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Few New Highs, but Even Fewer New Lows

The lack of new highs may seem like a concern, but one cannot talk about new highs without also looking at new lows because there are two sides to the story. We must weigh both sides for a true assessment.

The S&P 500 is within 2% of an all time high and there were just 28 new highs on Friday. There were over 100 new highs in early June, but new highs have not exceeded 50 since early September. There is an upside leadership issue within the S&P 500, but this alone is not reason enough to turn bearish. 

Despite fewer new highs, new highs are still outpacing new lows. This is what really matters because it means there are still more stocks in strong uptrends (hitting new highs) than strong downtrends (hitting new lows). Now let’s measure it with an indicator.

Two weeks ago I featured a timing technique using the High-Low Line for the S&P 500. Basically, the index has a bullish bias as long as there are more new highs than new lows. We can measure this on-going differential using the High-Low Lines, which rises when new highs outpace new lows. A rising High-Low Line is net bullish for the index, regardless of the total number of new highs.

Today I want to expand on this concept with the High-Low Lines for the six largest sectors in the S&P 500. These indicators can be used to find the leading sectors and measure the overall health of the S&P 500.

The charts below show these High-Low Lines with their 20-day EMAs and the sector weight. Note that I use a 20-day EMA with the sector High-Low Lines and a 10-day EMA with the index High-Low Lines because the latter are broader and smoother. Technology is by far the largest sector and accounts for 22% of SPY. Currently five of the six High-Low Lines are above their 20-day EMAs and rising. The Technology High-Low Line has been rising the longest as it crossed its 20-day EMA back in late January. The Finance and Industrials High-Low Lines have also been strong for an extended period as they crossed their 20-day EMAs in February.

One cannot be bearish on SPY when the High-Low Lines for Technology, Industrials and Finance are rising and leading.

Elsewhere, the Consumer Discretionary High-Low Line turned up in early September, while the Healthcare High-Low Line turned up last week. The Communication Services High-Low Line is the most erratic of the six because it has the fewest component stocks. It has dipped below the 20-day EMA three times in the last six months, but moved back above on Friday.

Putting it all together, the six big sectors account for 78% of SPY and this is more than enough to support an uptrend in the ETF. Of note, the Consumer Discretionary High-Low Line turned up quite sharply this week as new highs expanded in the sector. This is also a positive sign for the broader market.

Chartists looking to time these sectors and SPY can watch the High-Low Lines for signals. These signals are not very frequent and they can sometimes catch big trends, such as the uptrend in XLK since late January. At the very least, the direction of these lines tells us which side of the market we want to trade. Right now, this is the bullish side for SPY and the six big sectors.