A few days ago I mentioned that the market is setting up for a correction in the short term. Since then the market has been going sideways but the S&P 500 index also printed a very bearish upside down hammer candlestick on Monday.
Today I wanted to take a look at the market internals through the lens of the ratio of new 52 week highs to new 52 week lows. The chart below compares the Nasdaq High/Low ratio (to avoid the NYSE breadth data) with the S&P 500 index:
The normal pattern is to see the number of new highs relative to new lows increase as the market is rallying and for the ratio to decrease as the market falls. This makes sense since the more stocks rally, the more we are going to see them make new 52 week highs and less 52 week lows as they are lifted off the floor by bids.
Of course, spikes in either extreme for the ratio also signal major inflection points. I’ve drawn a few of the recent ‘top’ extremes in red circles.
But right now we are seeing the ratio of new highs to new lows decline, even as the market has been continuing to move slightly higher. That is unusual. It is a sign of a lack of a wide participation by the Nasdaq component stocks. And eventually, it will mean that there are less and less leaders championing the market’s move higher.
In recent times we saw a similar pattern in March 2010. The ratio fell, even as the market itself climbed into April 2010. But eventually, the number of new highs spiked higher, catching up with the S&P 500 index and marked the intermediate top.
The S&P 500 index’s cumulative advance decline measure is continuing to be positive but less robust than before.
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