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The High Low Index & The Stock Market: Up! at Trader’s Narrative

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?

To help answer that I decided to compare and contrast the NYSE new highs data with the Nasdaq breadth data. Here is another way of looking at the new high NYSE data:

NYSE new high low index Jan 2010

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%:

Nasdaq new high low ratio chart Jan 2010

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!

up film - hold on!
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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17 Responses to “The High Low Index & The Stock Market: Up!”  

  1. 1 Babak

    Venkat, not sure how helpful it is to drag Newton into this but I expect that such “V” bottoms have occurred in the past and therefore are reflected in the data that Ned Davis Research is relying on.

  2. 2 dogismyth

    Are you for real??

    There was a 7 month base in the SPX 2002-2003 before the resumption of the
    cyclical bull market. We had a 2-week (!!!!!!!!!!!!!!!!) base (LOL) before the
    resumption of the cyclical bull. Does that mean anything at all from a technical
    point of view?

    What’s different this time?? Credit expansion. Or the lack thereof. Credit was readily available in 2003. Remember the inflating of the housing bubble by Sir Greenspan??

    When you consider these two points, please let us all know how the comparison stacks up. There are other points to consider, but I think those two will be adequate in shooting down any irrational exhuberance.

  3. 3 Brad Miller

    “There is clearly an underlying strength in the stock market.”

    You mean other than taxpayer dollars being spread out to rotating sectors by the behemoths trading houses?They play tens of billions in the market every day with no downside to make guys like you swim in a mirage. Dive in, you are now officially part of the problem.

  4. 4 Venkat

    An alternative explanation is this:

    The lows formed in March 2009/ October 2008 were made when a record % of stocks made new lows. The reaction to that should be expected to be equally strong. Hence this input (99% stocks at 52 week highs in isolation) may indicate bull market, but in the context of the prior selloff may merely indicate newton’s third law and may not have any predicting power for the future.

  5. 5 DL

    Nothing to stop a “fast and furious” 7% correction.

    That’s what I think is coming soon.

  6. 6 Babak

    DL, correct. A short term and abrupt bout of profit taking would match the extremes of sentiment (especially the options data). But a significant top is not highly probable.

  7. 7 Milton

    “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.” If this is a bear market rally, the data may be moot. I wonder what the new highs were in 1930? Also, Robert McHugh is watching for a Hindenburg Omen which incorporates 52 week highs and lows, each of which must be greater than 2.2% of issues traded, the MO must be negative that day, and several other conditions.

  8. 8 Babak

    Milton, Ned Davis is referring to cyclical bull markets in the portion you quote. Also, the Hindenburg Omen requires that “new 52 Week Highs cannot be more than twice the new 52 Week Lows” and right now highs are completely dominating on the NYSE. Furthermore, I always prefer to take a weight of the sum rather than pick one single indicator, no matter how good it is (and the HO isn’t great since it has a lot of false positives).

  9. 9 GreenAB

    how do the Ned Davis guys distinguish between a bear market rallye and a bull market?

    quote from one of your articles:

    “In need to discuss Charles Dow’s “50% Principle.” He noted that what the averages do at the halfway level of a major rise or decline is important. The greater the move, the more important the 50% Principle. For example, I wouldn’t apply it to a move of a week or so covering maybe 100 points in the DJIA. However, for larger moves, this analysis is often helpful.

    According to the 50% Principle, if the Dow, after all its fluctuations, can settle and hold above the halfway level, there’s a good chance that this end of the see-saw will rise, allowing the index to test its prior high. But if the index, after all its fluctuations can’t settle above 10,759, then the odds are that this end of the see-saw will sink, taking the Dow down to test or even break below its March 7 low. In this event, I believe the second and longest phase of the bear market would be triggered.”

    so taking a new bull as a fact seems a bit risky to me.

  10. 10 Babak

    Ned Davis Research defines (cyclical) bull/bear market as meeting one (or more) of the following criteria:

    1] at least a 30% rise/fall in the Dow in 50 calendar days
    2] at least a 13% rise/fall in the Dow in 155 calendar days
    3] at least a 30% reversal in the Value Line Geometric index

    Ned Davis is saying that this is a cyclical bull market within a secular bear market and that the rally still has a ways to go. They are not saying that this is a new secular bull market. Hope that clears it up.

  11. 11 Steven Jon Kaplan

    The recent extremes noted above are clearly signs of a major top, just as similar but opposite extremes proved the bottom less than a year ago. We have either already begun, or will soon begin, the worst bear market since the Great Depression which will exceed the 57.7% decline in the S&P 500 from October 11, 2007 through March 6, 2009 (using intraday values, of course). –Steve

  12. 12 Monster Trader

    Do not fight the trend in either direction. How many bottom callers were railroaded in 2008? Top callers in 09?

    New Highs are a sign of strength, but rather measuring the height of all the trees in the forest it is better to look at if the trees are healthy and room to move higher.

  13. 13 Babak

    Steven, the high/low breadth numbers are a bit tricky because as I noted before in another comment, they can indicate a short term top but within a very intense burst of momentum like now and in 2003, they can remain elevated for a long time.

  14. 14 Aristotle

    If I am not mistaken, NDR tracks operating companies so I don’t think any of the debt, etc instruments are included in the NH-NL calculation

  15. 15 Tom

    I think there is an error in the Conclusion depending on whether you label this a Bear Market correction like those in the early 1900’s or a new Bull Market.

    I am in the camp that maintains the present is more like events in the very early 1900’s or the 1930s after the 1929 crash. The reasons for this is that I was a bright and bushy tailed young man in my early 20’s when the 1973-74 Bear Market came along.

    This time period is nothing like that, in many ways beyond what younger people can comprehend. Then the tone of everything was different with nothing resembling the 1990s technological boom, which is equivalent to the early 1900s boom.

    The cause of the problems in the 1970s and now are completely different. Then there was the problem of the Oil embargo and Inflation the likes of which we have not had but will experience again. The problems of today are the result of irresponsible Government policies that have fosterd overconsumption and subsidized the cost of over building and overconsumption.

    Further the technicals just don’t match and the overconfidence and bullishness I see is nothing like the Gloom and Doom of the 1970s and never even came close to the sentiment of the 1973-74 Bear Market even at the lows in March of 09.


  16. 16 Harry K

    while doing a search for new-highs index I came across this article, which was published on January 20th, 2010 - right at the top for the recent swing. since then prices have been hammered and are looking to move even lower. so much for the 52 week high/lows!

  17. 17 Babak

    Harry, this indicator (percent of new highs) offers a long term view of the market. While you’re right that we may have put in a significant top we have yet to see the new highs drop to the levels that have previously preceded such tops. As well, even if we do see the new high percentage fall to such levels, historically the market takes its time in actually topping out. I’ll try to explain more next week.

    By the way, as an update, the Nasdaq High-Low chart which I showed above is at 80% now.

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