Chart of the Week: New 52-Week Highs

There has been a good deal of debate in the investment community lately about whether equities are currently overbought. As a look at charts of individual equities I am struck by the number of stocks that are now making fresh 52-week highs.

This week’s chart of the week below chronicles one year of 52-week highs in the NYSE. Using new highs as an indicator of internal market strength, it is easy to see how momentum has continued to build over the course of the last year, with so many stocks hitting new highs last Friday (614 on the NYSE) that breakouts to new highs have created their own self-sustaining demand.

It only takes a couple of negative days to turn the new high trend in the other direction, but I have always been reluctant to short stocks that are making new highs. Even at historically elevated levels, an increasing number of new highs is a sign of strong market breadth and a healthy, broadly diversified rally.

For more on related subjects, readers are encouraged to check out:

• New Highs and New Lows for Market Timing
• The 52 Week Lookback Period and New Highs – New Lows
• Mamis Overbought Oversold Indicator
• Relative Highs and Lows in the SPX
• Canary or Canard?
  

[source: StockCharts.com]

Edit: Steve Place had an excellent suggestion that I try an arithmetically scaled (proportionally spaced) chart for these data sets. I have added a second chart with that arithmetically scaled Y-axis here.

Disclosure(s): none

Canary or Canard?

Earlier in the week, I introduced a ratio chart of the percentage of S&P500 stocks above their 50 day SMA divided by the VIX. I described this as an attempt to find a rough approximation of greed ÷ fear. Since this chart received some favorable reviews, let me unveil another VIX ratio chart that attempts identify the same market sentiment extremes and provide a warning about the increased probability of near-term market highs and lows.

The chart below is a weekly chart of the ratio of the new 52 week highs in the NYSE divided by the VIX. I focus primarily on the raw number and the 4 week SMA. You can see from the chart that raw reading above 30 and a 4 week SMA readings above 20 tend to signal that a top is near.

In fact, this chart provided excellent advance notice of the 2/27/07 top, the 5/11/06 top, and previous tops in March 2004 and March 2005. With bottoms, the record is not quite as good, with an excellent advance call of the October 2005 low, but calls that were too early for May-July 2006, March-August 2004, and July 2002-March 2003.

You can decide if this ratio chart deserves a spot in your toolbox or bird cage or whatever it is that you use to try to divine the future. For me, it’s a keeper.