Looking For, But Failing To Find, An Expansion In New Highs by Eric Bush, CFA – Gavekal Capital Blog
We have had a nice little bounce in the equity market over the past two and half weeks. Since making a multi-year low on 2/11, our GKCI United States Index has rallied by nearly 7%. From the May 2015 peak to the February trough, the index fell by almost 16%. So has the latest rally kicked the equity market correction to curb and have equity markets entered into a new bull phase? Unfortunately, one of the more reliable market internal data points is indicating to us that there is probably further downside ahead in the short-term for investors.
When at least 55% of US stocks are making new 20-day highs, this is a sign that the overall asset class is in demand and that stocks are being widely bought. In other words, this is a sign that equities are in a bull market and investors should be participating. In the chart below, we plot new 20-day highs against the GKCI United States Price Index and we have added a line at 55% to mark when new highs hit this threshold. Granted, this indicator missed the 06-07 rally (perhaps a sign of the narrowness of that bull market), but otherwise it has generally been correct in identifying when stocks are in a bull market. One of the reasons we are holding back our enthusiasm for this latest rally is the fact that new 20-day highs only reached a peak of 33% last week and have since fallen to just 22%. This is a sign to us that the distribution phase of the correction isn’t over yet and the market hasn’t moved into a broad accumulation phase.
Qualivian Investment Partners Up 30% YTD; Long ORLY Thesis
Qualivian Investment Partners commentary for the second quarter ended July 30, 2020. Q2 2020 hedge fund letters, conferences and more “Short-term investors will accept a 20% gain because they didn’t spend the time to develop the conviction and foresight to see the next 500%.” - Ian Cassell Executive Summary Readers of investment letters fall into Read More
In addition, not only are we not seeing an expansion in new highs in the US, we aren’t seeing it anywhere in the world. New 20-day highs hit just 31% in this latest rally in Japan, 27% in the UK, and just 23% overall for all stocks in the developed market. When the market finally makes the bullish turn in earnest, we expect new 20-day highs to be an early sign post that we are headed in the right direction.