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Momentum Top & Bottom Signals

Posted By Barry Ritholtz On November 15, 2008 @ 9:47 am In Contrary Indicators,Markets,Technical Analysis,Trading | Comments Disabled

Mike Santoli mentions two interesting technical measures in his streetwise column [1] in Barron’s this morning: Triple digit stock momentum at tops, and the downward momentum of low priced S&P500 stocks at lows.


“LAST YEAR, WITH THE MARKET near what would prove its ultimate high, I noted a perverse pattern in which triple-digit- priced stocks were consistently outperforming other issues, a sign of momentum-chasing speculation (Streetwise, May 14, 2007).

We’ve come nearly full circle, as single-digit midgets abound and stocks are pounded harder once they lose a digit before the decimal place. Ned Davis Research tracks the price of the 25th-lowest-priced stock in the S&P, which tends to mark a low as bear markets culminate, as a marker of speculative juices having been wrung out of investors. It’s now around $6, near levels of the 2002 bottom, though not yet the 1974 low — near when Barron’s ran a story pointing to the abundance of sub-$2 stocks that were effectively warrants on the survival of American capitalism.”

If I understand this correctly, when $100+ stocks are out performing the markets, one needs to be somewhat cautious, as this is a dangerous warning sign? And when S&P500 stocks break below $10, and then underperform the broader index, this can mark a bottom?

Hmmm . . .

Both of these metrics makes some intuitive sense; Has anyone back-tested either of these? Can you show some (or point to) data that verifies any of this?


Welcome to the Mind-Numbing Market [1]
Barron’s NOVEMBER 15, 2008


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[1] streetwise column: http://online.barrons.com/article/SB122670741435729951.html

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