Neither the bulls nor the bears are winning the equity market battle right now. When markets have strong momentum, either positive or negative, than you tend to see big spikes in 20-days highs (when positive) and lows (when negative). Currently, we see neither.
For example, in 2013 we consistently saw the percentage of stocks making new 20-day highs stay between 30-60%. This percentage declined slightly as roughly 20-30% were making new 20-day highs in 2014. Eventually, as the market lost momentum in the middle of 2015, less than 20% of stocks were making new 20-day highs. As we have bounced off of the February low this year, we saw 20-day highs spike over 50%. However, the market hasn’t been able to maintain the strong momentum that would indicate to us that the ‘all-clear’ sign has been given for the bull market. In fact, if anything this indicator is signaling that the US stock market has really lost momentum (even if prices are still near all-time highs) as just 8% of stocks are currently making new 20-day highs. If we zoom out a bit and look at how many stocks are making new 52-week highs we find a similar story. Between 20-50% of stocks were making new 52-week highs in 2013, then just 10-30% were making new highs in 2014 and eventually less than 10% of stocks were making new highs in 2015. After cresting above 20% during summer of this year, just 2% of stocks are currently making new 52-week highs.
On the flip side, however, we aren’t seeing major spikes in the percentage of stocks making new lows either. The percentage of stocks that are making new 20-day lows is currently at just 13%. Major market lows over the past five years tend to occur when new 20-day lows eclipse 50%. Again, from a longer term perspective, new 52-week lows are just 2% right now compared to 39% earlier this year in January. All of this is a long-winded way of saying that this market is currently just drifting along and is not being propelled higher or lower. Because we are not seeing a lot of momentum (either up or down), we think this is at least partially responsible for what feels like a growing amount of negative sentiment from investors. It’s difficult to have a lot of conviction one way or another when markets are drifting along as they currently are. At least when markets are at an extreme, either negative or positive, investors can comfortably make a momentum or contrarian play. Right now, investor’s are just stuck in ‘no man’s land’.