Good Bye, New Highs
Dear Santa...it's me, Hoofy. PLEASE come this year, I've been pretty good!
One of the peculiar aspects of this latest breakout, other than some evidence of already-excessive optimism on the part of investors, is the shrinking number of new highs on the NYSE. Toddo had a blurb from Jeff DeGraaf in Buzz & Banter this morning on the subject and I agree with him - it is not a sell signal, rather a warning sign of a loss of momentum from the stocks supporting the indices.
Take a look at the chart below and don't scroll down. This shows the NYSE new highs plotted against the S&P 500 for a certain period in time. Note the similar market action to our current one - an extended rally accompanied by ever-expanding new highs, a "blowoff" number that was quickly followed by a price high, an extended consolidation range, then a rally of about 10% which broke us out of the range but which showed a sharp contraction in the number of stocks at new 52-week highs.
OK, now scroll down...
The year was 1998, and here is the aftermath:
Once price momentum stopped, we saw a quick 20% loss in this big-cap index.
Late December is very consistent in its positive returns. Despite the fact that "everyone" knows about this, it continues to work year after year. I hate the idea of holding short positions as the S&P is breaking to new highs - in December - but I think with investor sentiment where it is, and emerging signs of a loss of momentum, we had best pick out the chair we're going to sit in once the music stops.
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