New Lows Surge to Historically Extreme Levels, Plus Implications of Today’s Negative Nasdaq Breadth

Over 700 issues hit new 52-week lows during Wednesday’s session, nullifying
the potential positive divergence between new lows and the S&P. But it’s
equally noteworthy that Wednesday represented the second time in the past week
that the number of new 52-week lows has exceeded 500. This absolute level has
historically represented an extreme reading, as illustrated on this long-term
chart of new lows. Readings this high are usually a sign that a final washout
is taking place prior to an intermediate bottom being formed. Since 1975,
there have been a total of 23 days in which over 500 stocks initially hit new
52-week lows on the NYSE. Each of these occurrences is noted in the table
below along with the S&P’s performance three weeks later…

500+ New 52-week lows on the NYSE
01/09/08 709 New Lows… S&P ??? three weeks later
01/04/08 539 New Lows… S&P ??? three weeks later
11/19/07 565 New Lows… S&P +3.1% three weeks later
11/08/07 505 New Lows… S&P +0.4% three weeks later
08/15/07 717 New Lows… S&P +5.1% three weeks later
08/06/07 688 New Lows… S&P -0.1% three weeks later
08/01/07 522 New Lows… S&P -0.1% three weeks later
07/26/07 828 New Lows… S&P -4.8% three weeks later
05/07/04 706 New Lows… S&P +2.0% three weeks later
10/09/02 604 New Lows… S&P +14.7% three weeks later
07/22/02 513 New Lows… S&P +10.2% three weeks later
09/19/01 539 New Lows… S&P +6.4% three weeks later
09/17/01 536 New Lows… S&P +2.3% three weeks later
12/14/99 565 New Lows… S&P -0.1% three weeks later
10/15/99 500 New Lows… S&P +9.9% three weeks later
10/07/98 535 New Lows… S&P +10.0% three weeks later
09/10/98 515 New Lows… S&P +0.6% three weeks later
08/26/98 575 New Lows… S&P -6.0% three weeks later
08/04/98 541 New Lows… S&P +1.9% three weeks later
04/04/94 637 New Lows… S&P +3.1% three weeks later
08/23/90 711 New Lows… S&P +3.2% three weeks later
10/19/87 1068 New Lows… S&P +8.1% three weeks later
09/28/81 590 New Lows… S&P +3.0% three weeks later
03/27/80 714 New Lows… S&P +2.4% three weeks later
10/30/78 583 New Lows… S&P +0.2% three weeks later

Note that in only three cases was the S&P down more than 0.5% three weeks
later, which could explain why institutional investors have seemed so
reluctant to sell recently. We saw heavy institutional selling prior to the
holiday break, but over the past week we’ve actually seen better buying.
TICKscore closed at +9 Wednesday and remains in a pattern of higher highs, as
does the cumulative Adjusted TICK.

Another factor that could be limiting institutional selling is the increased
chance of an aggressive move by the Federal Reserve at or before the January
30th FOMC meeting. Fed funds futures are now pricing in 75% odds of a 1/2
point cut at the late-January FOMC meeting.

VXO closed down 3% at 25.76, enough to send the volatility index less than 10%
below its 10-day moving average. That closes out the short-term buy setup that
went into effect at last Friday’s close (see Sunday’s column). Additionally,
today’s 2% rally for the Nasdaq100 lifted the 5-day RSI out of technically
oversold territory, fulfilling the short-term buy setup discussed Tuesday.
With virtually nothing left on the board, there’s little to lean on short-
term.

One negative development was the fact that NASDAQ breadth didn’t manage to
close in positive territory Wednesday despite the solid 2% gain for the NDX.
Advance/decline statistics are particularly important to monitor when the
market stages a solid advance. If breadth doesn’t back up the rally, chances
are it’s on shaky ground. When the Nasdaq100 (NDX) closes up 1.5% or more and
breadth on the Nasdaq exchange is negative (meaning declining issues outnumber
advancers), it’s usually breadth that’s the better tell. In recent years, this
setup has had a consistent tendency to lead to lower prices over the coming
week. Out of the last fifteen times that the Nasdaq has managed to close up
1.5% or more on negative breadth, the NDX has reversed course and closed at a
lower level one week later fourteen times. While the large number of new 52-
week lows puts on alert for an intermediate-term bottom, this suggests
conditions are likely to remain choppy heading into early next week…

Nasdaq100 +1.5% on a Negative Breadth Day
01/09/08… Nasdaq ??? one week later
08/06/07… Nasdaq -1.0% one week later
03/07/05… Nasdaq -1.9% one week later
07/22/04… Nasdaq -0.7% one week later
01/29/03… Nasdaq -4.7% one week later
07/15/02… Nasdaq -8.0% one week later
07/11/02… Nasdaq -0.3% one week later
07/03/02… Nasdaq +0.2% one week later
06/24/02… Nasdaq -5.6% one week later
06/12/02… Nasdaq -2.3% one week later
06/04/02… Nasdaq -6.6% one week later
04/01/02… Nasdaq -5.8% one week later
03/22/01… Nasdaq -8.2% one week later
03/05/01… Nasdaq -12.3% one week later
03/01/01… Nasdaq -1.5% one week later
02/14/01… Nasdaq -11.9% one week later

Categories : Archived EOD Commentary, End-of-Day Commentary

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