Mark Hulbert Notes Sell Signal From Key Indicator

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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.

Source: Marketwatch

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One Comment

1. 

   Clifton Portis

   July 23, 2013 at 6:40 pm

   You’re right, this information is basically useless because the majority of new lows were bond fund related. Hulbert, let us know when the market is going to crash. That might be useful.

   Reply