Mark Hulbert Notes Sell Signal From Key Indicator
In a MarketWatch column this week Mark Hulbert writes about Norman Fosback’s “High Low Logic Index,” created by Fosback in 1979.
The High Low Logic Index represents the lesser of two numbers: new 52-week highs and new 52-week lows (both expressed as a percentage of total issues traded). High readings are bearish, while low levels are bullish.
According to Hulbert:
Fosback recommended using a 10-week exponential moving average of the weekly values. When that average reached 5%, he said it indicated “extreme market divergence” and therefore bearish. And that’s just what the indicator did in June, rising to 5.1%. It currently stands at 4.6%.
Hulbert also comments on Ned Davis Research analysis of the indicator which indicates a lower threshold of 4.4% for a weaker market.
Although the weakness of the market following such a reading is certainly not catastrophic according to Ned Davis:
On average over the next three months, the firm calculates, the S&P 500 has fallen an average of 1.6%. Over the six months following such occasions, the average decline has been 2.7%.
SMA Comment: The number of new lows in the NYSE was skewed in June by the unusual weakness in the bond market which caused a spike in new lows for closed-end and ETF bond funds. I’m not sure if the indicator accounts for this anomaly. The bond market weakness also triggered a few occurrences of the “Hindenburg Omen” in June.