Will This Historically Bullish Setup Send Stocks Higher?

While stocks finished trading on Wednesday higher by 1.75%, we still saw an increase in the number of stocks making new 52-week lows on the NYSE. At first glance I thought this was another sign of deteriorating breadth, with fewer stocks participating in the advance. Not to say this is not true or to take away from the notion that breadth has been weakening over the last several weeks, but historically this setup has been short-term bullish for equities.

To look at things further I put the data in excel and ran the numbers. Below is a chart that shows past instances of the number of new 52-week lows on the NYSE rising, the S&P 500 ($SPX) closing with a gain of at least 0.80%, and the percentage of NYSE issues making a new 52-week low being greater than 7% going back to 1990. It’s rather common for the number of new 52-week lows to increase while stocks rise, but it’s rather rare to see this occur with a large percentage of stocks.

As you can see, when these three criteria are met, we have historically had a short-term bottom in stocks. The last example of this happening was in 2011 and before that was at the 2009 low. When looking at the data it’s hard to ignore the instances where these measures lined up before the 2000 and 2007 highs. So it is not to say that we won’t have lower prices, as there are many pieces of data right now that could help make that argument. However, we may be seeing some exhaustive selling that could allow equity bulls some reprieve.

If we were to tighten up the criteria to the S&P 500 having a gain of greater than 1.75%, like we saw on Wednesday then the number of previous occurrences gets cut from 24 down to 7, with the last four occasions being March 3, 2009, September 2008, and October 1999.

Data courtesy of stockcharts.com

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