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Technical Reasons For More Stock Market Gains at Trader’s Narrative

The gap between the fundamental and technical analysts is growing. As Jeremy Grantham worries about new bubbles, technical analysts from firms like NDR and Lowry research point to several confirming signals for a continuation of the rally.

If you’ve been reading the blog for a while, you’re already familiar with the metrics mentioned. The stock market rally started with very few believers in the spring of last year and now the many who missed out on the meteoric rise are standing on the sideline dumbfounded asking just how far it can continue to rise.

The president of Lowry Research, Paul Desmond, shares the concerns of Jeremy Grantham that this could end badly with yet another bubble. But for now he remains bullish because their proprietary measures of demand and supply point to an overwhelmingly strong picture for stocks.

According to Ned Davis Research, stocks making new 52-week highs made up 40% of the total market - a new peak going back to the birth of the super-bull market in 1982. Small caps continue to lead the market higher and not surprising when we keep in mind the number of new 52-week highs, the percentage of stocks trading above their 50 day moving average continues to be above 80%.

market breadth new highs WSJ graphic Apr 2010
Source: Technical Support: Signs Point to More Stock Gains (WSJ)

The number of new 52 week highs and their relative number compared to the whole market is an important metric. A healthy bull market is one where more and more individual stocks participate, reaching new highs. But the rapid recovery that followed the deep bear market of 2008 can provide a blind-spot for new 52 week highs. So looking at the number of new 52 week highs can be deceiving since stocks would have to fall by a huge amount to register as a new 52 week low. One way to remedy this is to normalize the measure by using a ratio of new highs to new lows:

nasdaq new 52 week high low ratio Apr 2010

As you can see, this ratio is showing remarkable strength in the Nasdaq as the number of new 52-week lows falls and the number of new 52-week highs reaches a new multi-year high itself. Right now there are about 100 new 52-week highs for each new 52-week low in the Nasdaq Composite.

As a side-note, a spike in the ratio of new 52-week highs relative to new 52-week lows does suggest a very overbought market. So we may see a small correction similar to what we saw when the ratio spiked in mid-September 2009 and in January 2010. But the intermediate trend, or as Lowry Research prefers to call it, “the primary trend”, remains intact.

Another way to avoid any potential distortions from the number of new 52-week highs is to look at a shorter time horizon. Here is a chart, courtesy of Chris Puplava, showing how many industry groups (60+) in the S&P 500 index are making new 6 month highs (green) and lows (red):

S&P500 6 month high low Apr 2010
Source: Breadth Supports Continuation of Bull Market

During the final months of 2009 there was a gradual decrease in the peaks of the percentage of industries making new 6-month highs. Eventually this lead to the correction that we saw at the beginning of the year. Now, once again, the number of 6 month highs is expanding. And once again, a spike high does generally correspond to a short term correction but the primary trend is up.

Finally, every major cumulative advance decline line is confirming that what we are seeing is a very plebeian bull market. That is one where every common stock is a fully participating member. Keep in mind that even if the market internals like 52-week highs and the AD line do collapse, from a historical perspective, it can take up to a year for the market itself to crest.

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11 Responses to “Technical Reasons For More Stock Market Gains”  

  1. 1 Jo

    What about the RSI divergence?

  2. 2 Tom

    Dow hit 61.85 Fib level yesterday. All other indexes have blown by Fib levels. But good old Dow did not. We will not do anything based upon this until we see how it closes but thought that was very interesting. Particularly struck by Barron’s cover this week ( Bear getting run over by a Bus as opposed to the March 09 bottom with a Bull crashing missing a safety net).

  3. 3 jezza

    Glad to hear more from NDR and Lowry and less from EWI!

    You can’t argue with the tape-keep up the good work Babak, many thanks!

  4. 4 Streetcar

    Technical analysts have no choice but to join the cheerleaders after their indicators have been defeated by the rage market over and over again.

    It is a time to get nervous if you are long.

    “Dow hit 61.85 Fib level yesterday”
    Good point, Tom. I was looking at that too.

  5. 5 Fibocycle

    Tom’s observation that ‘All other indexes have blown by Fib levels.’ is not quite accurate. Using the October 11th 2007 high and the March 2009 low on the S&P 500 the 61.8 percent retracement level is @ 1228.73–which is slightly above the recent high. If one triangulates the decline of 2007-2009 and the advance from that low this week represents 50 percent of the decline period compared ot the post bear market advance. This is an area where significant resistance should be seen and possibly a termination of the bull campaign.
    See for graphic representation.

  6. 6 Tom

    I stand corrected. Fibocycle is absolutely right. SPX has not crossed 61.8% level. SPY did I think. In any event most averages have gone over. I know Value Line Arithmetic Index hit all time high.

    The Barron’s thing as someone else said is so poetic. I am getting short. We will always trade with a reasonable stop in case we are wrong.

  7. 7 thunderbird

    Well, there’s that theory shot all to hell! -2.3% on the SPX today. People all of a sudden freaking out about Greece & Portugal, and running to gold.

  8. 8 Chris

    For what it’s worth, I recall the vast majority of technical sites calling for a continuation of the bear in March, April, May, June, July…..because all the indicators were bearish. Now that every measure has turned bullish, I am cautiously looking for the big bad bear to return.

  9. 9 Fibocycle

    The markets are probably not freaking about Greece–or Goldman–or Financial Regulation–they are too obvious. What I believe the market is beginning to discount is the potential of a meltdown in China. Take a look at the April 19th entry about the SSE–then take a look at the action recently in Shanghai.

  10. 10 OntheMoney

    Fibocycle -

    Excellent point about China. Shanghai has been leading Western stock markets for a year and has been a screaming tell over recent months. The breakdown in that index has accelerated and the potential downside from a technical perspective is substantial.

    Also we are at an HISTORIC extreme in the monthly rate of change on the Dow, going right back to 1923. Only a very few instances have been this stretched and they are, as I discovered, very informative indeed. You’ll find the charts around two-thirds of the way through my post here

    Incidentally, Babak, your site has quickly become one of my first ports of call every morning. Congratulations on the consistently smart and insightful work!

  11. 11 Financial Spread Betting

    I too worry about a new bubble. Remember the previous highs (2008) were made during a credit bubble. We should be well off these numbers.

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