Arguing One Technical Indicator From Both Sides of the Dugout

Is it the third inning or the ninth?

Senior Market Strategist
Mar 4, 2021 at 2:07 PM
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One could be easily appalled by the spike in [New Yearly Highs / New Yearly Lows] and the four-week or monthly moving average depicted below alongside the S&P 500 (SPX). This chart uses all-optionable tickers going back to 2007.

SPX for all optionable trades

One could argue that the ramp-up and rollover of this indicator is a sign of a top, and they would have good reason for that argument. 2007 is a great example, as is 2011. Both circumstances were notable turning points that bears remember vividly.

The very nature of this indicator “rolling over” suggests either less new highs from the preceding weeks, more new lows from the preceding weeks, or both. Think about that dynamic and try to understand how this indicator could be a good thing for the overall stock market.

Therefore, this indicator demarcates an appropriate conclusion that this liquidity-fueled rally has run too far and too fast. The seventh inning stretch is long-gone. It's time to put in the closers for the rally in the ninth inning.

Alternatively, a spike in this indicator could also be construed positively, with more new highs seen as a sign of momentum and a spiking indicator suggesting more and more market participants. Going back nearly a decade and a half, only once was today’s reading surpassed, and that was in the early innings of a robust rally off of the Great Financial Crisis of 2007-2009.

It was more than six months after the Great Financial Crisis before ultimately peaking out at relative highs and turning lower from October 2009 – April 2010. The market just recently crossed above 30 in the first week of February of 2021.

Another solid argument may be to take a look back in predicting the “forward bias” on this indicator. What I mean by this is to say “before you can make a new high, you must look back a year to prior price action and how it was behaving. It is this price action coupled with forward momentum that ultimately computes next week’s tally." And, remember, this is a monthly moving average depicted.

Looking back one year, the U.S. was on the verge of “quarantining in mass" and that such event arguably has yet to pass. So, forward readings on this indicator could be biased to the upside as the year-over-year comparisons going forward will be based off of this look-back period.

Like all great ballgames, the conclusion is still unknown. Are we in the early stages of an unannounced market rally, the third inning of a long game to go, or is the sun setting on this drawn out affair and it’s time to hit the exit buttons?

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