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Nasdaq New Highs are at a cycle low and New Lows are at a cycle high; what is this odd set of circumstances telling us?

It has certainly been a monumental week in the stock market. Moves in both stock prices as well as market-based indicators have been interesting and, in some cases, historic. Take, for example, our Chart Of The Day yesterday.

Now, given the recent market action, it's not at all surprising that the number of New 52-Week Lows are elevated currently, nor that the number of New 52-Week Highs are very low. However, per our data provider, the number of New Lows on the Nasdaq exchange reached a cycle high yesterday of 400. That was the highest number since the market low on February 11, 2016. Again, it's not surprising to see the number elevated. However, it's a bit surprising to see it hit a cycle high with the indices not far below all-time highs here.

On the other end of the spectrum, Nasdaq New Lows hit just 13 yesterday. That's not surprising either. However, that is also a cycle extreme, i.e., the lowest also since the market bottom on February 12, 2016. Again, it's not surprising to see the direction they're headed in -- but to see both at cycle extremes is really interesting.

Now, we were curious to see if there were other instances of the 2 series at opposite extremes. As it turns out, there have been a handful of other (interesting) occasions, which we examine in a Premium Post at The Lyons Share.

The high New Lows and low New Highs obviously results in an extreme in the number of net New Lows (i.e., New Lows - New Highs). Yesterday’s Net New Lows represented 12% of all issues, as we see in the chart below.

Now, certainly a lot of 52-week lows and a dearth of 52-week highs is not ideal for a stock market bull. However, as the chart demonstrates, there does come a time when the data is so bad that it is good. Or, in other words, it can’t get much worse. However, are we at that point yet? The Net New Lows are certainly well below the highest levels highlighted on the chart. Furthermore, the market is not that far off of its highs. Does that make a difference in how we should interpret this data? We take a closer look at that as well in our Premium Post at TLS.

One thing is for sure -- these breadth readings are certainly unusual.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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No 52-week high in the Nasdaq 100 has ever been accompanied by as few advancing stocks as today’s.

As most readers know, we are big proponents of strong breadth, or participation, in signifying healthy markets. When rallies are accompanied by a large swathe of advancing stocks, it is more likely to go further and last longer than those coming on the back of just a relatively few stocks. As such, it was encouraging to see the significant level of participation during the August-October stock market rally. Recent efforts, however, have not been so robust.

Today’s action on the Nasdaq exchange is Exhibit A. On the one hand, the Nasdaq 100 (NDX) managed to rally -- again -- closing at a new all-time high -- again. Despite the new high, however, the breadth on the Nasdaq read as follows (according to our vendor):

Nasdaq Advancing Issues: 840

Nasdaq Declining Issues: 2105

If that seems unusually skewed to decliners considering the NDX hit a 52-week high, you are on to something. As a matter of fact, at 28.5% of all issues, today saw the fewest advancing issues ever on a day when the NDX closed at a 52-week high.

So, is this dwindling participation a serious warning sign for the rally? Or is today a random outlier, irrelevant to the bigger picture? In a member post at The Lyons Share, we look deeper into the issue of participation, using quantitative evidence to come to an informed conclusion.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering what we believe will be an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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Yesterday’s stock market bounce may not have been all it was “cracked” up to be.

We’ve been warning quite a bit regarding what we call “cracks” in the internal structure of the market. Specifically, while the large-cap stocks have held up quite well, there has been a distinct deterioration in the number of stocks market-wide that are still participating to the upside. Even during yesterday’s very nice bounce in the market, the internals were not all that impressive. In fact, for as good a day as we saw in the Nasdaq, some of the breadth figures were historically weak.

Specifically, although the Nasdaq 100 (NDX) rallied 1.5% yesterday -- and is within 1.5% of its 52-week high, there were still well more new lows on the Nasdaq exchange than new highs. That is a combination that has only occurred on 14 other days since 1990.

Like many recent charts, the former occurrences included some near major tops as well as some during unabated bull markets. So was yesterday’s rally all it was cracked up to be -- or was merely a dead cat bounce?

Once again, in a premium post at The Lyons Share, we address that issue by studying the historical precedents in depth to come to an objective conclusion. We also look at a unique twist to the study which carries potentially compelling implications.

If you’re interested in the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share, where we are currently running our PRE-”FALL” SALE. Considering the discounted cost and the current market juncture, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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In response to yesterday’s post, today we present a chart of NASDAQ’s second half of the year seasonal patterns. Today’s chart uses the same four scenarios presented yesterday and in other posts; Post-Election Year, the Seventh Year of the Decade, the First year of a new Republican Administration and a Positive January Trifecta. Please keep in mind that NASDAQ’s patterns are using data from 1971 to present and two of the scenarios have very limited data. New Elected Republican Administrations are just three years, 1981, 1989 and 2001. The pattern’s near 15% plunge from July 1 to late September is due mainly to 2001. Seventh Year of Decades is also limited to just four years, 1977, 1987, 1997 and 2007. Here 1987 creates the near 13% plunge from early October to late October.

Compared to the patterns of DJIA and S&P 500, NASDAQ is quite similar only the magnitude of its moves are greater. All four patterns finish out the second half of the year in a range from slightly less than down 5% to up a little better than 6%. Prior to today, 2017 was in the upper ranges of these four patterns. The sizable range in these patterns best suggests some volatile trading could persist throughout the remainder of the third quarter and into the early fourth quarter.

Recently noted deterioration in market internals appears to be getting worse, as evidenced by this rare divergence in the Nasdaq market.

One of the hallmarks of our intermediate-term Risk Model that helps orient our investment posture toward equities is breadth, a.k.a., internals. Internals measure the level of participation in the stock market, e.g., how many stocks are advancing versus declining, the number of new highs versus new lows, etc. The more participation there is, the broader the foundation for a market rally -- and the more comfortable we feel being aggressively invested.

In recent weeks, we have published a series of charts and posts highlighting what appears to be a weakening of the internals, or participation, in the market recently. This trend has been interesting to note since the major large-cap averages have continued to trade near their all-time highs. That trend has not slowed down. In fact, it has arguably accelerated, as evidenced by today’s Chart Of The Day.

Today’s ChOTD shows that while the Nasdaq 100 (NDX) remains close to its 52-week high (i.e., less than 1% away as of yesterday), the number of new 52-week lows is now outstripping new highs on the Nasdaq exchange. Not only that, but the number of net new lows, i.e., new lows minus new highs, equated to more than 2.5% of all issues traded on the Nasdaq.

If that does not seem like a big number, it is actually just the 9th day ever that saw so many net new lows while the NDX was so close to its 52-week high.

As the chart suggests, prior occurrences seeing such conditions appear to have come at inauspiciously timed junctures. We’ve asked the question in our previous posts on “internal cracks” -- do these examples constitute discernibly negative events? Or could they be mere coincidences or stat-foolery?

In a premium post at The Lyons Share, we address that question by studying those historical occurrences above and the NDX’s subsequent performance. We also consider whether our present case might be different than its precedents. All of the research, as always, is made in an attempt to come to an informed, quantitatively-backed conclusion.

If you’re interested in this “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Thanks for reading!

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The recent string of Nasdaq new highs occurring with negative breadth has only been matched by a stretch in 1999-2000.

In yesterday’s Part 1 of our “Internal Cracks” mini-series, we looked at the unusual recent spate of new highs in S&P 500 that occurred on negative NYSE volume. That is, despite the 52-week high in the Index, there was more volume in declining stocks than advancing ones. Specifically, we have seen 6 such days in the past 3 months -- double the previous 3-month record going back more than 50 years. Today’s Part 2 looks at a similar phenomenon. Namely, we have observed a recent cluster of 52-week highs in the Nasdaq Composite occurring along with negative breadth on the exchange, i.e., more declining stocks than advancers.

Wednesday marked the 7th such occurrence in the last 3 months. That is the largest string of these days on record, outside of a run of 12 that ended in late January 2000. I probably don’t have to tell you what happened soon after that episode.

This chart shows all of the 3-month clusters of at least 5 occurrences going back to the late-1980′s.

So is this a red flag regarding the durability of the bull market? Some will point to it as evidence of a thinning out of the rally. We certainly have seen these clusters pop up in the lead up to some tough markets in the past, e.g., 1998, 2000, 2007, 2011. But do the statistics objectively bear out those concerns?

As with yesterday’s Part 1, we took a look at prior occurrences and the Nasdaq’s subsequent performance to come to an informed, quantitatively-backed conclusion. You can see the results in a premium post at The Lyons Share.

If you want this “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Thanks for reading!

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Wednesday’s reversal lower from 52-week highs in the Nasdaq looks ugly on the chart, but how ominous is it really?

One reason that chartists find their craft so appealing is the optics.  They can tell a great deal about a market or security merely by looking at the chart.  At times, however, they can get into trouble by making assumptions about the optics that are not borne out by reality.  In other words, looks can be deceiving.

Take yesterday’s dramatic reversal lower in the stock market, for example.  Specifically, the NASDAQ was well into new all-time high ground at one point during the day.  However, by the end of the day, the index has lost all of its gains and then some, closing well into negative territory.  Upon a glance at the day’s bar or candlestick on its chart, one might understandably be concerned about residual negative consequences stemming from the day’s action.  Such concern over the event may be reinforced by the popularity of ominous-sounding descriptors like “key reversal” or “bearish engulfing”, etc.  The problem is, despite the widespread acceptance of such terms, historical evidence often fails to back up their reputations.

That indeed may be the case with yesterday’s action in the NASDAQ.  At least we did do some historical research in attempting to ascertain whether or not the reversal was indeed a red flag – or significant in any respect. As such, we tried to pinpoint historical reversals in the NASDAQ occurring under similar conditions as yesterday.  Specifically, we looked for all days since 1992 meeting the following criteria:

1. The NASDAQ trades at least 0.5% higher intraday, and 2. It trades above its 52-Week High Close, and 3. It reverses to close lower by at least 0.5%.

As it turns out, yesterday was the 43rd day in the past 25 years meeting the above criteria.

As one can probably glean from glancing at the chart, several of those events occurred if at inauspicious points -- specifically, cyclical or major intermediate-term tops. That said, one may not be able to tell from the chart that median returns following the events were actually better over the following 2 weeks to 2 months than the average random day.

So, a historical look at these types of reversals yields some fodder for both bulls and bears. Perhaps most importantly, though, it fails to confirm the widely accepted notion that yesterday’s type of action is a reliable predictor of further trouble in the market, despite the ugly candlestick and its scary-sounding descriptions.

Want to see the “deep dive” version of this post, including specific dates, future returns and which of the reversals were truly cause for concern? Check out our new “all-access” site, The Lyons Share, where members get our full research reports – as well as our complete macro market analysis EVERY DAY.  If you find the original research we share here helpful and enjoyable, we think you’ll get a ton of value from The Lyons Share.

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Despite the recent string of Nasdaq new highs, more stocks have been declining than advancing.

One of the hallmarks of the post-election “Trump Rally” in stocks has been the fairly broad participation. With a few exceptions, most sectors and style groups have gone along for the ride, resulting in breakouts to new high ground among most mainstream indices. However, there are signs that such broad strength has begun to thin. For example, the last few days have witnessed a development in sharp contrast to that prior positive breadth. Looking at the Nasdaq specifically, we see that the Nasdaq Composite has made a 52-week high on each of the past 3 days. Despite the new highs, however, each of those 3 days saw more declining issues on the Nasdaq exchange than advancers.

As you might expect, such a streak is rare. Indeed, similar 3-day runs have only occurred 2 other times since 1988 (and perhaps longer). Those dates were July 13, 1998 and February 28, 2012. And while 3 days of diverging internals isn’t necessarily a long-term death knell for the rally, it isn’t a healthy condition either. Following the prior occurrences, the Nasdaq was able to rally another week in the former case and another month in the latter before succumbing to 25% and 10% pullbacks, respectively.

2 precedents is not a lot to go on, however, so we took a look at all streaks of at least 2 days in which either the Nasdaq Composite or the Nasdaq 100 (NDX) closed at a 52-week high with negative breadth on each day. That produced 20 prior occurrences going back to 1990. Two of them occurred in 1995 and 1996 and did not lead to more than a hiccup in the ongoing Nasdaq bull market. The other occurrences, beginning in 1998, were not all as benign.

We typically show aggregate median or average returns based on these types of studies. However, given the hit-or-miss performance of the NDX following each of the prior specific occurrences, it wouldn’t be of much value. Rather, let’s take a look at some specific instances.

As mentioned, the 2 events in 1995-1996 were irrelevant as red flags and, in fact, the majority of events (barely) still saw the NDX higher from 1 day to 2 years out. However, as seen by looking at the chart, there have been some signals that were 

obviously well-timed warnings regarding the thinning new highs. These include occurrences immediately preceding bear markets in July 1998, March 2000, September 2007 and July 2015 (in some indices). There were also occurrences directly preceding pullbacks of 5%-10% in April 1999, December 2004 and September 2012.

Which will it be this time, false alarm or prescient warning? Again, we unfortunately do not have a crystal ball. We will point out that most of the dates mentioned above that preceded serious trouble had seen a more significant deterioration in the market’s internals leading up to the signal. They were not just “one-off” data anomalies, but more tipping points to an unhealthy condition that had been building for some time.

And while this very recent run of lagging internals is certainly not a healthy condition, we would definitely not characterize the larger market environment as experiencing a large-scale internal deterioration. The advance-decline lines on both the NYSE and the Nasdaq set new highs just last week. And many broad market indices, including small-caps and mid-caps are just coming off of new highs as well.

This doesn’t mean the market won’t correct here. This data point, again, is not a signal of health. But we would stop short of labeling it a sign of major or long-term concern just yet.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.