Signals have marked buying opportunities during the current bull market
Prior to the early February correction, U.S. stocks were chugging along to record highs. Since then, however, the number of stocks touching 52-week highs has plummeted, while the number of stocks exploring annual lows has crept higher -- sending up a stock market signal not seen in two years.
New Lows Exceed New Highs for First Time Since 2016
Looking at all optionable stocks -- nearly 3,200 equities total -- the four-week moving average of new highs/new lows has fallen below 1.0 for the first time since February 2016, according to Schaeffer's Quantitative Analyst Chris Prybal.
Since 2010, and using only one signal every four weeks, this ratio has fallen below 1.0 just 10 other times. The last time it dropped from positive to negative territory -- indicating stocks at new lows exceeded stocks at new highs over the previous four weeks -- was in November 2015. The ratio stayed below 1.0 until early 2016.
Signals Have Marked Buying Opportunities
These signals have marked buying opportunities during the current bull market. One week after a signal, the S&P 500 Index (SPX) was up 1.19%, on average, and higher 70% of the time. That's more than five times its average anytime one-week return of 0.23%, with a 60% win rate, looking at data since 2010. One month later, the SPX was up 1.66%, on average, and higher 80% of the time, compared to an average anytime gain of 0.98% with a win rate of 67%.
Three months after signals, the S&P was up 6.12%, on average -- more than double its average anytime return -- with a higher-than-usual win rate of 80%. Likewise, the SPX's post-signal average six-month gain of 10.77% is much higher than its average anytime return of 5.93%, and the index was in the black 90% of the time. Meanwhile, the S&P was higher 100% of the time one year later, with a stronger-than-usual average return of 15.66%.
However, it should also be noted that volatility tends to run hotter than usual after signals. As you can see on the charts above, Standard Deviation is higher than normal after the four-week moving average of new highs/new lows drops below 1.0. In the short term, though, Schaeffer's Senior V.P. of Research Todd Salamone notes that the Cboe Volatility Index's (VIX) inability to topple 25 recently indicates that "now might be a good time to bet on lower volatility in the days ahead."