Friday, April 23, 2010

New Highs and Lows in the Stock Market: What They're Telling Us

Here we can see the steady march higher of the S&P 500 Index (SPY; blue line) during the bull market, plotted against the number of stocks across the NYSE, ASE, and NASDAQ that have made 65-day new highs minus new lows. What we see is that dips in the 65-day highs minus lows have occurred at successively higher price points, a hallmark of a bull market. We also see that the 65-day highs minus lows have stayed persistently above zero since the important February bottom.

In evaluating market cycles, we generally want to look for momentum peaks--points at which the largest number of stocks make their new highs--and lows. As Terry Laundry has stressed, there is a proportionality between the time it takes markets to make momentum highs and cycle lows and the time it takes a subsequent bull cycle to make a fresh peak. With the momentum high in early September and the cycle low in early February, that formulation suggests that this bull phase could last into the summer.

Interestingly, that is consistent with today's market analysis by SentimenTrader, who investigated historical periods of persistent upside momentum and found that those rarely turn tail quickly. That view also meshes with the analysis of Market Tells, which finds intermediate-term bullish action tends to follow strength in their version of the S&P Oscillator.

All that is not to say that we won't have our share of short-term market pullbacks between now and then. It does suggest, however, that automatically assuming that an overbought market will reverse in the near term can be hazardous to your wealth. As long as more stocks are making 20- and 65-day highs than lows and the advance-decline line is making fresh bull highs, those pullbacks will tend to provide opportunity for investors to buy into a strengthening economy that continues to enjoy low interest rates and little inflation.