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NYSE High Low Logic Risk-Off Model

Dean Christians
2021-04-08
Let's review the NYSE High Low Logic Index Risk-Off Model.

The High Low Logic Index, created by Norman Fosback, is a classic market breadth indicator that seeks to identify a market environment when a high number of issues are simultaneously making new 52-week highs and lows. An elevated level of new highs and lows implies that market participation is inconsistent or out of gear. For a more detailed explanation of the High Low Logic concept, please see Jay's note from 3/4/21. The version of the High Low Logic Index that I use has the following modifications. I use a 40-day exponential moving average versus the original Fosback 50-day exponential moving average, and I added a spike in new lows as the final sell trigger. In my note today, I plan to review the version of the High Low Logic Index that I use as a component in the TCTM Risk Warning Model. 

Components

1.) Percentage of NYSE 52-Week Highs

2.) Percentage of NYSE 52-Week Lows

NYSE High Low Logic Index Risk-Off Model

The NYSE High Low Logic Index Model seeks to identify instances in history when the Index exceeds a user-defined threshold, and new lows start to expand. The model will issue an alert based upon the following conditions.

Signal Criteria

Condition1 = High Low Logic Index >= 1.8%.

Condition2 = Percentage of NYSE Lows >=3.5%.

Condition3 = S&P 500 Index <= 3.75% from 252-Day High

Condition4 = High Low Logic Index resets below 1.5%. i.e., the reset screens out duplicate signals.

If Condition 1-4, signal risk-off.

Let's take a look at some charts and the historical signal performance.

Current Day Chart

Please note, I calculate performance statistics in the chart as a short signal, whereas annualized returns result from buying the S&P 500.

 

2015-16 Oil/Commodity 

1998-2000 LTCM & Internet Bubble 


1990 Savings & Loan/Iraq Oil Spike


1980 Correction


1968-70 Bear Market


1966 Bear Market


1962 Bear Market


1957-58 Bear Market

1929-32 Bear Market

Signal Performance

As one can see, performance is weak across all timeframes with several notable z-scores.


Historical TCTM Risk Warning Model Table

The following table provides a historical signal perspective for components within the TCTM Risk Warning Model. A "yes" in a model column indicates that a signal triggered either before or after a significant correction or bear market peak. 


Conclusion: While the NYSE High Low Logic Index recently drifted higher, it remained well below the warning level of 1.8%. With NYSE issues trading significantly above a rolling 52-week low, it's hard to foresee the potential for a new signal in the near term.  

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Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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