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Good Bye, New Highs


Dear'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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