There has been a slight pullback in the S&P 500 Index (SPX) recently, but one thing I noticed is that the index keeps settling closer to its lows, rather than its highs. The chart below shows the benchmark along with the 10-day moving average of what I dubbed the “High/Low Relative Close,” which is where the index closes at a percentage between the daily high and low. If it closes at its high, it is 100%, and if it closes at its low, it is 0%.

You can see below the 10-day moving average of the indicator has recently collapsed to near 40%. Going back to 2010, the average level has been 57%, with a median of 60%. This is significantly below its usual level. This week, we will look at historical data to see how stocks have performed after similar incidents.

Settling Closer to the Lows

Going back to 2010, I looked at the 10-day average of the SPX close relative to its daily high and low price (the red line in the chart above), and identified the times it fell below 43% for the first time in at least a month. This occurred last Friday, as well as 39 other times. The following returns are summarized below, while the second table shows the typical returns since 2010 for comparison.

At first glance, this indicator is not a cause for concern. In fact, it has been a bullish signal in the short-term. In the two weeks after these signals, the SPX averaged a 1.7% return, with about 85% of the returns positive. Compare this to the usual one-week return of 0.5%, with a 65% chance of being positive. There is also significant outperformance one month after these signals. The longer-term returns have shown only slight outperformance when looking at the average return.

I also wondered how the numbers would change when you consider how strong the market has been. I broke the returns above into when the SPX flashed this signal while within 2.5% of an all-time high (the current situation), as opposed to the other times it signaled.

In this scenario, the bullishness in the returns above disappears. While the two-week returns were still good, take a look at the returns at one and three months. The average returns after these signals, within these timeframes, has been negative. A month after a signal with the index near a high, it averaged a small loss, with 57% of returns positive. Three months after a signal, the index averaged a 0.17% loss, with 57% of returns positive.

However, when the signal occurred while the index was not as close to an all-time high, it averaged a gain of almost 7% over the next month, with nearly 90% of the returns positive.

Before running these numbers, I thought intraday selling might be a cause for concern, but in the short-term these instances have been overall bullish. Looking only at times when stocks were near all-time highs, however, this has been a worrisome indicator. Hopefully, we buck that trend.