You know, when you've been in the business long enough, you become quite a skeptic. When it looks as though the world is going to hell in a handbasket (as in late February and early March) and put/call ratios are going through the roof, you start to wonder if things are really as bad as they seem. Similarly, when all the financial publications are mesmerized by round numbers and trumpeting Dow 13000 and S&P 1500, you begin to reflect if things are actually all that good.
To be sure, my money flow figures for the Dow, summarized daily on the Weblog, have been looking strong. Still, as the chart above notes, there's an unsettling piece of divergence in the new high/new low data that is worth keeping an eye on.
We're looking at the number of stocks in the broad market (NYSE, AMEX, NASDAQ) that are making fresh 20 day highs (pink line) and those making 20 day lows (yellow line). Normally, you'd expect new highs to rise when the S&P 500 Index (SPY; blue line) goes up and new lows to decline. This doesn't always happen, however. The S&P Index is a weighted index of blue chips. It can rise or fall to new price extremes without taking the broad market with it. It's during those periods of divergence that we frequently see reversals of trend.
Notice, for example, that new highs tailed off and new lows moved higher, even as SPY hit new highs in late February. New lows also dried up during mid March prior to the market rally.
Of late, we've seen continued price highs in SPY, but over the past two weeks the new highs have not participated and new lows have crept higher. For now, I'm considering that a yellow light. Should we start to see continued divergence in the new highs/lows accompanied by subnormal dollar volume flows into institutional favorites, I would be more inclined to look for a significant market correction.
In my next post, I'll take a sector by sector look at dollar volume flows and see what they're saying about the current market.