Near the beginning of summer when the statistics on this page were gathered, the world was a sorry place indeed. There seemed to be something of a War-of-the-Month plan in effect -- the British against the Argentines, the Israelis in Lebanon, plus a few older skirmishes hardly worth recalling. Worse still, interest rates stubbornly refused to come down, while money supply repeatedly exceeded targets. No wonder, then, that stocks went into another swoon after perking up a bit from March to May. Wall Street loathes uncertainty, even if earnings for the most part were proving able to withstand adverse conditions.
As the Dow Jones Industrial Average shed some 70 points, or 8%, in a single month from May to June, there was a clear-cut sign that stocks weren't performing as badly as generally supposed. That shard of a silver lining came in the comparatively few new lows registered during the spring plunge, suggesting that stocks were sparking the interest of bargain hunters to buy at higher levels than before.
To measure this important quality-of-the-market factor, most technical analysts apply a gauge called the high-low differential. This is a 10-day moving average of the difference between daily new highs and daily new lows. Although, of course, more stocks went to new lows during the decline than to new highs, this indicator has now made two significant advances. On both the New York Stock Exchange and the American Stock Exchange (data from over-the-counter is not sufficiently inclusive), the moving averages did not go down as far in March, when the DJI was under 800, as it did in late September 1981, when the Dow was 25 points higher. The high-low differentials again improved this June; as the DJI once more broke 800 on the down side, the charts traced by the moving averages held significantly above the level in March.
As a bear market progresses, the number of new lows usually increases on each intermediate-term wave (a move lasting several weeks before coming briefly to a halt). Much more so than bull-market tops, bear-market bottoms need a lot of "work" -- backing and filling -- before the pessimism of all those wanting to sell is wrung out and the prescient optimism of new commitments begins to carry the day. When the number of new lows lags, selling pressure is clearly mitigating. Thus high-low statistics are a major key in detecting changes in mass investment psychology that lead to major market reversals.
Unfortunately, they are not the only ones. A market turn for the better cannot be gauged on the waning of new lows alone. Another outstanding evaluator of sentiment is the advance-decline line, also a 10-day moving average, previously discussed in these pages. If, in addition to new lows, the ratio of declines to advances starts to decrease as the market falls, a much stronger indication of underlying firmness is established. As of mid-June, this was not the case. But despite the turmoil outside and the naysayers within, Wall Street had no cause to throw in the towel. Investors who made it this far without severe loss could breathe a little easier -- unless new lows come on strong again.