Subdued New High-Low Index has Negative Implications for the Intermediate-term

The Nasdaq McClellan Oscillator generally oscillates between +150 (market
overbought) and -150 (market oversold) territory. During particularly strong
advances, the Nasdaq McClellan can approach and even exceed +200, which
represents extreme territory as far as this indicator is concerned (see long-
term chart). Historically, such high readings have led to a selloff in the
Nasdaq over the next week as buying pressure fades and sellers gain the upper
hand. Tuesday represented only the eleventh time in the last twenty years that
we've seen a reading over +190...

NASDAQ McClellan Oscillator Closes over +190
11/04/08 Mcc +224... Nasdaq ??? one week later
04/05/04 Mcc +196... Nasdaq -2.4% one week later
11/01/02 Mcc +196... Nasdaq -1.0% one week later
08/22/02 Mcc +194... Nasdaq -8.3% one week later
10/11/01 Mcc +205... Nasdaq -4.3% one week later
04/18/01 Mcc +233... Nasdaq -0.9% one week later
01/03/01 Mcc +197... Nasdaq -4.5% one week later
06/02/00 Mcc +224... Nasdaq +0.1% one week later
09/23/98 Mcc +238... Nasdaq -3.5% one week later
05/05/97 Mcc +214... Nasdaq -0.9% one week later
12/18/87 Mcc +210... Nasdaq -1.3% one week later

The New High-Low Index is calculated by dividing the number of new 52-week
highs by the sum of new highs + new lows. This figure is then smoothed with a
10-day moving average. Note from the long-term chart that prior to the last
year, this indicator routinely moved into the 80% area during market rallies.
This reflects the fact that a large majority of issues were hitting new highs
vs. new lows, a generally bullish sign. It's not bullish when a big move in
the S&P is not accompanied by an expansion of new 52-week highs (relative to
new lows). That is the case currently. Over the past ten days, the S&P has
rallied over 5%. Yet the New High-Low Index remains in single-digit territory,
currently 7% as of Tuesday's close. The table below lists each of the last
thirty separate instances in which the S&P500 was up 5% from its ten-day ago
close and the New High-Low Index was under 80%, along with the performance of
the S&P500 two weeks later. Note the general theme of limited upside
potential. In 21 out of 30 cases, or 70% of the time, the S&P was trading at a
lower level two weeks later. That's significantly greater than the 47% at-any-
time odds of a lower S&P two weeks later. Also note that in only three cases
out of the last thirty was the S&P up 1% or more two weeks later...

S&P500 +5% Over Two Weeks, New High-Low Index <80%
11/04/08... S&P500 ??? two weeks later
08/11/08... S&P500 -3.0% two weeks later
04/28/08... S&P500 +0.5% two weeks later
04/03/08... S&P500 -0.3% two weeks later
04/01/08... S&P500 -2.6% two weeks later
12/10/07... S&P500 -1.3% two weeks later
12/06/07... S&P500 -3.1% two weeks later
03/18/03... S&P500 -0.9% two weeks later
01/06/03... S&P500 -4.5% two weeks later
11/27/02... S&P500 -4.0% two weeks later
11/25/02... S&P500 -3.1% two weeks later
10/28/02... S&P500 -1.6% two weeks later
08/27/02... S&P500 -2.7% two weeks later
08/15/02... S&P500 -1.3% two weeks later
11/13/01... S&P500 -0.9% two weeks later
10/10/01... S&P500 +0.4% two weeks later
10/04/01... S&P500 -0.1% two weeks later
04/18/01... S&P500 +2.3% two weeks later (*)
10/31/00... S&P500 -3.3% two weeks later
06/09/00... S&P500 -1.1% two weeks later
06/07/00... S&P500 +0.5% two weeks later
05/01/00... S&P500 -1.1% two weeks later
03/21/00... S&P500 +0.1% two weeks later
03/16/00... S&P500 +2.0% two weeks later (*)
11/16/99... S&P500 -1.5% two weeks later
11/03/99... S&P500 +4.1% two weeks later (*)
08/24/99... S&P500 -1.4% two weeks later
07/09/99... S&P500 -3.3% two weeks later
05/03/99... S&P500 -1.1% two weeks later
04/12/99... S&P500 +0.1% two weeks later
04/07/99... S&P500 +0.7% two weeks later

On the plus side, it should also be noted that the S&P closed higher than the
October 30th settlement when breadth settled better than 4:1 positive on the
NYSE. As I recently noted at the end of my November 2nd column, when the S&P
can trade higher in the three days following a 3:1+ positive breadth session,
the market is usually trading higher two weeks later. This is in direct
conflict with the New High-Low setup discussed above, suggesting the potential
for generally choppy conditions over the intermediate term.

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

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