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Bears in the Midst of New 52 Week Highs: A Paradox?


There is a great deal of bearish sentiment out there, and flipping through the news channels and browsing news sites give us a clear reason to be.  Starting at least in mid December of last year, heads were talking about the markets looking for any excuse to sell.  I thought a new month (that also happens to be a historically weak month) in a new year after year end window dressing might be plenty of reason to pull back.  But alas the S&P closed up 2.26% for the month of January.  Bearish SentimentYou’d think that the protests in Egypt would be enough to cause a real sell off in the market.  I don’t care what the “real” deal is in Egypt and what the true economic impact will be.  Investors are largely driven by sentiment, and I am surprised that these constant streaming video clips of violence in Egypt are not producing a more immediate sell off in the markets.  Some might argue that it’s because the real impact on the economy yielded by the situation in Egypt will not be major.  I could agree with that, but I’m talking about a mere short lived sell off driven by investor fear.  It looked like we’d have one last Friday, but yesterday we experienced one of the most powerful rallies in years, printing new 52 week highs.  So all of this bearishness in context of the market making fresh 52 week highs- is it a paradox?

I looked back about 10 years to the start of Jan. 2000 to filter for days when the S&P futures made new 52 week highs.  Then I proceeded to observe the next 5d, 10d, and 20d change.  Below are the results of the model:

New 52 Week Highs

First, I will point out that fresh 52 week highs has happened 227 times since Jan. 2000, or 8% of the time.  Now to the results showing what tended to happen in the subsequent days.  The probability of the market continuing to move higher is only marginally above the 50% mark.  I don’t think these figures (56.5%, 62.2%, 63.4%) are high enough for me to express bullish sentiment, but they certainly are not bearish numbers.  The averages and medians also point somewhat to the upside.  The average changes for the three time periods are flattish while the medians help show the market slightly favor the upside.  (Median 5d change following a new 52 week high day is +11bps, median 10d change is +46bps, median 20d change is +80bps.)

I’m not going to lean too much on these stats as I like to use odds as only confirmation signs for a broader thesis of mine.  That’s the usefulness of the probability models for me- the probabilities will give me comfort; however, they will rarely (if ever) formulate my thesis.  The fact is the market does what it wants.  They say history repeats itself, but I say eff that!  No, but jokes aside, there are a million factors that go into the market action of each day.  You have to be aware of the overall market trend, economic conditions, global events, market sentiment.  Because my basic probability models cannot capture all of that, I can only use these numbers as another piece of color to help support a larger thesis.  If the market is truly looking for an excuse to sell off, then this Egypt debacle should have been enough to pull the trigger for the bears.  I have personally been waiting for a pull back since December.  I don’t expect our next pull back to be sudden, but based on the charts, pull backs following a new 52 week high does not happen in one or two days.  There is at least a few days of battle between the bears and the bulls, one which the bears slightly dominate), and then the real pull back move happens.  Until I see the market struggling at a level for a few days, I am not willing to jump over to the short side.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.