Markets just passed the midway point of this year and it looks rocky at this time given all of the risk factors such as high oil prices, interest rates, inflation, the economy, and earnings.
The second quarter was not something to remember as markets corrected and whether a bottom has been found is still uncertain. The positive was the ability of stocks to rebound after recently declining to some key technical support levels: Dow (10,600), NASDAQ (2000), S&P 500 (1,260), and Russell 2000 (700).
Now, with second quarter earnings beginning to trickle in, markets will be on full alert. The current sentiment indicators indicate an apprehensive market.
Let’s take a look at the new high-new low ratio (NHNL)–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 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% is bearish.
The daily NHNL on the NYSE has improved over the last seven sessions after weeks of readings at below the 20% bearish level. This is positive, but we have yet to see a reading above the bullish 70% level since a 76.70% reading back on June 2 and before that on May 9. The current trend is down, but we could be at a bottom similar to the situation we had in October 2005 prior to the fall- winter 2005 rally.
On the tech front, the NHNL ratio for the NASDAQ has also shown improvement over the past seven days. Again, we have seen only two readings at above 70% since May 10.
The current readings of the NHNL clearly suggest caution in the market. For the market to rally and be sustainable, we need to see a trend develop with readings at over 70%.
Monitor the ratio and you will feel the pulse of the market.