The media was all abuzz this week with the “New Highs” made by the Dow Jones Industrial Average which climbed above its peak of late 2007. Less noise was made about the fact that the S&P 500 and Nasdaq have not made new highs, perhaps because people prefer to hear the good news.
It is important I believe as an analyst and trader (or investor) to separate the fact from the fiction, because very often the financial media blurs the line between the two. The fact that new highs were reached in the Dow was widely interpreted as meaning that we should expect further bullish moves from the market. This is a mistake. The fact is that new highs were reached. The idea that this means that we should “turn bullish” is not only fictional, it is deeply flawed.
Of course the new highs in the Dow are exceeding a peak of almost six years ago (six-year cycle anyone?), but there is also a shorter term drama playing out, which has new highs in all US markets. What do these new highs mean? I have been reminded often recently of the market situation in late 2007, and to explore this idea I would like to draw your attention to what “new highs” meant in 2007.
Note the sequence of three bullish 18-month cycles, the straddled trough of August 2007, which implied fairly symmetrical price action around that trough, and the new highs made in October of 2007. I don’t need to tell you what those new highs meant. Here is what is happening now:
The similarities are clear. Price action surrounding the trough of November 2012 is stretching the definition of a straddled trough to its limit, with price now about 5% higher than the peak before the trough, but the Nasdaq is still showing a very likely straddled trough:
And so what do New Highs mean in terms of looking ahead? New Highs more often occur at or near peaks in the market, and their implication is not bullish, but bearish.
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