Gauging Market Strength After a Move to New Highs

Whenever a market makes new price highs or lows over a period of time, I like to examine whether the number of individual stocks making fresh new highs or lows has expanded. This tells me whether the move has been broad-based or simply dominated by a limited number of sectors. Interestingly in the recent market, we've seen considerable sector rotation, with new highs lagging as the stock indexes moved higher. Most recently, however, as noted in my Twitter comment, we've seen leadership from the small caps as well as NASDAQ stocks, suggesting a broadening of the rally.

Yesterday we hit fresh price highs in the NASDAQ and Russell 2000 indexes, as those markets have moved nicely off their March lows. As the above chart of the NYSE Composite Index indicates, we came close to price highs in the broad market before backing off in the afternoon. The helpful chart from Decision Point shows, however, that new 52-week highs among NYSE common stocks expanded, reaching a fresh post-March high.

I then examined new highs specific to the S&P 500 large cap stocks and the S&P 600 small caps. These also expanded to post bear-move highs: we had 38 annual highs among the large caps and 2 new lows; 25 new highs and 7 new lows among the small caps.

On a shorter-term basis, we also saw strength in the market, with 968 NYSE, NASDAQ, and ASE issues making fresh 65-day highs and 195 registering new lows.

Yet another way that I assess market strength during a move to new highs is to gauge the number of stocks closing above their moving averages. On Wednesday, we saw 54% of S&P 500 stocks close above their 200-day moving averages, the highest reading of 2008. Similarly, we had 46% of S&P 600 small cap stocks closing above their 200-day averages, also the highest reading of the year.

Because the proportion of stocks closing above their moving averages tends to crest ahead of price peaks during bull moves, an expanding reading suggests that we should see higher prices ahead, even if there is some corrective action in the near term.

By looking at new highs/lows and percentage of issues above moving averages for multiple indexes, we can gain a multifaceted perspective on whether markets are gaining or losing strength. This is quite helpful in identifying trends that are more likely to continue, and those that are more likely to reverse.

Comments

[Paul D.Castro, CFA]

Right on, Dr. Brett! This is what it's like to be in the early innings of a new bull market. I prefer looking at whether or not we are on a series of higher intermediate highs and higher intermediate lows to determine trend. In all 4 major indexes (DJIA, Nasdaq, S&P and Russell 2000) we have within the last few weeks made the first higher intermediate high since last summer or fall (depending on the index). Nice to see other indicators confirm what I already know.

[BrucePile]

Two key groups that led the market downturn, the retail index and the transports, seem to want to lead in a break of the downturn. And it's those two groups that are the sum of all fears in this market - consumer spending and oil.

Speaking of fear, if you look at a VIX chart comparison between the '00-'03 bear market and now, you see a near clone of the movements of the VIX. I did a diagram posted at theoildrum.com/node/39... (scroll down a couple comments to the one by "netfind" in the May 14 Drumbeat). This diagram shows the market to be in limbo between bear and bull right now as far as the fear/complacency issues go that the VIX tabulates. Bear selloffs take the VIX to over 30 while bear rallies take it to a pivot range at around 16-18, where it either goes back to another bear crunch or does a quiet drift into the below 18 range that stable bull markets like to climb in. We are in that dangerous 16-18 pivot area right now. The VIX is looking like it wants to march strongly right through that pivot area and shows no signs of stalling. But that could turn quickly. Stay tuned.

[Alpha Seeker]

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