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While there are some undeniable indications of an overbought market right now, the bull market that started in March 2009 seems to be intact. Those indicators are of course mostly of the sentimental variety. We looked at the Hulbert Newsletter sentiment for the general market and the Nasdaq in particular yesterday.
Today the results of the weekly Investors Intelligence survey show very little has changed from last week. The bulls are slightly higher at 48.4% and the bears inched down to 23.1%. Over all however, we aren’t seeing the type of wildly bullish ebullience evidenced by either the Hulbert indicator or the Investors Intelligence survey itself just a few months ago.
But as I mentioned, the market internals suggest that the overall health of the bull market is intact, notwithstanding any potential short term corrections. Back in January when the year was still very young, I made a similar suggestion based on the pattern of new highs and new lows, The High Low Index & The Stock Market: Up!.
In a nutshell, the market usually makes a major top when there is a dearth of stocks making new highs. That is, when the stock market is rallying with the coincident indicator of a large portion of new highs, it is highly improbable that it will turn out to be a major top. The most recent rally from September has induced a concomitant rise in the number of new highs.
So I once again looked at the indicator which tracks the number of highs on the Nasdaq (I don’t use the market internals for the NYSE unless they’ve been scrubbed of non-operating company issues). The indicator is rather simple, it tracks the number of new 52 week highs divided by the number of new highs and new lows. To smooth things out we then apply a 2 trading week (10 day) moving average.
The two major market tops in 2000 and 2007 occurred with a lower number of new highs. So as the indexes were powering higher, there were less and less issues actually making new highs. So in effect, fewer and fewer of the stock index constituents had to do most of the bull’s work and then eventually all the bull’s work until they just gave up.
But that is not what is happening right now. As the market revisits the April levels, the relative number of new highs is relatively high. It reached a short term peak in mid-October at 87.7% and today at 85.6%.
According to Ned Davis Research the stock market has never formed a significant top when a significant portion of securities are making new 52 week highs. None of the 13 bull markets since 1967 (as defined by the firm’s own stringent requirements) ended when 25% or more of issues were hitting new highs.
So while I won’t be surprised by a pause or a short term correction to digest the move up, especially as we approach an area of previous resistance (thanks to the April 2010 top), the health of the bull market remains stable.
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