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%.
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:
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):
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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