Read Larry Connors' blog – Short Term Trading Strategies
In a recent article, I proposed a simple indicator. Look over the past 20 days and subtract the number of days in which we've made a 20-day low from the number of days in which we've made a 20-day high. There's no question we've been strong on that measure in the S&P 500 Index. We've had no 20-day lows in the past 20 days, and we've had nine highs.
Ah, but strength does not always bring strength. Since 2004, my research found that market returns are subnormal--and actually negative over the next two weeks--when we've had five or more new 20-day highs than lows. When new low days have outnumbered new highs by five or more over a 20-day period, market returns have been extremely bullish.
But it's not just market strength that has me concerned. I also notice strength in the large cap indices that isn't being matched by strength elsewhere. Consider the following:
How broad is the large cap rally? Consider this:
The bottom line is that a narrowing base of large cap issues, highly weighted in the major indices, are carrying this market higher. As we look from the March-May period to the present period and even within the last few trading sessions, the rise is becoming more selective. Every piece of research I have conducted suggests to me that, on average, intermediate-term market returns are subnormal following such extended narrowing.
Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Performance, is due for publication this fall (Wiley).
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