New 52 Week Highs Flash A Warning

As we all know, when a market is in a bullish cycle it stands to reason that with each new day some of the stocks in that index attain a new 52 week high.  When the market re-opens for the next trading day, the number of stocks hitting a new 52 week high is reset to zero and we start counting all over again.  And naturally, when that same equities market reaches its ultimate peak for that cycle, those stocks which were strongest will begin to decline as well.  In other words, if the market puts in a peak and begins to decline, the number of new 52 week highs will decline with it... always.

But what happens when the market is surging and yet the number of new 52 week highs begins to decline anyway?  That's a very serious (and reliable) signal that something is going wrong with the market internals.  In fact, that's when the Hindenburg Omen indicator sits up in its chair and starts taking notes.  As a matter of interest, this metric of 'the number of new 52 week highs' is one of the components of the HO indicator.  On that topic, by now all my followers know that I have an ongoing post regarding the Hindenburg Omen on this site as well as one which I've been conducting at Seeking Alpha for 28 straight months.  I purposely let those two posts go quiet when there is basically nothing to say on the topic.  That way, when I 'do' update those HO posts readers realize that most likely something is brewing and the update is worth reading... it won't likely be idle chatter.  My friends like to chat (I've never been accused of that though) but the HO posts are one place where we keep that to a minimum, at least until the HO once again becomes a relatively hot topic.  The chart below indicates that day may be fast approaching:

A serious negative divergence is setting up between the New 52 Week Highs and the NYSE.  Click here for live and updating version.

This daily chart shows the NYSE as well as the 7 day moving average of the number of new 52 week highs it generates (orange line).  The line representing 'the new 52 weeks highs' has been made invisible in order to reduce the noise.  It has become abundantly clear now that the number of new highs has begun to decline even as the market continues to melt ever
higher.  This is a relatively rare event which occurs when the market is losing leadership.  It begins to rise "unnaturally".  This is where a critic might jump in and say something like "No leadership?  You're off your rocker AR.  Have you never heard of AAPL?"  All I can do is simply point out that AAPL is just one company and contrary to popular belief, it cannot carry the entire NYSE all by itself.  We are talking about the entire broad market here.  As one commenter said the other day (my apologies that I don't remember who you are or where I read it or I'd give you credit), "AAPL is the first publicly traded religion".

Be that as it may, as you can see, normally when the market heads lower the number of new highs naturally heads lower with it.  But when we see the number of new highs begin to decline before the market does, we know that internal weakness is building.  How can a market continue to melt up when its leaders are no longer advancing?  Are we to believe that for some reason investors are selling their winners and rotating their cash into weaker stocks?  I don't think so!  So there isn't much point for bullish investors to argue against a warning like this.  It's nothing less than realistic evidence that things aren't quite what the seem on the surface.

Not to sound alarmist though, I can also show you one case where this very same phenomenon occurred in December of 2010 and ultimately didn't turn out to a hill of beans.  Clicking this link will take you to the same chart as above, but over a two year time span.  The annotations on the chart will be slightly distorted but that's ok, I just want to show you the December 2010 instance, the only occasion in the past two years where a divergence like this amounted to nothing.   In all other instances when the 52 week highs began to decline, the market had already begun to decline a day or two earlier.  Again, the status that we're seeing today is not a signal that a top is in.  But it is a signal that the market is not nearly as robust as you may think.  Ultimately, on this topic by far the greatest monitor is the Hindenburg Omen which takes this metric (plus more) completely into account.  But keep in mind, that by virtue of it's cautious nature (reluctance to issue false signals), the HO will almost assuredly be late.  Please feel free to bookmark the HO page and check in from time to time as we move forward.  I'm quite confident you'll be seeing an update there in the coming days.  When you do... stay tuned because at the very least, things will get interesting.

Best of luck to almost all of you  :-)