If you've been reading this blog for the past little while, you're already familiar with the argument that the stock market has been rising higher on the strength of new 52 week highs. I commented on this earlier this month and not long after, Wayne did an extensive historical study of the ratio of new highs and lows as a bullish omen.
Now this same concept has been championed by much more famous market prognosticators. In a recent note, Ned Davis Research advised clients that 26.7% of the NYSE issues made new highs for the week of January 8th 2009 and 25.1% for last week. This is of paramount interest to you if you've been peeking at the hard right edge of the chart expecting to spy a top here. This data tells us that such pursuits are futile. At least for now.
According to Ned Davis Research the stock market has never formed a significant top when so many securities have been 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.
In fact, when the market did crest, the median percentage of NYSE issues at new highs was only 10.9%. At the most recent top, in October 2007, there were 14.4% issues on the NYSE with new 52 week highs. At the 2000 bubble top, there were only 6.4%. That helps to put the current reading in proper (bullish) context.
If you're looking for a direction and not craning your neck higher, Ned Davis Research wants you to give your head a shake. Providing even more bullish charge, the eponymous quantitative research firm further mentions that the stock market tops out with considerable lag after the new highs are unable to do so. The median lag for the past 13 cycles since 1967 has been 33.6 weeks or a little over 8 months.
So even if you insist on muttering humbug and digging in your heals as a bear, expecting the new highs to have already peaked, the stock market could continue to go higher well into September 2010. In a curious way, that dovetails with the 1970's bear market script.
I have to admit, even as the new 52 week highs are looking healthy and this does bode well for the market historically, I can't help but be a little nervous that we're relying on NYSE breadth data. After all, the NYSE data has become infamously polluted over the years by interest rate sensitive issues like bonds and municipal closed-end funds. And with a zero rate Fed policy, these same issues have been rocketing higher (My Year End Strategy for 2009). So are we getting fooled by a mirage?
This is a chart of the short term average of the High-Low Index which is the ratio of daily new highs and new daily lows. Basically the same chart that Gerald and Marvin Appel, editors of the Systems & Forecasts advisory service refer to in Mark Hulbert's recent article. Right now it is at an extreme 99% - where it was last during heady days of the 2003 cyclical bull market. And here is the same indicator for the Nasdaq currently at 95.8%:
While the extent of the extreme which took the NYSE new highs to 26.7% of issues traded (in early January 2010) can be partly attributed to the interest rate sensitive issues, it is clear that that isn't the whole story. In other words, we can't simply dismiss this as by-product of the low interest rate environment which has pushed up the price of fixed income (and quasi-fixed income) securities. The High-Low index for the Nasdaq is only 3% points lower after all.
There is clearly an underlying strength in the stock market. Otherwise, the Nasdaq breadth data would be much, much lower. There you have it. Say it with me now... Up!
breadth, closed end funds, high low index, market study, mark hulbert, Nasdaq, Ned Davis Research, new high, new low, NYSE
And if you've somehow made it this far without listening to the Upular Remix by Australian DJ Pogo, have a listen. See how long you last until you tap your feet or start dancing
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