The 'Junkie' Market Is Back

Tyler Durden's picture

Via Dana Lyons' Tumblr,

The past few days have seen a reversal from substantial net New lows to substantial net New highs – a condition that has preceded poor performance in the past.

We’ve posted several pieces in the past regarding what we’ve termed “Junkie Markets” – junctures characterized by a substantial number of both New 52-Week Highs and New 52-Week Lows.

Such conditions represent a key component of various and notorious market warning signals, such as the Hindenburg Omen and others. As the ominous sounding names would imply, the historical stock market performance following such signals has been poor. We have found the same to be true with respect to our “Junkie Markets”. Today’s Chart Of The Day deals with a new variation of the Junkie Market.

Specifically, we have seen an unusual development over the past 2 days. On Wednesday, the number of net New Lows on the NYSE, i.e., New Lows minus New Highs, exceeded 2% of all exchange issues, a fairly large amount. The very next day, yesterday, conditions completely reversed as we saw net New NYSE Highs, i.e. New Highs minus New Lows, actually account for more than 2% of all issues. If you think that sounds strange, you’re correct. It is just the 15th such occurrence since the start of our data in 1970.

image

Here are the dates of these reversals:

3/25/1970
4/14/1972
7/11/1974
10/20/1977
1/2/2001
4/22/2004
5/11/2004
4/18/2006
6/28/2007
7/19/2007
9/19/2008
5/30/2013
10/10/2013
1/15/2015
11/16/2017

What would cause such a phenomenon? Well, the only thing we can offer is that a Junkie Market, i.e., one with lots of New Highs and Lows, is really the only type of market in which such a reversal is even possible. Thus, it should not be surprising that the S&P 500’s aggregate performance going forward following these precedents has been less than stellar (incidentally, aggregate performance is similar following the 19 occasions of the opposite reversals, i.e., >2% Net New Highs to >2% Net New Lows).

image

With median returns negative from 1 week to 6 months, this appears to be another version of the Junkie Market that, for whatever reason, has not been kind to stocks going forward. Obviously, the presence of signals near cyclical peaks in the early 1970’s as well as 2001 and 2007-2008 do not help the aggregate returns (average returns are even worse than median).

Now, not all signals have occurred at the beginning of cyclical bear markets. However, as the chart shows, one interesting observation is that all of the occurrences have occurred during secular bear markets (that is, of course, if one accepts that we are still within the confines of the post-2000 secular bear market, as is our view – that is a topic for another time, though). The point is that, if true, the ramifications may reinforce the negative tendencies associated with Junkie Markets.

The bottom line for now is that, while it is certainly possible that stocks can continue higher in the interim, this condition of elevated New Highs and New Lows is a potential unhealthy headwind in the longer-term.

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If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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topspinslicer's picture

I find stability in my 1800's dated silver Morgan's

mcbond's picture

The real  'Junkie' Market is here:


Bitcoin Price Target: 1 Million?

 

Forecast: Continued acceptance is driving demand for Bitcoin. From recent price moves, Bitcoin is being compared to the Tulip Bulb Mania. True or not?

In the past year, Bitcoin moved from $800.00 to nearly $8,000.00, a multiple of 10. Given the draw and attention of Bitcoin, its store of value and its use as a medium of exchange, Bitcoin will continue to draw more and more users.

jamesmmu's picture
Einhorn: Issues That Caused the Crisis Are Not Solved… Richard Duncan: When Stocks Fall, Expect A Recession

http://investmentwatchblog.com/einhorn-issues-that-caused-the-crisis-are...

Bear's picture

"The average hedge fund returned 7.2 percent this year through October, while the S&P 500 Index has handed investors about 17 percent in 2017, with dividends reinvested"

why does anyone ever use a hedge fund? I'm all for Zero Hedge

ReturnOfDaMac's picture

Irrelevant.  Just STFU and BTFD.

Vlad the Inhaler's picture

True. Just look at the massive divergence on everything for the past couple of months, whether it's breadth or the NYMO or oscillators, and the market just kept going up through it all.  Nothing matters but liquidity.

Captain Nemo de Erehwon's picture

Add obligatory warning: Past performance is not a guarantee of future results.

Add community-service ad: This is your brain on drugs.

Grandad Grumps's picture

With AI in control, who knows what she will do ... likely whatever causes the most fragmentation of the human mind.