Very few stocks hit 52-week lows in the past five days. Today we look at previous market environments where this was also the case, and provide an update on the Implied Momentum Bellcurve.
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As discussed in recent reports, a market pushing to new highs is not always suggestive of pending doom and gloom. For example, over the past five days we’ve seen very few stocks hit 52-week lows, an average of about four (daily average) to be exact, highlighting the breadth of the recent rally. To add some color behind this observation, we looked at the rolling five day average number of stocks hitting lows on the NYSE and calculated forward equity market performance from each of the dates where this average reading was below 4. As shown below, this historically suggested good things to come as 84% of the returns were positive on a one month basis and 100% of returns were positive over one year.
We also checked up on the Implied Momentum Bellcurve found under Asset Allocation > Distribution Curves. Using implied volatility for stocks based on their option premiums, we place each stock in a zone that essentially signifies overextension to the upside (Zone 6) or downside (Zone 1). We then compute an “average level” (located at the top of the curve) that gives us a numeric data point to represent the skew of the curve. The curve is updated daily and can provide a timely, visual feel for the market in the near-term – skewed right suggesting overbought and vice versa. For a deeper refresher on what this curve means or how it’s calculated, click here.
We looked at the daily average level going back to 2009 and distributed the readings below. We typically see this curve reside around the 3.6 – 4.2 level yet the most recent (11/18) average level is 4.68 for all stocks tracked on our platform, signifying a moderate skew to the right. The curve does not stay at levels like this often, as readings north of 4.5 only account for about 4% of the total observations; however, forward returns for the major indices in mention are also positive on a longer-dated (one month plus) horizon. Although, when at extended levels (4.5+) we could expect moderate underperformance relative to the index averages in the near-term (one – two week horizon).
