Saturday, October 20, 2007

Weekly New Highs and Lows: The Stock Market's Recent Dynamics

If you click on the above image, you'll see a weekly chart of the Russell 2000 ETF (IWM), with a set of numbers overlaid in blue type. The first number of the set is the number of NYSE stocks making 52-week highs during the week. The second number is the number of NYSE stocks making 52-week lows during the week.

I specifically chose the peak new high and new low periods during the recent market swings to emphasize the market's recent dynamics. Note that IWM has been in a trading range since late December, 2006. While the large cap indexes, such as the Dow and S&P 500 Index, made new highs during the recent upswing, IWM failed to surmount its prior highs. We've now pulled back into the middle of the longer-term trading range.

The weekly NYSE new high/low figures show that progressively fewer issues are participating in the market's upswings. Moreover, we've seen an expansion of new lows during the declines of 2007. That is what I'm focusing my attention upon at present. If we see fewer new lows as IWM tests the lower end of its trading range, I'll expect that range to hold. An expansion of new lows from the August extremes would be troublesome for the bulls indeed and would put a large proportion of shares in bear market mode.

Bear market? We're not there yet, in my estimation. A look at the charts for banking stocks ($BKX) and homebuilders ($HGX) shows clear bear markets in those sectors. Quite simply, we're making lower lows during 2007's declines. On the other hand, we have other sectors, such as energy (XLE) and technology (XLK), that are in clear uptrends, making fresh highs during 2007's rallies. One sector I'm watching particularly to see if we hold or break recent lows is the consumer discretionary issues (XLY). They may provide one of the best indications of whether housing-related weakness creates bear market conditions across the economy.

My gut tells me that large cap growth is too attractive to pass up with the dollar's decline and the current level of liquidity; that's helped sustain the NASDAQ 100 rise. For that reason, I expect the trading range to hold. But my gut's been wrong before. That's why I track the sectors and the new highs/lows every week and review major indicators in my Weblog. It helps to have objective data to support subjective perception.

RELATED POST:

Recent Market Themes
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6 comments:

West Coast Trader said...

Bret,

Nasty day on Friday indeed. You know, I have had some difficulty with objective assessments of what is happening linking to my actions in the market. I started blogging my thoughts and tradesas a means to catch myself. Friday I got stomped but my assessment while the market was moving was dead on. I posted on Friday afternoon my assessment of my actions that led to my demise in Friday trading. It may be too much to ask, but I would greatly appreciate your assessment of my thoughts if you get a chance. My assessment is located within the Friday "Market Assessment" post.

http://equifutures.blogspot.com/2007/10/market-summary.html

Many thanks in advance.

Jeff Pietsch CFA, Esq said...

Brett - Any credence to the so called "Hindenburg Omen" indicator, which also considers wild swings in new highs and lows? Good work as usual, Jeff

Anatrader said...

Brett

This being the 20th anniversary of Black Monday of October 19, 1987, apart from the Hindenberg Omen indicator, perhaps, you could delve more into whether history will repeat itself as there is talk of Socionomics leading to WWIII.

Brett Steenbarger, Ph.D. said...

Hi West Coast,

Wow. That is one powerful blog post; thanks for the link. Your ideas about limiting trades to established setups is right on the money. The impulse trade is a killer, and you're right: too often it's justified (lamely) as intuition.

Brett

Brett Steenbarger, Ph.D. said...

Hi Jeff,

There's a nice post from Jason at SentimenTrader on Hindenburg also noted in Adam Warner's blog (Daily Options Report). The logic of the signal makes sense, IMO.

Brett

Brett Steenbarger, Ph.D. said...

Hi Ana,

I've been hearing the WWIII talk for a while now. It's not clear to me that socionomics is predictive rather than descriptive, at least in its current iterations.

Brett