When I discuss the market’s breadth one of my go-to measures is the Advance-Decline Line. This tool simply looks at the number of stocks that are rising and falling and ideally we have more stocks that are going up than going down. So far, the A-D Line has continued to confirm the rise in stocks. Simple as that. But there is another tool that I like to watch and that breaks down the 500 stocks that make up the S&P 500 and examines where they are relative to their individual 52-week highs and lows. I looked at this indicator back in October of last in a post titled, We Haven’t Seen A Market Top Yet. And based on it’s current level while the S&P 500 is at (near) a new high, I began to dive deeper into the data.
We do not only want more stocks going up than going down when the U.S. market itself is rising but we want broad participation at new highs. Barry Ritholtz once shared some of the key signs Lowery’s Research looks for in a market top (note: I’m not calling for a market top in this post) in an article for Bloomberg. One of which is the number of stocks that are 20% or more below their 52-week high. Quoting Paul Desmond, chief strategist of Lowry’s:
When a major index such as the S&P 500 is making new highs but the number of SPX stocks making 52-week peaks begins declining, that divergence is a significant warning sign. Desmond notes that this can warn of an eventual top as much as a year ahead of time.Note: There is a print link embedded within this post, please visit this post to print it. Note: There is an email link embedded within this post, please visit this post to email it.
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This point is what I’d like to take a look at today. One of the charts I review daily is below and shows the S&P 500 ($SPX) and an indicator that measures the average position of the individual S&P 500 stocks in relation to their own 52-week high and low on a scale of 100-0 with 100 being all of the stocks are at their 52-week high and 0 if all the stocks were at a 52-week low As of May 26th, we are at 63, meaning we are closer to stocks being at their mid-point (a reading of 50) between their high and low than they to mirroring the index and being near at fresh all-time high. So what’s this mean? Next I’ll review past examples of this taking place.
Below is the S&P 500 (blue line) with red vertical lines marking past instances since 2002 when the S&P 500 was at a new 52-week high but the above mentioned indicator was at 70 or less. Since the start of the current bull market we have only seen this occur once, and that was in February of 2012. Before that we had quite a few days meet this criteria in 04-06. And yes, it also marked the market peak in 2007, but stay with me and don’t just assume we are seeing an end to the bull market. So let’s zoom in a bit on this next chart….
With this next chart we can get a better idea of the resulting price action after the above mentioned criteria has been met, as shown by the red lines during 2002-2007. Typically we have seen price decline but the majority of the examples have turned into what many would call “buyable dips.” You’ll notice that not every time did the market decline, nothing is perfect in measuring the ‘health’ of an up trend – October 2006 is a great example of where we saw very low relative readings while the market was at a fresh high but the S&P 500 continued even higher.