Slump in New 52-week Highs and Surge in Nasdaq/NYSE Volume Ratio Imply Limited Upside Potential

Major market averages settled with minor gains Wednesday, boosted by a decent
rally in tech stocks. On the big board, however, market internals were less
than stellar. Despite the S&P posting higher highs and higher lows, new 52-
week highs contracted sharply, from 113 to only 56. That's a surprisingly
steep drop and suggests most stocks didn't remain as well bid as the indices.
Looking back at times when the SPX posted a rally day (higher high, higher
low, higher close) and new 52-week highs were cut in half compared to the
previous day (when the previous day registered over 10 new highs), there's a
tendency for the market to trade flat-to-down over the next couple of
sessions...

SPX Rally Day, New 52-week Highs CUt in Half
04/23/08... S&P500 ??? two sessions later
01/24/08... S&P500 +0.1% two sessions later
03/04/04... S&P500 -0.7% two sessions later
07/03/00... S&P500 -0.9% two sessions later
10/09/98... S&P500 +1.1% two sessions later
01/02/98... S&P500 -0.9% two sessions later
01/07/88... S&P500 -5.2% two sessions later
04/21/87... S&P500 -2.1% two sessions later
01/16/87... S&P500 +1.0% two sessions later
01/04/82... S&P500 -2.9% two sessions later
09/28/81... S&P500 +0.6% two sessions later
07/09/80... S&P500 -0.1% two sessions later
01/06/75... S&P500 -1.5% two sessions later
08/25/70... S&P500 -0.1% two sessions later

Along similar lines, it's noteworthy that the number of new 52-week lows
overtook the number of new 52-week highs Wednesday despite the generally
higher prices. In the table below is every instance since 1970 in which the
S&P500 posted a rally day (higher high, higher low, higher close) and new 52-
week lows on the NYSE took the lead from new 52-week highs. (By that I mean
new lows exceeded new highs following a day in which new highs exceeded new
lows.) Again note the tendency for the market to trade flat-to-down over the
next few trading days...

SPX Rally Day, New Lows Take the Lead over New Highs
04/23/08... S&P500 ??? three sessions later
02/13/08... S&P500 -1.4% three sessions later
09/12/07... S&P500 +0.4% three sessions later
08/24/99... S&P500 -1.1% three sessions later
04/08/97... S&P500 -3.7% three sessions later
01/18/91... S&P500 -0.6% three sessions later
03/19/90... S&P500 -2.3% three sessions later
11/13/89... S&P500 +0.3% three sessions later
09/07/88... S&P500 +0.2% three sessions later
09/14/87... S&P500 -2.5% three sessions later
07/17/86... S&P500 +0.9% three sessions later (*)
09/23/85... S&P500 -1.6% three sessions later
02/01/78... S&P500 -0.5% three sessions later
12/09/77... S&P500 +0.4% three sessions later
01/06/75... S&P500 +0.1% three sessions later
07/26/73... S&P500 -1.5% three sessions later
08/09/72... S&P500 +1.5% three sessions later (*)

While there's a slight edge in favor of lower prices in the days following
this setup, the more noteworthy fact is the limited upside potential. In only
two cases out of sixteen occurrences did the S&P500 gain 0.5% or more over the
next three sessions.

Another development that bodes poorly for the market was Wednesday's sharp
pickup in speculative activity. The NASDAQ/NYSE Volume Ratio closed back over
the 1.50 level, indicating NASDAQ volume exceeded big board volume by over
50%. I've discussed previously the 20-day moving average of this ratio and the
bearish implications of a move over 1.50 (signaling lopsided speculative
activity). But this principle can also be applied on a shorter-term time
frame. The table below lists each of the last thirty instances in which the
daily Nasdaq/NYSE Volume Ratio exceeded 1.50, followed by the date when the
ratio closed back under 1.50 and the performance of the Nasdaq100 in this time
frame...

Daily Nasdaq/NYSE Volume Ratio Exceeds 1.50
04/23/08 - ??/??/??... Nasdaq100 ???
04/09/08 - 04/11/08... Nasdaq100 -1.5%
04/03/08 - 04/07/08... Nasdaq100 +0.3%
02/27/08 - 02/28/08... Nasdaq100 -0.3%
02/20/08 - 02/25/08... Nasdaq100 -0.1%
02/13/08 - 02/15/08... Nasdaq100 -2.4%
02/06/08 - 02/12/08... Nasdaq100 +2.3% (*)
02/01/08 - 02/05/08... Nasdaq100 -4.5%
01/16/08 - 01/17/08... Nasdaq100 -1.6%
01/14/08 - 01/15/08... Nasdaq100 -2.8%
01/04/08 - 01/07/08... Nasdaq100 -0.3%
12/07/07 - 12/11/07... Nasdaq100 -2.2%
12/04/07 - 12/06/07... Nasdaq100 +3.3% (*)
11/29/07 - 11/30/07... Nasdaq100 -0.6%
11/06/07 - 11/16/07... Nasdaq100 -7.9%
10/23/07 - 11/01/07... Nasdaq100 -0.3%
10/04/07 - 10/19/07... Nasdaq100 +1.3% (*)
09/26/07 - 09/27/07... Nasdaq100 +0.4%
07/17/07 - 07/18/07... Nasdaq100 -0.2%
05/04/07 - 05/07/07... Nasdaq100 +0.0%
04/25/07 - 04/26/07... Nasdaq100 +0.4%
02/20/07 - 02/21/07... Nasdaq100 +0.3%
01/18/07 - 01/19/07... Nasdaq100 +0.2%
01/16/07 - 01/17/07... Nasdaq100 -0.8%
03/03/06 - 03/06/06... Nasdaq100 -0.9%
01/14/05 - 01/18/05... Nasdaq100 +0.8% (*)
01/04/05 - 01/05/05... Nasdaq100 -0.5%
12/27/04 - 01/03/05... Nasdaq100 -0.2%
12/03/04 - 12/09/04... Nasdaq100 -0.3%
03/08/04 - 03/09/04... Nasdaq100 -0.3%
03/02/04 - 03/03/04... Nasdaq100 -0.5%

Note again the theme of limited upside potential. In only four cases out of
the last thirty was the NDX able to gain 0.5% or more when NASDAQ volume
exceeded NYSE volume by this wide a margin.

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

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