New Highs and Lows in the Stock Market and What They Tell Us

If you've followed the blog for a while, you know that tracking the number of stocks across all exchanges making fresh one- and three-month new highs versus lows is one of my favorite measures of broad stock market breadth.  Above we see the three-month new highs vs. lows (raw data from Barchart) going back to the start of 2014.  We can see that breadth improved recently, as small and mid-cap stocks outperformed large caps.  Even with that improvement, however, we still see fewer stocks registering new high vs. low strength relative to the end of 2014.  Contributing to recent weakness has been not just large caps, but also commodity-related shares.  I continue to view this as a rotational, range environment and most likely part of a broad topping pattern that will eventually lead to a meaningful correction.

Going back to 2012, the new high/low data have mattered.  If we just look at one-month new highs and divide the data with a median split, we see that when new highs have been high, the next five days in SPY have averaged a gain of +.11%.  When new highs have been low, the next five days in SPY have averaged a gain of +.55%.  It's yet another great example of how markets that look the best yield the worst returns on average.  The results are similar if we look at three-month new highs.  When those have been high, the next five days in SPY have averaged a gain of only +.01%.  When they have been low, the next five days in SPY have averaged a gain of +.64%.

Overall, chasing new highs and stopping out of long positions on expansions of new lows has brought subnormal returns.  We have had a trending environment since 2012, but not a momentum environment.  Understanding that distinction has been crucial to stock market returns.

Further Reading:  VIX and Stock Market Returns
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