Monday, October 06, 2008

A Look At Broad Weakness In The Stock Market

A quick scan of data suggests that slightly over half of all NYSE-listed stocks made fresh 52-week lows on Monday, continuing the expansion of weakness described in the recent indicator update. Such broad weakness is not common. Indeed, since 1965, I could only find six trading days (out of nearly 11,000) in which more than 50% of all NYSE stocks made new annual lows. These days were:

* May 21, 25, and 26, 1970
* October 19, 20, 1987
* August 29, 1966

The S&P 500 Index ($SPX) was higher one year later after each of those occasions, rising over the next 250 days by an average of 32%. The clustering of the above occasions, however, suggests that--in the short run--very weak markets can get even weaker before reversing.

Broadening out the search, we've had 41 occasions since 1965 in which 30% or more of NYSE issues made fresh 52-week lows. After 250 days, the S&P 500 Index was higher 34 times and lower 7, for an average gain of 18.7%. Interestingly, the losing occasions occurred in June/July, 1969; and March, May, and December, 1973. Each of these occurred roughly one year after important bull market highs on the way to important bear lows in 1970 and 1974. A careful look at each of these occasions suggests that the vigor of the rally following the very weak market days has tended to separate the longer-term buying opportunities from bounces that ultimately produced significant new price lows. When markets have been historically weak and even then cannot generate sustained buying from value-oriented participants, they have gotten much weaker over the next year.