“A large number of new 52-week highs is very bullish. A large number of new 52-week lows is very bearish.” – Pundit

Pundits make these statements with conviction. Conviction, we are told, is a good thing, regardless of whether it is based on fiction or fact. New highs, they scream, are bullish. New lows, they scream, are bearish. Simple. Case closed.

Actual analysis accompanying said statements? Nil.

What does the evidence suggest? Let’s explore…

We have data on NYSE new 52-week highs and lows going back to 1970. To standardize the analysis over time (as the # of stocks in the NYSE varies), we need to use a ratio of new highs to new lows and segment these ratios into deciles.

In decile 1 are the lowest ratios (fewest 52-week highs as compared to 52-week lows). In decile 10 are the highest ratios (most 52-week highs as compared to 52-week lows).

Going back to 1970, what do we find?

There is nothing in the data to suggest that a high ratio is uniquely bullish or that a low ratio is uniquely bearish. What we find is positive returns following all ratios going forward.

While a high ratio is followed by above-average 1-6 month returns, a low ratio is followed by above-average returns from 3 months through 5 years forward. Average forward returns for the lowest ratios beat those from the high ratios in every time period except 1 month forward.

That is not to say that a large number of new 52-week highs are by themselves a bad thing. They certainly are not as evidenced by the positive forward returns. They’re just not as good as they are portrayed to be, and surprisingly, not as good as a large number of 52-week lows.

The evidence of stronger forward returns, if any, seems to exist in the 1-month time period and in the consistency of positive forward returns. A high ratio of new highs to lows tends to predict a higher probability of a positive forward return.

New Highs, New Lows, New Noise

Sound bites on new highs and new lows are interesting. But as we continue to learn, not everything that is interesting is actionable. Most things we hear on a daily basis are just noise.

In December we have seen a spike in new 52-week highs and many pundits telling you that is the most wonderful thing since sliced bread. Back in February when the market was 20% lower they said just the opposite when there was a spike in new 52-week lows.

Why would they say such things when the facts don’t support it? Remember: it is their job to entertain; it is your job to ignore.

If anything, history has shown that longer-term investors should actually prefer new lows to new highs as that tends to mean above-average returns going forward. That should make sense intuitively because you are more likely to see new lows after a market decline, when the low in “buy low” presents itself.

In any case, it is a myth to say that a large number of new 52-week highs relative to lows is uniquely bullish while the reverse is uniquely bearish.

Don’t believe everything you hear on TV, especially in this business.