The benchmark large-cap SPX Index continues to set new 52-week highs as mega-cap technology stocks drive the index higher.
The S&P 500 reached an intra-day high of 4,340.13 on 6/12/23 and ended at 4,338.93, closing at new 52-week highs. Also, the Nasdaq Composite Index (COMPQ) and Nasdaq 100 Index (NDX) achieved 52-week highs during early June and mid-May 2023, respectively.
The stronger-than-expected economic numbers over the past few weeks, including the tightness in the labor market via the weekly jobless claims, will likely force the Fed to hike rates 25bps later in the month and another 25bps in the subsequent FOMC meeting. Market volatility will increase as second-quarter corporate earnings releases can impact specific names.
Understandably, traders remain cautious about the market's recent gains due to a few mega-cap technology names. The new 52-week highs in SPX, COMPQ, and NDX have many fearing this is not sustainable.
So, what is the significance of the 52-week high indicator?
One theory postulates markets or stocks that closed above the highest level over the past 52 weeks show leadership qualities such as price momentum and relative strength.
It is based primarily on the premise that the 52-week high acts as a resistance zone, preventing the market or stock from moving higher.
However, once the hurdle has cleared, this will prompt the rally to progress toward the next resistance zone, if any. Establishing new 52-week highs can also signal improving or strengthening market internals, suggesting more stocks are participating in the rally toward new 52-week highs. In addition, breaking out above 52-week highs can lead to potential supports as the previous breakout levels turn to supports on pullbacks.
Others theorize that since a market or stock trades to the top of its 52-week range, it suggests it may be vulnerable to profit-taking given the overbought conditions and distance from key supports. Although a breakout to new 52-week highs may signal the start of the next bull rally, the lack of follow-through is a bearish condition, indicating a false breakout and a trend reversal.
A new 52-week high and low may be a reliable buy or sell signal for traders or shorter-term investors. For long-term investors, including buy-and-hold types, the indicator may not be as helpful. Many investors probably fall somewhere in the middle of the two-spectrum. Active traders and investors may rely more on the indicator to buy or sell, while passive investors may not care as much.
Three (3) major market indexes (i.e., SPX, COMPQ, and NDX) are currently setting 52-week highs but not all-time highs. Four (4) other market indexes (INDU, NYA, MID, and SML) are currently trading below their respective 52-week highs.
Interestingly, INDU, NYA, and MID are within striking distance of achieving their 52-week highs. INDU at 34,712.28 (12/13/22), NYA at 16,222.20 (2/1/23), MID at 2,738.88 (2/2/23 high). The small-cap SML is still far from its 1,320.95 (2/3/23).
Although stocks have rallied sharply over the past year on backdrops of many headwinds, bearish sentiments remain widespread.
Will the bears be forced to capitulate and buy stocks at higher levels? This time frame may be approaching, especially if INDU, NYA, and MID record new 52-week highs.
On the other hand, SPX has rallied over 29.17% from the October 2022 low point or close to the returns during the early parts of the global financial crisis, only to fall back once the recession occurred. If market indexes do not follow through with new 52-week highs and reverse sharply lower, these false breakouts will favor the bears growling loudly again, and the 52-week high indicator does matter.