Number of Stocks Hitting New Highs on the Decline

While I hardly consider myself a “chartist” or technical analyst, I oftentimes look at the number of companies making new 52 week highs or 52 week lows to gauge the overall strength or weakness in the underlying markets. Whereas many fundamental analysts were urging caution during the March 2009 timeframe, an unusual number of technical analysts were getting massively bullish given the declining number of companies breaching new 52-week lows. Although the indexes were continuing to hit fresh lows, the breadths of the declines were rapidly diminishing. As suggested in the chart below, whereas nearly 1,900 companies hit a 52-week low in September 2008 (right around when Lehman collapsed), only 667 breached a new low on March 6, 2009 (when all the major indexes hit their cycle lows).

In a similar vein, despite the continued strength of the equity indices over the last 10 months (up until the last 2 days), the number of stocks hitting new 52-week highs hit a peak in October 2009. Technical strategists would argue that this suggests a market on the throes of a correction. If the last two days are any indication, they may be right.