Don’t Get Too Excited About Current Gains

Stock markets made a nice four-day rally prior to the Thanksgiving break. Yet, despite this, I’m not convinced that the upward trend is sustainable, as the market risk remains high. Investor sentiment continues to be extremely bearish and this will hinder the sustainability of any upside move in stocks. As of November 26, only about 5.65% of all U.S. stocks are above the 200-day moving average, up from the 3.98% a week earlier, and compared to 5.60% a month ago. The same goes for the shorter-term moving averages. And, unless we see the percentages move higher, any gains will be questionable.

 A technical measure that I like to monitor for a feel of the market is the new-high/new-low (NHNL) ratio, a measure of the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows. The theory is that, in a bullish market, investors quickly bid up stock and you see a rising NHNL ratio. When investors get nervous, less new highs are made and the NHNL ratio will tend to decline, thereby giving you a warning. At the other end of the spectrum, bear markets have more new lows than new highs.

 There is a general guideline that we use to examine the NHNL ratio. When the ratio is above 70%, it is bullish; below 70%, it is a warning; and below 20%, it is bearish. Watch the sentiment to see how the market is feeling.

 The NHNL on the NYSE remains extremely bearish; 55 of the last 60 sessions have a reading of below 20%, including 46 of the last 47 sessions, which were very bearish. There have only been three readings over 70% since May 22. The NHNL on the NASDAQ has also been weak, with only three bullish readings since October 11, 2007. In all, 56 of the last 60 sessions were below the bearish 20% level. The near-term trends on both the NYSE and NASDAQ are in a downward trend. You want to see a reversal in the trend before getting too excited with the current rally.