By Bruce Zaro | July 23, 2008 | 11:19 AM | 7 Comments
Everybody wants to know when the market is going to bottom out, when we can finally exhale again. I may not be prepared to sing hallelujah just yet, but I think the latest bout of climax selling has provided the opportunity for at least a nice, deep breath.
On July 17th, the Dow broke a long series of lower lows and lower highs with a bearish signal reversal, a play that often indicates stocks are poised to move higher, very quickly.
One day earlier, one of my favorite indicators of market risk levels, the New York Stock Exchange Hi-Lo Indicator, took a major stand on market movement. The NYSE Hi-Lo is a contrarian indicator that has shown good sense and dependability in calling bottoms. It measures the stocks on the NYSE reaching new highs as a percentage of all the stocks setting 52-week records—both highs and lows. On July 16th, this 28-year-old indicator recorded its lowest ever reading of 4. (Only 4% of the NYSE new 52-week highs or lows were highs.) Four? At 30, the downside is considered overextended. Readings in the rarified teens get analysts’ attention. Four is the equivalent of a multi-mega-watt spotlight shone deep into the den of a bear market, illuminating the depths.
And this wasn’t 4% of a small circle of record makers either. On that day, out of 2,764 listed issues, 1,390—fully half of the lineup—recorded new lows.
Selling, selling, selling…worry has been in the air of all the major indices. But a selling climax generally signals opportunity approaching. Look at yet another contrarian sign: a contrarian buy signal is generated when a stock or index hits a new 52-week low but closes out the week at a level higher than that of the previous Friday. Nearly 950 stocks across the US exchanges exhibited contrarian buy signals last week.
And the rebounds after past exhaustive selling bouts have been impressive. After days on which a mere 900 issues have recorded new lows, we’ve seen 3-month returns of 12.59% and 6-month returns of 16.59%.
Whether or not the market has hit rock bottom, remember that the January 2008 selling climax led to a very actionable rally that lasted until late May. As selling moves into the territory of overdone and capricious, the environment becomes favorable for investing. Of course, with the dismal headlines flashing across our screens each evening, it’s likely that market-hardened traders will be making most of the moves but sensible investors can also explore the bear’s den for treasures.
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