Saturday, December 22, 2007

Returns Following Surges in Short-Term New Highs

Above we can see a chart tracking the S&P 500 Index (SPY) versus the net number of stocks in my basket that make closing five-day highs minus lows. With Friday's strong up move, we saw a surge in short-term new highs among the issues in the 40-stock basket. (See this post for a listing of the stocks included in the basket).

Going back to 2004 (N = 981 trading days), I found 47 occasions in which the net number of five-day new highs minus lows within the basket was 25 or greater. Five days later, the average change in SPY was -.05% (23 up, 24 down). That is notably weaker than the five-day average change of .15% (532 up, 402 down) for the remainder of the sample.

Interestingly, however, when we look 20 days out, we get a different picture. After a surge in five-day new highs, SPY averages a gain of .81% (31 up, 16 down), which is actually stronger than the average 20-day gain for the remainder of the sample (.56%; 595 up, 339 down). It thus appears that, after a surge in new highs, we've tended to see some consolidation of those gains in the near term, which has led to underperformance over the next five trading sessions. This consolidation has, however, been a buying opportunity on average over the next three weeks as the burst of strength has been followed by further strength.

In my next post, we'll look at short-term bursts of new lows and what they have brought in terms of five and twenty-day returns.


Using Intraday New Highs/Lows to Anticipate Market Turns