, and other weird and woolly financial concoctions.

The result is that these securities move like a great galloping herd. But they don’t move to the rhythms of the stock market. Rather, they take their cue from the bond market. So when you people get spooked about rates (thinking that we won’t see a rate cut or maybe even have a rate increase) these non-common stocks get clobbered.

And that effects the NYSE breadth numbers. Let me show you with one example. Here is the chart for BlackRock Municipal Bond Trust (BBK). Last week it sliced through its 200 day moving average (blue line):

Now look at the effect of moves like that one, multiplied by hundreds and hundreds of similar bond-like securities:

That is one really oversold market? Isn’t it? We are at the same extremes that we saw at the Feb-March 2007 market bottom. But are we really? Take a look at the Nasdaq advance decline numbers:

Oversold? What oversold? We are in neutral territory. And that is how the siren call of the NYSE breadth numbers can throw you off course.

If you’re interested to know how I trade these munis, take a look at My Year End Strategy.