Monday, November 19, 2007

Explosions of New 52-Week Lows

In August of this year, we had a situation in which over a third of all NYSE issues traded during the week made 52-week lows. Two weeks ago, we saw nearly a quarter of all NYSE issues make fresh annual price lows. With Monday's weakness, we've started a new week on a footing that just might give us more than 25% of issues making new 52-week lows.

It turns out that explosions of new lows of this type have had favorable returns going forward. If we go back to 1981 (N = 1382 trading weeks), we find only 16 occasions in which more than 25% of traded stocks in a week made 52-week lows. Twenty weeks later, the Dow Jones Industrial Average ($DJI) was up by an average of 7.58% (13 up, 3 down), stronger than the average 20-week change for the remainder of the sample (4.28%; 954 up, 392 down).

It's not unknown for us to see clusters of explosions of 52-week lows. This occurred in September and October of 1981; August, September, and October, 1990; August, September, and October, 1998; and July and October, 2002. If you check your market history, these were not bad occasions to be buying stocks for a multi-year period.

RELEVANT POSTS:

When New Lows Swell

Falling Markets and New Lows
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3 comments:

Anatrader said...

Brett

Your post touching explosive lows reminds me of what you said in October:

When there is broad participation to the upside during market rises, there is usually room for further upside. When there is not broad participation to the downside during market declines, there tends to be reversal of the weakness. These are relationships that may well hold over other time frames as well.
Unquote

This is a valuable Left Brain insight which can be incorporated into our Right Brain analysis to give us the best decision before taking a trade.

Which by the way, this process of Right Brain and Left Brain analysis is being covered at :

www.tradingsuccess.com/blog/

Bear said...

Dr. Brett,

Great post, especially as it covered many bull & bear markets. I did go back and check to see if I could learn more.

Sept/Oct 1981 - was the mid-point of a bear market that ended in Aug 1982.

Aug/Sept/Oct 1990 - was a deep correction prior to an up leg to Feb 1994.

Aug/Sept/Oct 1998 - was also a correction prior to the final bull mkt up leg lasting to Mar 2000.

July & Oct 2002 - were key lows building the bottom of the 2000-2003 bear mkt. As we all know, there was another important low in Mar 2003.

Given this record it could be an important week, but obviously one deserving respect.

Bear

Brett Steenbarger, Ph.D. said...

Hi Bear,

Excellent point: New lows do point to zones of opportunity, but don't necessarily pinpoint specific price lows.

Brett