Taking the Market’s Pulse
Tuesday, September 16th, 2008
By George Leong, B.Comm. for Profit Confidential
The current inability of stocks to move in either direction with any degree of sustainability indicates the nervousness of investors. I’m not convinced that a sustainable rally is in the works, as there remain numerous market uncertainties that will continue to negatively impact stocks.
At this juncture, the top performer this year has been the Russell 2000, which is holding at over 700, but has been losing some steam. It is down about six percent this year after recently approaching the breakeven level. The same cannot be said for the over 13%-14% declines in the DOW and S&P 500, as well as the nearly 15% drop in the NASDAQ. Unless we see a major reversal, stocks are set to end lower this year for the first time since the bear market in 2002.
An indicator that I like to follow to give me an idea on the market’s heartbeat, which ultimately consists of the investors, is the new-high/new-low ratio (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.
My interpretation is that, 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.
On the NYSE, the NHNL has been neutral to bearish — 11 of the last 17 sessions had a reading below the bearish 20% level, including five of the last six sessions. Overall, there have only been three readings over 70% since May 22. The trend on the chart is negative.
The NHNL on the NASDAQ has also been weak, with only two bullish readings since October 11. Twenty-nine of the last 36 sessions have improved to over 20%, but five of the last six sessions were below the bearish 20% level. The near-term trend is down.
The reality is that, unless investors feel more confident on stocks, the battle for upward moves will be difficult for the remainder of this year and into 2009.
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
