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Did We Just See A Ten-Year Flood?

Author: James Brumley (info)
Website: http://bluegrassportfolio.com
Posted: August 16th, 2007 at 3:32 pm EST
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We’ve seen the market get wild the last few weeks, as have the underlying dynamics. Though a lot of our normal tools are at oversold/rebound levels, we’ve yet to actually see it materialize. Today we update the next few of these charts. And yes, these signs and the market are still (in some cases anyway) at odds with themselves.

New Highs/New Lows

Back on July 27th, when the NYSE forked over 828 new lows for the first time in years (2004 to be exact), we figured that was the blow-out that would also serve as the bottom. The NASDAQ saw a whopping 532 new lows on August 6th, again hinting that things literally couldn’t get any worse. The thing is, things DID get worse, culminating in a mind-boggling day yesterday.

On the chart below, we can now see the NYSE produced 1183 new lows on Thursday. That’s an insane level, and if history holds true, then it’s likely to be the pivot. Take a look at the chart, then keep reading.

S&P 500 with NYSE new highs (green) and new lows (red) - Daily

Just to set some perspective, let’s look at the same chart on a long-term (weekly) basis.

S&P 500 with NYSE new highs (green) and new lows (red) - Daily

Here you’ll see that’s the highest reading since September of 1998, and before that, October of 1987. It’s true - things didn’t get that ugly even during the bear market of 2000-2002. In the prior two instances, stocks were considerably high a couple of months later.

The risk we all run here is that the new low thing could become an epidemic. We were discussing how the leading from late July probably meant the bottom, only to see more new highs a few days later. Who’s to say it can’t be topped again? However, you can see the chart for yourself….this is something akin to a ten-year flood (a flood so bad it only happens every ten years). Maybe there’s something else going on that negates this ‘new low’ theory. If you have counter-thoughts (with reasonable rationale), feel free to share it.

I just wanted you to know the facts. What you do with them is up to you.

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