According to one widely followed gauge, the U.S. stock market is now staging its most powerful rally in months. But that doesn’t mean the bear market is over.
This gauge is based on the relative number of new 52-week highs in the stock market and new 52-week lows. In each of the first five trading sessions of January there were more highs than lows. There was only one day in 2022 in which the same could be said, in August. Prior to that, you have to go back to November 2021 — 15 months ago — to find a sustained period of more highs than lows.
To determine the significance of the new highs vs. new lows indicator, I analyzed daily data over the past four decades — which is how far back I could obtain new-high and new-low data. I focused on each exchange separately — NYSE, AMEX and NASDAQ — as well as entire market totals. I focused on unbroken streaks of net new highs over periods as short as one week and as long as a month.
I came up empty no matter how I sliced and diced the data. Sometimes unbroken streaks of more new highs than lows indicated that the rally had much further to run, and at other times it meant the market had gotten ahead of itself.
In fact my analysis came up less than empty: I found that, on average, the stock market loses ground over the weeks and months after long unbroken streaks of net new highs.
Take what happened last August, which was the last time before now when there were more new highs than lows for five consecutive trading sessions. It came on the exact day of the top of the market’s rally off its June lows; the S&P 500
today is 9% lower.
Or take what happened in November 2021, the last time the unbroken streak of more new highs than lows extended more than just five trading sessions. It was in that month that benchmarks such as the Russell 2000
and Nasdaq Composite
hit their all-time bull market highs.
Fortunately for the U.S. stock market, the inverse correlation between the stock market and this new-highs-versus-new-lows indicator is not significant at the 95% confidence level that statisticians often use when deciding whether a pattern is genuine or not. So it would be going too far to conclude that this indicator is downright bearish for the stock market’s near-term outlook.
Still, even the suggestion that the indicator might be more bad news than good provides a powerful reality check on the bulls’ enthusiasm. If they want to argue that the bear market is over and we’re in a new bull market, they will have to rely on some other data besides the greater number of recent new highs than new lows.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com
More: Morgan Stanley’s Mike Wilson warns U.S. stocks could slump another 22% if recession arrives in 2023
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