The Bullish Signal You Might Have Missed

01/12/2012 6:30 am EST

Focus: STRATEGIES

Mark Hulbert

Senior Columnist, MarketWatch

The vast majority of stocks hit 52-week lows in the late-summer swoon, which is actually a bullish indicator, explains Mark Hulbert of the Hulbert Financial Digest in a late October interview.

Mark, I want to just thank you for your 30-plus years of tracking these investment advisory newsletters, which has been the basis for a lot of our decisions as to who we’ve had as speakers for all these years. And it’s been of huge benefit to millions of investors.

Well, thank you so much for saying that, and thank you for all that you have provided in your show. It’s been a wonderful service, so it’s great to be here.

Well, great. Let’s get right into something you’ve just been writing about, which was from one of our speakers, Ned Davis’s shop, who has been following our other old friend, Norm Fosback’s high-low logic index. Apparently, it’s not only turned bullish, but it’s turned quite bullish based on its own amplitude, and it has a very good track record.

Well, that’s right. On the high-low logic index…I’ll say a few things that’ll go off a little bit in a complex direction, but it isn’t really that complex. It basically looks at the percentage of stocks that are reaching 52 week highs, and then compares that to the percentage that are hitting 52 week lows. It takes the lesser of those two numbers and that’s all there is. That’s the index that is the high-low logic index.

The theory behind it is that when that number gets too high, that means that you have a relatively high proportion of stocks that have both a lot of 52-week highs and 52-week lows at the same time. That typically is not a bullish thing.

So what you want to do to get a bullish signal from this index is to have a very low number, and that means, according to Fosback’s theory, that the market is acting in a particularly uniform way—that relatively speaking at least, you have a lot of stocks that are going in one direction and few going in another direction.

Now that makes sense when the market’s going up. If a lot of stocks are hitting new 52-week highs and very few reaching 52-week lows, I don’t think any one of us would argue, well, that’s a bullish thing, right?

But by the same token, he finds it equally bullish when lots of stocks are hitting 52-week lows and very few are hitting 52-week highs, even though that seems to be a market conformity or uniformity going in the wrong direction. Historically that’s been bullish, too, and that’s what we saw in the market’s plunge in July, August, September, especially in early October, when it dipped down into official bear market territory.

There were lots and lots of stocks hitting 52-week lows…not a big surprise there. Not very many hitting 52-week highs; again, not a very big surprise there. And yet, from the high-low logic index’s point of view, that’s a bullish phenomenon…

And it’s, in fact, reached one of its more bullish readings in recent history. If you go back and look, when it gets to these extreme values of the last 30 years, it’s almost always…In fact, I don’t know of any major exception to it catching a market top or market bottom within a month or two.

A few months, yeah. I think you wrote that it hit that low in 2008.

Well, that’s right. The longest period of time in which there was a time lag between a low reading of the high-low logic index—anything as low we’re seeing right now—and the market bottom came at the bottom of the bear market in 2008-2009.

And we got a reading in late 2009 that was similar to what we’re seeing right now, and the market didn’t bottom until early March. So it was about a two- or three-month time lag. But a lot of other times, it was actually much closer.

Again, we always can base anything we say just on a read of history. But assuming the future’s like the past, the most time lag that we might be talking about here is two or three months to see some sort of a tradeable bottom, and it may already be in for all we know.

Norman Fosback wrote about this in his Stock Market Logic, a whole chapter.

Well, that’s right. It’s a very good point that you raise. A lot of the indicators you see mentioned on blogs and so forth these days are indicators that are invented or inaugurated now, retroactively applying it to the data, and saying, “Wasn’t this a great indicator?”

What’s so important about this is that Fosback developed it in the 1970s. He wrote about it in his classic textbook, which is called Stock Market Logic. So this is not something that’s an after-the-fact sort of data-mining exercise.

Before the fact, it was in place, and in real time has had an excellent record. In fact, Fosback says it’s one of his favorite market-timing indicators of all.

Is he writing about it in his service as well, his news service?

Yeah, his newsletter is now called Fosback’s Fund Forecaster, and he is writing about that as far as I can tell. The only reason I say that is that his newsletter comes out relatively infrequently, every couple months or so, so he’s not had an issue that’s come out since this very bullish reading, and so one can only imagine what he might say.

But it turns out that Ned Davis Research has picked up on Fosback’s indicator, and gives Fosback full credit in their own service. And so I think the way to follow it on an ongoing basis now is probably through Ned Davis than it is through Fosback, though I can imagine that it wouldn’t be all that difficult for somebody to probably calculate it themselves.

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