It seems you have JavaScript disabled.

Ummm.. Yeah... I'm going to have to ask you to turn Javascript back on... Yeah... Thanks.

Number Of S&P 500 Highs vs. Lows Suggests Caution at Trader’s Narrative

Here’s yet another market indicator which is suggesting caution. I’ve been noticing these pop up for a while now. And although we have now broken above the problematic resistance level of 1400, there are several reasons to reign in any rampant bullishness in the short term.

Among them, sentiment as well as the High/Low Indicator that I’ve mentioned before a few times. It measures and compares the number of highs to lows in the S&P 500 index. It is a ratio of the highs to the sum of the highs and lows. So when it is a low number, we know that there are ample lows but little or no highs. And the reverse when it is a large number: many highs with few lows.

spx new highs new lows index may 2008

Like many others, this metric is much better at pinpointing a bottom than top. This year has already brought two crazy oversold situations in the market. The first in January and the second, mid-March. You have to remember the blue line in the above graph is a moving average, which means that we spent many days with a tonne of new 52-week lows and zero 52 week highs.

At the same time, we aren’t yet pushing the other extreme. Clearly the extraordinary situation in early 2008 has been resolved and the S&P 500 has bounced back - around +10%. And even if the High Low Index did get red-lined, it is no guarantee that the S&P 500 will top out instantly.

But the important thing I take from this metric is that we no longer have that deep oversold condition from which to catapult higher. Been there, done that. The easy money has been made in that trade. Now the longs have to keep their wits about them.

Enjoyed this? Don't miss the next one, grab the feed  or 

                               subscribe through email:  

5 Responses to “Number Of S&P 500 Highs vs. Lows Suggests Caution”  

  1. 1 Russ Abbott


    I saw some of your columns on Seeking Alpha and found my way here. I’ve just subscribed to your weekly(?) mailings. It looks like you are doing interesting work! I appreciate it.

    Have you ever looked at the ratio of implied volatility of calls to implied volatility of puts? It would make sense, for example, to look at that for some general security or index like QQQQ, SPY, or DIA. The higher the implied volatility of an option, the more expensive the option, which means that the option sellers are demanding more to sell options in that direction. So a high implied volatility ratio of calls to puts means that option sellers (and buyers) see the likelihood of a price rise as greater than the likelihood of a price decline. Of course, until one looks at historical correlations, it will be difficult to tell how useful this might be — if it’s useful at all. And if it is useful is it a leading indicator or a contrarian indicator?

    – Russ

  2. 2 Angelo

    looking at a weekly chart volume has been declining foe the last 5 weeks of this rally,what do you make of the news of the 63% put jump, headge or fall ?

  3. 3 Melinda Baker

    I’ve been reading your column here for a few weeks and wanted to get a sense of where you thought we were; should we be in the market or out? I’ve been also reading a new blog at Fisher Investments Blog that has been touting the fact that they believe we’re in a correction, not recession and we should just hold tight and ride this one out. Thoughts?

  4. 4 Babak

    Russ, thanks for the compliments. What you suggest sounds intriguing. I would pass it by Bill since he is the volatility expert.

    Angelo, yes low volume is somewhat problematic. I’m not sure what you mean by “63% put jump”? is this related to the CBOE put/call ratio?

    Melinda, it all depends on your approach and how granular you want to be. The fractal nature of the market means we can zoom into very short time frames. As I’ve written several times already, my take is that the market has bounced back from a correction and is now facing some indigestion as it sits at or below resistance. In the short term we are probably facing turbulence but in the long term I think there are enough catalysts to push us higher.

  5. 5 Bisco

    Hi Babak,

    You are still doing incredible work here, keep it up! I had a question about how you’d allocate your capital with a setup like the one we are in now. If I look back to 2003 I see that coming off a big bear market this indicator managed to stay overbought for a very long time. Currently we are coming off only a 20% correction, so I would not expect the indicator to stay overbought for the same amount of time but I certainly wouldn’t be using this as an opportunity to short just because it looks a little overbought. Do you use these opportunities to trim your long exposure or do you try to time small corrections during by going short?

Leave a Reply