Zignals: When New Lows reach Extremes it may not be Bullish

For the latter part of 2008 the number of stocks making new lows soared as the corresponding reverse for stocks making new highs flat-lined. This typically is considered a capitulation and a strong indication for a bottom, but it may not mean a bottom for all stocks.

In 2003 to early 2004 the reverse situation occurred where the number of stocks making new highs wiped the floor of stocks making new lows. The first peak in mid-2003 did not mark a top as may have been expected, although the shift in momentum following 3 years of selling was enough to keep the bullish advance intact.

The second peak - which closely approximates the second peak markets are making now in new lows - did mark the eventual top for that cycle, but it did not bring a collapse in market prices; instead it kicked off a steady advance where the trend in stocks making new highs fell as fewer sectors (and therefore stocks) participated in the rally. Eventually the last sector standing was the energy sector which eventually popped.

Could the reverse scenario play out?

Markets continue their decline but sectors like Transports, Regional Banks, Consumer Staples, Budget Retailers should do well and later, Technology and Services sectors too.

In the near term some form of relief rally can be expected, but longer term this slump may take considerably longer to work its way out of the market. The 2000-2003 decline didn't have to contend with the damage we are seeing now; partly because the decline was related to over-inflated (non-earning) technology plays; 'old economy' stocks were still making money. The current decline has smacked every company bar a select handfull and this will take a lot longer to work its way out of the system.

Buyer beware.

What does this mean for your stocks? Make a call in Zignals Stock Charts and share your thoughts.

Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts, and stock charts website

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