Wednesday, May 14, 2008

Gauging Market Strength After a Move to New Highs


Whenever a market makes new price highs or lows over a period of time, I like to examine whether the number of individual stocks making fresh new highs or lows has expanded. This tells me whether the move has been broad-based or simply dominated by a limited number of sectors. Interestingly in the recent market, we've seen considerable sector rotation, with new highs lagging as the stock indexes moved higher. Most recently, however, as noted in my Twitter comment, we've seen leadership from the small caps as well as NASDAQ stocks, suggesting a broadening of the rally.

Today we hit fresh price highs in the NASDAQ and Russell 2000 indexes, as those markets have moved nicely off their March lows. As the above chart of the NYSE Composite Index indicates, we came close to price highs in the broad market before backing off in the afternoon. The helpful chart from Decision Point shows, however, that new 52-week highs among NYSE common stocks expanded, reaching a fresh post-March high.

I then examined new highs specific to the S&P 500 large cap stocks and the S&P 600 small caps. These also expanded to post bear-move highs: we had 38 annual highs among the large caps and 2 new lows; 25 new highs and 7 new lows among the small caps.

On a shorter-term basis, we also saw strength in the market, with 968 NYSE, NASDAQ, and ASE issues making fresh 65-day highs and 195 registering new lows.

Yet another way that I assess market strength during a move to new highs is to gauge the number of stocks closing above their moving averages. On Wednesday, we saw 54% of S&P 500 stocks close above their 200-day moving averages, the highest reading of 2008. Similarly, we had 46% of S&P 600 small cap stocks closing above their 200-day averages, also the highest reading of the year.

Because the proportion of stocks closing above their moving averages tends to crest ahead of price peaks during bull moves, an expanding reading suggests that we should see higher prices ahead, even if there is some corrective action in the near term.

By looking at new highs/lows and percentage of issues above moving averages for multiple indexes, we can gain a multifaceted perspective on whether markets are gaining or losing strength. This is quite helpful in identifying trends that are more likely to continue, and those that are more likely to reverse.

RELEVANT POSTS:

When New Highs Get Higher

What Happens When New Lows Expand

Intraday New Highs and Lows
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3 comments:

Mark Wolfinger said...

I like your analysis. Detailed and covers a broad range of stocks and indicators.

I'm not well-positioned for an advance, so will be on the alert to adjust my positions. Thanks for the heads-up.

Tom said...

Why do I get this sense in the pit of my stomache that this rally off the March lows is "fake"?

Ramesh N. Patel said...

Tom's sense in the pit of his stomach makes a good point. Seems like market may enter at least a not insignificant roll back. If it does, we can take another look at what develops to find a sense as to whether it will continue further down.