Twelve lows against seven highs, the quiet market indicator

The short version

• On 1 September twelve companies in the S&P 500 recorded a new 52 week low and only seven a new high.
• The index itself is heading for its fourth winning year in a row in the current year.
• Among the lows stood mainly consumer, travel and leisure shares, among the highs health care and energy shares.

Twelve against seven

On 1 September twelve companies in the S&P 500 recorded a new 52 week low and only seven a new high. The index itself is heading for its fourth winning year in a row in the current year.

This comparison is one of the oldest figures in market observation and is rarely explained. It stands in every trading summary, costs two numbers and is still almost never placed next to the index level that it puts in order.

Yet the two entries from the same day appear to work against each other. The index is approaching its fourth winning year in a row, and at the same time more companies mark a twelve month low than a twelve month high. Both are correct, and the contradiction only dissolves once you know what each of the two figures measures.

What the figure measures

The statement is simple. If an index rises while more shares mark lows than highs, the rise hangs on a few large names.

The count itself knows no weighting. Every company counts once, no matter how large it is. Exactly that makes it the cross check for an index level that comes about under quite different rules.

That also settles why the two do not contradict each other. An index near its record and more lows than highs are not an arithmetic error but two measurements with different yardsticks. One counts weight, the other counts shares.

How to read it correctly

The right reading matters. Narrow breadth is not a forecasting instrument. Such phases can last a long time.

Anyone who reads the figure as a sell signal is using it wrongly. It says nothing about whether an index rises or falls tomorrow. It only says how many companies took part in the move so far, and that is information about the past.

What it does change is sensitivity. The more an index depends on a few shares, the larger individual news about these companies looks. A report that would barely stand out in a broadly carried market moves the whole index in a narrow phase. That is not a forecast about direction but a statement about the possible swing.

On 1 September the lows were mainly consumer, travel and leisure shares, and the highs health care and energy shares. That describes a rotation rather than a weakness.

This difference is decisive. If all areas fall at the same time, capital is withdrawing from the market. If some fall while others mark new highs, it is merely changing industry.

The split on this day is orderly and not random. On one side stand areas in which households decide freely, on the other health care and energy. The count of twelve to seven therefore describes less the state of the market than the direction in which it is currently shifting.

Assessment

In reporting this figure costs half a sentence and prevents the most common misreading of index news.

A record level is usually read as a statement about the economy. In fact it is a market value weighted statement about the expectations for a particular group of companies.

Anyone who wants to know how healthy an upward move is should therefore not look at the index level but at how many shares carry it. This figure is published daily and almost never quoted.

Frequently asked questions

What is a 52 week high

The highest price a share has reached in the past twelve months. If you count daily how many shares of an index mark new highs and how many new lows, you get a measure of market breadth, that is of how many companies actually carry an index move. On 1 September twelve lows stood against seven highs.

How can an index stand near its record when more shares mark lows

Because the large indices are weighted by market value. A very large company moves the index more than many small ones together. In phases of narrow breadth an index level therefore describes the situation of a few heavyweights rather than that of the whole market.

Is narrow market breadth a warning signal

Narrow breadth is not a forecasting instrument, and such phases can last a long time. What it does change is sensitivity. The more an index depends on a few shares, the larger individual news about these companies looks.

This text is not investment advice. It reports verifiable figures and puts them in context.

This analysis is for information only and is not investment advice.