Sunday, January 29, 2006

Falling Markets and Stocks Making New Lows

This poster graces my office, thanks to

Yesterday's entry found that there was greater follow through to the upside when rises in SPY were accompanied by an expansion in the number of stocks making fresh 20-day highs. Today we look at days in which SPY declines to see if the number of new lows makes a difference.

Since January, 2003, we have had 334 declining days in SPY. When those declines have been accompanied by an increase in the number of stocks registering fresh 20-day lows (N = 249), the average gain in SPY over the next two days has been .08% (133 up, 116 down). When declines in SPY have not been accompanied by an expansion in new lows (N = 85), the next two days in SPY have averaged a gain of .25% (48 up, 37 down).

When there is broad participation to the upside during market rises, there is usually room for further upside. When there is not broad participation to the downside during market declines, there tends to be reversal of the weakness. These are relationships that may well hold over other time frames as well.