Many investors know about the internals of the market. They are a data metric that many traders watch and read about but for some particular reason, it is not very often you see a chart where they are overlayed on their respective indexes. I think this is a real shame because they are able to convey a lot of information in a very intuitive manner.
On the chart below, I overlayed the NYSE New 52 Week Lows in green and the New 52 Week Highs in blue. Looking at the green dots, you will notice how the peaks match very well with important moves of the SPX. Most of the time the green and blue curves are fairly subdued, but each important bottom of the SPY is matched with corresponding numbers on the New 52 Week Lows. You can also notice the divergences between the blue and green clustered dots over time. The most notable divergence is occurring right now, with the market trailing up the past month, but the internals show more new sustained 52 week lows over 52 week highs, clearly showing a sickly internal bearish divergence.
A strong point of this indicator is the abrupt way the upward spikes in the New Lows end yet the moves toward the 52 week peaks are progressive. The spikes and drops stand very clear on the chart. The larger spikes in the 52 Week Lows correspond to short term bottoms.
This indicator is not normalized, meaning it doesn’t oscillate in a set range of values (+/-1, +/-100….). This has advantages and disadvantages. It doesn’t saturate like the stochastics, banging its nose against the ceiling; on the other hand, like the VIX you never know in advance how high it will go. But as an early indicator and a confirmation of temporary tops and bottoms, it can give some clues. Notice it will always be limited on the upside by the number of stocks listed on the exchange. It seems it will be a long time (maybe a year) before the 52 week highs will consistently overtake the 52 week lows on a sustained basis.
Dr. Steenbarger is an ardent promoter of analyzing the internals, and uses them in a compounded form: the difference between the highs and the lows. This gives similar results but since it is compounded, you lose some information too. I didn’t talk about the blue dots (highs) as much. It is clear that their performance is abysmal, and this gives confirmation and some clues on the health of the markets so far this year.
Compare 2008 to 2007. Here the blue (High) points dominate the picture. But you can also see an exhaustion moves and divergences: the blue clouds each time are less strong and shorter. Let’s look at the Mar-Aug rally. Started mid-April, the new highs of the SPX are not matched by corresponding increases in the new 52-week highs. Compare the blue peak in mid-July to the blue peak in mid-April, the level is diverging when the SPX is 80 higher. This divergence is a sign that the rally was on shaky ground. Fewer and fewer stocks are driving the market up. It's a recipe for disaster but also a good opportunity for day trading in selected stocks due to volatility. Same story in October-November.
As you can see when the blue dot line and cluster go under the green line, the move is sharp and the transition is very brutal. That is what we want from an indicator, confirmation and possible leading indicator due to the green/blue transition.
This graphic depiction of internal indicators can help you understand the Big Picture through confirmation and analysis. The charts I presented here show two completely different trading environments. In 2007, it was possible to go long for some length of time in the indexes. This year seems to be the year of the day trader or short term trader.
I hope this article will make you appreciate the Internals more and please look to my updated posts on this index graph as well as other market indexes and sectors which I plan to include in the future!!
Stock position: None.