The US stock market has risen sharply from its lows in late October, bringing us to new highs in several large stock indexes. On Thursday we saw particularly strong breadth with more than 2,500 stocks across the major indices hitting new monthly highs and more than 1,700 stocks hitting three-month highs. Meanwhile, only 188 and 86 stocks hit one- and three-month lows. Thanks to a dovish shift by the Fed and a major shift in interest rates, buying has been widespread, sending small and large-cap stocks alike soaring. When we see big moves across asset classes — fixed income, currencies, and stocks — we know something fundamental is afoot among macro investors. But what comes next? After this broad strength, do we see more bullish momentum or a reversal? Let's take a look at the recent market history.
As I've noted in the past, strength (measured by the number of stocks making new highs) and weakness (measured by new lows) should be considered relatively independent variables. The two are certainly related – since 2016 (almost 2,000 days on the market), the correlation between 1-month new highs and lows is -.54 and between 3-month new highs and lows is -.46. What this means is that only about 25% of the variance in new lows is accounted for by the number of new highs and vice versa. (All data from Barchart.com).
When we examine historical data since 2016, we can see the importance of looking at strength and weakness separately. For example, we only had 24 days at the time where new three-month highs crossed 1,000. Over the next 10 trading sessions, the SPY's average loss was 0.11%, compared to 0.23% for the rest of the session. a sample. However, over the next 50 trading sessions, SPY gained an average of +3.81%, which is much more than the average gain of +2.39% for the rest of the sample. In fact, when we saw new highs, the market rose 21 times, and fell only 3 times over the next 50 days. Over the next 10 days, the price rose 11 times and fell 13 times.
Conversely, when new three-month lows were below 100 (N = 475), returns were superior over the next 20 trading sessions, with an average gain of +1.99% versus an average gain of +.59% for the rest of the session. . a sample. In other words, when new highs are high, we have seen momentum over a longer period of time; When new lows are lower, we see short-term bullish momentum. When new highs are high* and new lows are low, the pattern is similar to that of new highs: weak returns over the next 10 trading sessions; Superior returns over a 50 day horizon.
Future news about inflation and growth will undoubtedly impact interest rate markets, and this in turn could move stocks. During bull trend/momentum markets, I have found it useful to look for short-term oversold points in the market (points during which the majority of stocks close below their 3 and/or 5 day moving averages) that are occurring at a higher price. Lowest levels. These dips represent opportunities to participate in the broader trend and also create logical points to stop if the uptrend breaks. At least for now, markets are treating the Fed news as a game-changer. Recent historical evidence suggests that a rising tide that lifts all boats often persists, but not necessarily in the short term.
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