Tuesday, November 20, 2007

Expanding Stock Market Weakness and a Look Ahead

As I mentioned in the Weblog, one of the things that concerned me about Friday's market action was the expansion of stocks making fresh 65 day lows. Of course, those expanded further with Monday's weakness. Across the major exchanges, we had 138 new 65 day highs against 1742 new lows. Going back to September, 2002, which is when I first began collecting the data on 65-day new highs and lows, we've had only 22 occasions in which those new lows have exceeded 1500. Forty days later, the S&P 500 Index (SPY) was up every single time, by an average of 5.33%. That is much stronger than the average 40-day gain of 1.83% (845 up, 398 down) for the remainder of the sample. The bear case is that this time is different, owing to dynamics of housing, credit, etc. If that's the case, we should see new lows expand from here and beyond the levels registered in August of this year. The bull case rests on a drying up of new lows and then an expansion of new highs going forward. I'll be tracking that measure closely.

All in all, we had 27 NYSE common stocks make annual new highs on Monday and 265 new lows. Interestingly, the new lows are below the level registered two weeks ago and below the 300 registered in August. Whether or not this divergence holds is, I believe, important to the bull case. We're also seeing 24% of S&P 500 stocks trading above their 50-day moving averages, another divergence with respect to earlier this month and with August. One divergence that hasn't held is the Advance/Decline Line for the NYSE common stocks: it is now below its August level. The line for SPX stocks remains above its August reading. There's no question that small caps have been underperforming large caps across both the NYSE and NASDAQ. How they behave from here will play a major role in determining whether or not those new lows expand further or live up to their 2002 - present performance.


When New Lows Expand

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gaius marius said...

dr steenbarger, i've found your examination of monthly and quarterly new lows to be really useful -- thank you.

a question: have you examined the drawdowns associated with these new low explosions? that is, do they normally signal the onset of a possible buying opportunity, or the opportunity itself?

Always Fair and Objective said...

Your blog is one of the few I read because it gives me a good swath of across-the-board information. Initially I found it while perusing Instant Bull and have been a frequent visitor ever since. I am also trying to do a similar blog - some ideas, some technical education, and some general information - and would appreciate a mention on your blog in hopes of getting more followers/readers. Please check it out first when you get a chance and let me know what you think as well as how I may be able to improve it.
Thanks, http://technicalinsights.blogspot.com

Brett Steenbarger, Ph.D. said...

Hi Gaius Marius,

Very, very good point; examining those drawdowns is key to assessing risk-reward balance. Whenever buying weakness, there tends to be volatility and possibility of drawdown on the way to gains, which is why I like to scale into positions.


Brett Steenbarger, Ph.D. said...

Hi Always Fair,

I appreciate the note and your blog URL. I encourage readers to check out the blog and offer feedback. Thanks--


Always Fair and Objective said...

Thanks for the mention and keep up the good work...I just added your blog as a link on my blog for others interested in your analyses.