Saturday, January 28, 2006

Rising Markets and Stocks Making New Highs

If you've followed the Trading Psychology Weblog, you know I place great emphasis upon whether or not rising markets expand the number of stocks making fresh short-term highs (and vice versa). Rises in ES that do not expand new highs and declines that do not expand new lows are, in my testing, more likely to reverse than rises and falls that are accompanied by broad participation across market sectors.

Going back to January, 2003, I found 419 days in which the S&P 500 Index (SPY) was up on the day. Of these, 229 displayed an expansion in the number of NYSE, NASDAQ, and AMEX stocks making new 20 day highs. Three days later, SPY was up by an average of .20% (136 up, 93 down). When the rises in SPY were not accompanied by an expansion of 20 day highs, SPY over the next three days averaged a gain of only .02% (103 up, 87 down).

It will be interesting to study this relationship over different time frames, intraday as well as longer term. In general, it appears that upside moves are more likely to continue higher if they carry a majority of issues to fresh new highs. When this doesn't happen, it suggests that many stock sectors are not participating in the rise, setting up subnormal near term returns.