Systematic Relative Strength

At Dorsey, Wright Money Management we have followed the NYSE high-low index for years. In fact, Harold wrote his CMT paper on this indicator. It’s useful for market entry and it’s not a bad overall breadth indicator.

Now Mark Hulbert is reporting that the market indexes may be months away from a peak based on the high-low data. While we’ve never looked at the high-low data for this specific feature, it is true that markets almost never peak at the point of maximum momentum.

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.) As of 1/19/10.

(Click to Enlarge)

The 10-day moving average of this indicator is 89% and the one-day reading is 85%. This oscillator has shown the tendency to remain overbought for extended periods of time, while oversold measures tend to be much more abrupt.