NYSE New Highs Contract While SPX Makes 50-day High

Also notable from Friday afternoon is the fact that new highs contracted substantially while the S&P made a 50-day high. The percentage of stocks hitting new 52 week high dropped from a little over 7% on Thursday to under 5% on Friday. I looked at other times the SPX made a 50-day high while the drop in new highs equaled 2% or more of the total issues.

(click image to enlarge)


What I found interesting and compelling about the above test was NOT the size of the average decline. In fact that was somewhat weak. It was the fact that 95% of instances closed below the trigger day close at some point in the next 5 days. This suggests that while the lagging new highs might not indicate an immediate selloff, the market has consistently struggled to move higher.

An Off-The-Charts Example

As an example of the kind of extremes I was referring to in my previous post, below is a chart of (NYSE New Highs - NYSE New Lows) / Total Issues. New Highs are in the top panel. News lows are in the 2nd panel. Total issues are in the 3rd and the net percentage is in the bottom panel. Over 50% net of issues hit new lows yesterday.



According to my data, the last time the reading was under -50% was 10/19 and 10/20/87. Prior to that was 5/21, 5/25 and 5/26/1970, which is about as far back as my data goes.

Edit: It was pointed out in the comments section that Dr. Steenbarger also noticed this. His data went back prior to 1970 and he found an additional instance.

Are Lagging New Highs Worrisome?

Even with the strong move to a new 30-day high on Friday new highs were unimpressive. In fact they were beneath new lows. I decided to examine the possible significance of this:



Results appear choppy and under perform a random sampling. The instances are quite small, and before jumping to conclusions it’s important to isolate the affect of the indicator. So below is the same test when news highs exceeded new lows:



These results are worse than the 1st case where lows exceeded highs. So while the market may pull back (which it frequently does after making 30-day highs), the blame shouldn’t be laid on the lagging number of new highs.

Net New Lows Testing and the Need to Normalize

One measure of breadth that reached an extreme on Friday was the number of NYSE stocks hitting new 52-week lows. Rather than just looking at 52-week lows, I typically like to look at the differential of highs and lows. As with many of the indicators I use, I believe it’s important to normalize the results when looking over long time periods. (Click here for a discussion on normalizing put/call ratios.) For this indicator the need to normalize springs from the fact that the total issues trading on the NYSE is significantly greater now than it was in the 1970’s and early 80's. Therefore I divide the raw result by the number of issues outstanding to get a percent figure. The total result on Friday was a net of 757 or just over 23% of the total issues traded on the NYSE. Here’s an example of two tests that demonstrates how results would vary greatly if you fail to adjust for the total issues trading:


Using 750 as your trigger level would give you 10 trades. Most of which are fairly recent. Now let’s use the percentage instead and see what the results look like:


18 trades instead of 10 and results are not as good as they appeared with the first test. Many more instances are found here when looking back to the 70's and 80's. By using raw numbers instead of normalizing them, you’d be missing out on almost half the pertinent data.

"Positive" Divergence of New Lows?

One statistical divergence I’ve seen some discussion of lately is the smaller number of new lows compared to the January bottom. Theory says that this is a positive breadth indication. Since less stocks are posting new lows, less stocks are in poor technical shape. Hence, although the price level of the observed index is near or below the previous swing low, the makeup of the market is improved. Supposedly this has bullish connotations looking forward.

Proponents of this kind of analysis can easily point to some instances where the divergence seemed to work beautifully. One nice looking example would be August 2004 bottom. The S&P 500 poked beneath the May lows but NYSE New Lows contracted. The market put in a nice rally after that.

I ran a test to see if a contraction of new lows on a swing lower for the S&P 500 was predictive of a rally. Basically I looked for the SPX to make a 100 day low while the highest number of new lows in the last 100 days was greater than the highest number of new lows in the last 10 days. The trade entry point for the study was above the prior days high and the exit was 20 days later. Going back to 1992 I found 10 instances. I’ve listed them below.






It appears to me this divergence worked well during bull markets (98, 99, 04, 06) and not well during the bear market of 2000 – 2002. Success would therefore seem to be attributable to factors other than the divergence.

October ’98 and October ’02 launched some very strong 1-month moves and it’s interesting that the divergence was in place at those times. Based on the magnitude of success of some of these rallies the divergence may therefore be notable. As a stand alone indicator I was unable to find predictive value using my fairly simple test.

Is Leadership Breadth Important For A Successful Bottom?

One reason cited by IBD recently for their lack of confidence in the current bottom attempt is the lack of stocks with sound basing formations. While doing a historical study of the number of basing formations seems near impossible to me, one reader suggested looking at new highs. I thought this was a good idea since it should give a reasonable estimate of leadership breadth.

I looked at every Follow Through Day (FTD) identified in Part 1 of the IBD Follow Through Day Study and calculated the percent of New York Stock Exchange stocks that hit new 52 week highs on the day of the FTD. I broke the results down into “Successful” and “Unsuccessful” FTD’s.

This is what I found:

The average percentage of NYSE stocks making new highs on “successful” FTD’s – 2.1%
The average percentage of NYSE stocks making new highs on “unsuccessful” FTD’s – 2.0%

The median percentage of NYSE stocks making new highs on “successful” FTD’s – 1.2%
The median percentage of NYSE stocks making new highs on “unsuccessful” FTD’s – 1.4%

The minimum percentage of NYSE stocks making new highs on “successful” FTD’s – 0.1%
The minimum percentage of NYSE stocks making new highs on “unsuccessful” FTD’s – 0.1%

It appears that leadership breadth has no predictive value when assessing the likelihood that a FTD will succeed or fail.

On January 31st there were 18 new highs out of 3272 issues traded on the NYSE according to my database. This equates to 0.55% and has hereby been deemed a useless fact.

I found the results somewhat surprising as I thought leadership breadth would provide at least some advantage.

I still feel leadership is important to sustain a rally. It appears many times the real bull leaders may not emerge immediately. While the FTD typically comes 4-10 days after the bottom, leadership may take 3 weeks or more to establish itself.

So will this rally attempt succeed? I don’t know. I do know if it fails it won’t be because leadership breadth was too weak.

After all this recent testing of "conventional market wisdom" I’m starting to feel like Adam and Jamie from the Discovery Channel. Myth: Leadership Breadth Is Important At Market Bottoms – BUSTED! Think I could land my own tv show?