Where Are All The New Lows?

Posted At 9:00 AM EST

Good morning...We begin the day with some buying interest in the pre-market futures, as some early morning follow-through from yesterday afternoon was bolstered by better-than-expected economic data. 

Even during the worst of yesterday's decline, we weren't seeing a big expansion in the number of stocks hitting fresh 52-week lows, and by the close the number barely inched higher.

Like other breadth figures, the number of new lows varies widely depending on what vendor you use.  The Wall Street Journal shows only 8 stocks hitting a new low yesterday, Yahoo! Finance shows 54, Reuters shows 13 and eSignal shows 23.

We use Reuters for historical data after 1985.  Incredibly, there has only been one other day since 1965 (besides yesterday) when the number of new lows numbered less than 15 on a day when the S&P 500 slumped to at least a two-month low.  That day was May 18th, 1988 - a pretty good time to be looking long, as the S&P turned around and rallied about 8% over the next month.

Using an absolute number of new lows is a bit spurious given the changing number of stocks traded on the exchange over the years, so if we normalize the figure by expressing it as a percentage of total stocks traded, then we can more accurately compare current readings to historical ones.

In that case, the current level of new lows is only 0.4% of all stocks traded on the NYSE.

Due to the historic surge last fall, the current oscillations in new lows are really hard to see, so let's just zoom in on the past few months, and we can see that even with a push lower in the S&P, the percentage of stocks languishing at new lows is below where it was in mid-May.

While the extremely muted number of news lows is obviously a reflection of the exceptionally swift and steep rise off the March low (and the fact that bonds have held up well lately, propping up some of the interest-rate sensitive issues on the NYSE), I don't think that necessarily negates its meaning.

To help determine if there is any meaning to this, let's check for any precedents.

There has been only other time since 1965 that the S&P has closed at at least a two-month low and the number of stocks on the NYSE hitting a 52-week low was under 0.5%.  That was on March 11, 2004 (which marked a decent low for stocks).

One instance doesn't help us much, so let's expand our study and include any date where the percentage of stocks at a new low was 1% or below.

This is a little better, as we capture 11 unique occurrences.  Over the short-term of one to two weeks, the S&P actually did pretty well, especially lately.  Since 1981, the S&P showed positive returns every time but once, and that one exception was very minor.

After that, things became more dicey, with the S&P performing about in line with random.  Six months later, the returns were pretty good and consistently positive, but I'm not putting a whole lot of weight behind that.  The S&P was in a major bull market during most of the study period, so looking at six-month returns after a two-month low in the S&P is going to generate some good numbers, regardless of what the percentage of new lows was.

But for the shorter-term of a couple of weeks and under, this is an intriguing data point, and something I'm going to keep in mind especially if the S&P can quickly regain its breakdown level of 875ish in the coming days.

Bottom line - Intermediate-term Outlook: Neutral (since April 9, SPX 843)

Beginning in early March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration.  Some of those studies were even more positive, and suggested not just a rally, but possibly a new bull market.

During mid-April, the market held up extremely well in spite of some overbought types of indications.  This is very rare during an ongoing bear market, and is important to keep in mind especially given many of the "this time is different" kinds of studies we reiterated in early May.

While there were - and continue to be - many reasons to consider this rally something different than we'd seen previously in the bear market, I was looking for the S&P to run into trouble if it traded into 940-950, which happened early in June.  I wasn't expecting any kind of waterfall decline to new lows, just more of a pullback than we'd seen.

With the most recent surge in the spread between the Dumb Money and Smart Money Confidence, and the tendency for initial breakouts from volatility coils to be "false", I was looking for the first breakout above 950 to be beaten back.  Now that that's happened and we're nearing the opposite end of the May - June range, we need to see how the market responds to short-term oversold conditions, especially now that we've seen a "failed" rally above the 200-day average.

Not only that, but this week the S&P 500 triggered the Head & Shoulders pattern that we discussed on Monday.  When this pattern has been activated in individual stocks, much more often than not the stock went down to hit the target area.  For the S&P, that target would be around 840-850 or so depending on how you draw the trendlines.  I don't want to get too hung up on the idea that that level has to be hit, but the success of this pattern on individual stocks has been intriguing.

Adding to the questionable nature of the uptrend, the market was not able to rally well off of short-term oversold conditions hit Monday afternoon.  We did bounce a bit off those oversold conditions and technical support, but rolled right back over again.  Now we're kind of in the same place as Monday - oversold and near support.  If we fail to see a meaningful bounce here, and instead continue to slice through 875-880, then that will be another consistent indication that the larger trend has changed and 850ish should be a minimum downside target.

Bottom line - Short-term Outlook:  Neutral (since June 30, SPX 919)

Yesterday we touched on the stretched nature of a few of our short-term composites, like the STEM.MR Model and Short-term Indicator Score.  It's very rare to not see a bounce of 1 to 3 sessions after those kinds of extremes, so I was looking either for an immediate bounce, or a "false" breakdown.

The latter scenario is where we slice below an obvious technical support level, wash out resting stop orders just underneath, then rally back above.  We got some hint of that yesterday, we the S&P dipped under support then rallied into the close, nearly unchanged on the day.

The afternoon rally wasn't enough to move our short-term composites out of oversold territory, so there is still some support here for a short-term bounce.  That's especially the case should the S&P manage to hold 875ish.  That's doubly the case given today's indicated gap up opening, right near yesterday's high.  If we see a higher intraday high after the first hour of trading, particularly if it's above yesterday's high, then I'll be looking for even higher prices into the close.

All the best,