NYSE High/Low Logic Index
The MTI’s Technical category is still decisively negative at -3, but some of its shorter-term “counter-trend” components look intriguing for the first time in 2022’s entire decline. In particular, we’re watching the behavior of a group of indicators that performed brilliantly near the bull market highs.
Bulls have been quick to assure us that this market “bears” no resemblance to the dot-com bust. We agree—but probably for very different reasons. Among them are the conventional breadth measures, which provided little warning of this year’s January peak. And, the initial decline off January’s top has been much broader than during the first phase of the dot-com bust.
In late March, the S&P 500 rallied to within 3.5% of its January high, likely prompting producers at CNBC to put in an order for “S&P 500 5,000” hats. But we think that 4,000 will be undercut before 5,000 is topped, and action in key indexes (with the notable exception of the S&P 500 itself) reinforces our view.
We wrote in the latest Green Book that a breadth indicator that should be more well-known than it is—the High/Low Logic Index (or HLLI)—had moved to “maximum negative” right at the cycle high in the NASDAQ Composite on November 19th. Specifically, the 10-week moving average of this indicator showed a perilous internal condition in which too many NASDAQ stocks were reaching 52-week New Highs and New Lows simultaneously. That’s the very definition of a “fractured” market, and has preceded some important NASDAQ declines. There have also been a couple of premature warnings, as in the summers of 1996 and 2019.
We’ve written periodically about the likely distortion of market breadth figures resulting from High Frequency Trading, the domination of ETFs, and (we believe, most importantly) the decimalization of stock quotations. Our concerns led us to expand our technical arsenal, and one of the gems we uncovered in that process was the High/Low Logic Index (HLLI).
The granddaddy of all technical indicators—the NYSE Daily Advance/Decline Line—continues to make new highs alongside the S&P 500, suggesting the market should move to even higher (but perhaps narrower) highs well into the fall. As noted a month ago, we increasingly suspect that granddaddy may be telling a lie.