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Daily Report : New highs dominate a broad market

Jason Goepfert
2020-12-15
The net number of securities hitting 52-week highs is the most dominant in 4 years. That has pushed long-term momentum above a key level, even as shorter-term measures relax. This kind of setup has been very positive for long-term returns.
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New highs dominate a broad market: The net number of securities hitting 52-week highs is the most dominant in 4 years. That has pushed long-term momentum above a key level, even as shorter-term measures relax. This kind of setup has been very positive for long-term returns.

Bottom Line:

  • The market environment is pristine, but with near-historic optimism, gains tend to be muted, with a high probability of being reversed at some point over the ensuing weeks.
  • Market environment (More info)
    PositivesNegatives
    1. Price pattern1. % of Stocks in Correction
    2. Moving averages
    3. McClellan Summation

    4. % Stocks > 200-Day
    5. Net New Highs / Lows

  • Sentiment / Breadth / Other
    PositivesNegatives
    1. Big up volume (and again)1. Confidence at record high
    2. Surging small-caps2. Too much options speculation
    3. Surging tech stocks3. Equities high vs GDP, Assets
    4. Mar-May thrusts, recoveries4. IPO market too hot (and here)
    5. Excess liquidity is high
  • Other Sectors and Assets
    PositivesNegatives
    1. Energy (here, here, and here)1. Skewed tech (here and here)

    2. Dollar test

Smart / Dumb Money Confidence

Smart Money Confidence: 22% Dumb Money Confidence: 85%

Risk Levels

Stocks Short-Term

Stocks Medium-Term

Bonds

Crude Oil

Gold

Agriculture

Research

New highs dominate a broad market

BOTTOM LINE
The net number of securities hitting 52-week highs is the most dominant in 4 years. That has pushed long-term momentum above a key level, even as shorter-term measures relax. This kind of setup has been very positive for long-term returns.

FORECAST / TIMEFRAME
SPY -- Up, Long-Term

The biggest thing this rally has had going for it is broad participation. It's not slowing down much.

Over the past week, nearly 10% more securities trading on the NYSE and Nasdaq managed to tick at a 52-week high than fell to a 52-week low. That's the most in almost exactly 4 years.

If that sounds like a long time, it's because it is. This ends the 3rd-longest streak in almost 60 years with fewer than a net 9.5% of securities at new highs over a 5-day period.

Below, we can see how the S&P 500 performed after ending a streak of at least 2 years with fewer than 9.5% of issues at a new high across both exchanges. The returns were impressive, and eerily consistent, over the medium- to long-term.

Those impressive longer-term returns shouldn't be too surprising, since it meshes with similar types of studies we looked at this fall. One of the standout features of these signals has been the impressively positive risk/reward ratios.

The Nasdaq did even better.

If we relax the parameters to get a larger sample size, then it's still quite positive. The table below shows returns after a streak longer than one year finally ended (instead of two years).

It was for good the Nasdaq as well, with only a loss in 1974 marring its one-year forward returns.

Because new highs have become so dominant, and new lows are almost nonexistent, the HiLo Logic Index has plunged over the past 200 days and is nearing a record low. The indicator will drop when either 52-week highs or 52-week lows dominate the market, and in practice that usually means new highs.

Back in January, we were looking at the opposite scenario. At the time, HiLo Logic was very high, and that has consistently preceded trouble, which it did again.

When the indicator drops to a very low level following a market correction, which it did way back in August, it has usually meant long-term gains.

The kind of sustained momentum it takes to push so many securities to new highs is the same kind that has pushed the McClellan Summation Index above +1,000. At the same time, some short-term choppiness has been enough to push the shorter-term Oscillator below zero for the first time in a month.

The last time we saw that was during the recovery from the year-end 2018 correction. It proved to be only a temporary setback, which was more the rule than the exception.

We can see above that out of the 19 other times that this triggered since 1962, the S&P saw only 3 losses over the next 3 months, and 2 of those were less than -1%. Over the next year, all 19 showed a positive return, once again with an exceptionally positive risk/reward skew and a tremendously better probability of seeing a big rise than a big decline (see the Knowledge Base for more info on these terms).

There is really no way to perfectly square the conflict that's happening right now between high (even record-breaking) optimistic sentiment versus high (even record-breaking) momentum. There is almost always a conflict between them, which is why we spend a lot of time looking at the quality of participation and momentum - to see if it's the type that can consistently overrule sentiment extremes. 

The market has never really undergone a conflict as severe as the current one, which is a challenge. Those who are bearish, or under-invested, will prefer to look at the negatives from extreme sentiment. Those who aren't will prefer to comfort themselves with high momentum readings.

Objectively, the most likely scenario is limited, choppy upside at best, with a high probability of a 3%-8% minimum pullback over the next 1-2 months. Buying breakouts with leveraged positions in this kind of environment is highly risky. Shorting isn't much better, since momentum conditions like this can continue for weeks or months before it finally cracks. That leaves both sides with a poor setup.


Active Studies

Click here to view the Active Research on the site.
Time FrameBullishBearish
Short-Term01
Medium-Term58
Long-Term532

Indicators at Extremes

Click here to view on the site (% Extremes and "Excess" tabs on the dashboard).
% Showing Pessimism: 2%
Bullish for Stocks

NYSE Arms Index
S&P 500 Down Pressure
VIX
S&P 500 Price Oscillator
NYSE Up Volume Ratio
% Showing Optimism: 56%
Bearish for Stocks

Smart Money / Dumb Money Confidence Spread
Intermediate Term Optimism Index (Optix)
Smart Money Confidence
Short-term Optimism Index (Optix)
Dumb Money Confidence
% Showing Excess Optimism
% Showing Excess Pessimism
Fidelity Funds Breadth
NYSE High/Low Ratio
Rydex Bearish Flow
Rydex Ratio
Rydex Money Market %
Rydex Sector Breadth
SPY Liquidity Premium
Equity Put/Call Ratio
VIX Transform
Equity Put/Call Ratio De-Trended
Options Speculation Index
AIM (Advisor and Investor Model)
Equity Hedging Index
ROBO Put/Call Ratio
LOBO Put/Call Ratio
SKEW Index
Insider Buy/Sell Seasonally Adj
Risk Appetite Index
NAAIM Exposure Index
AAII Bull Ratio
AAII Allocation - Stocks
Retail Money Market Ratio
NYSE Available Cash
Mutual Fund Cash Level
Equity / Money Market Asset Ratio

Portfolio

PositionDescriptionWeight %Added / ReducedDate
Stocks10.4% VWO, 9.1% XLE, 8.5% RSP, 6.6% PSCE34.5Reduced 6.7%2020-12-14
Bonds10% BND, 10% SCHP, 10% ANGL28.4Reduced 0.1%2020-10-02
CommoditiesGCC2.4Reduced 2.1%
2020-09-04
Precious MetalsGDX8.9Added 4.8%2020-12-01
Special Situations0.0Reduced 5%2020-10-02
Cash25.8
Updates (Changes made today are underlined)

Quite a few of the studies that have been triggering for stocks have showed a poor risk/reward skew over a short- to medium-term time frame, even though many of them have also been quite positive over medium- to long-term time frames. We're in a very favorable seasonal window, so it would be somewhat odd to see a substantial pullback in the next few weeks. Leave it to 2020 to do just that, I suppose, but the calendar is a point in bulls' favor.

Even so, record-high-and-declining sentiment, coupled with early signs of a reversal were enough that I reduced my S&P 500 position a bit. I fully expect that the energy funds will suffer some losses in the coming weeks, but as I noted when buying them, they're intended as long-term positions and almost by definition they're going to be volatile.

RETURN YTD:  8.0%

2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%

Phase Table

Click here to view the Phase Table on the site.

Ranks

Click here to view on the site (Ranks tab on the Dashboard).

Sentiment Around The World

Click here to view on the site.

Optimism Index Thumbnails

Sector ETF's - 10-Day Moving Average
Country ETF's - 10-Day Moving Average
Bond ETF's - 10-Day Moving Average
Currency ETF's - 5-Day Moving Average
Commodity ETF's - 5-Day Moving Average

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