After research, there appears to be a bottom indicator based on these values.
The Equation
The thesis we wanted to test involves this equation:
HOLU Function = (% Below 52 Week High) - (% Above 52 Week Low)
In order to find a bottom, we wish to maximize The HOLU Function (HOLU = High Overextended Low Underextended).
Theory Behind the Equation
The theory is that we want to:
- Maximize the Percentage Below the 52 Week High:
The Greater the Percentage Below the 52 week high, the more likely the market has overextended to the downside, and the bottom may be near. - Minimize the Percentage Above the 52 Week Low:
The stock market axiom "Buy low, Sell High", appears to be true, and minimizing the percentage above the 52 Week Low is a goal.
So by combining both goals, we have created the HOLU Function above and we wish to maximize the value.
Method
We used data on the S&P 500 From 1950 to March 31, 2008. We looked at the HOLU Function values in relation to the forward one year return on the S&P 500. We averaged the one year forward return on the S&P 500 based on different cutoff values.
The Results
In the chart above, if we have a HOLU Value greater than 10%, the average one year forward S&P 500 return is 13.55%, many percentage points above the average one year forward S&P 500 return of 8.51% if the HOLU value is less than or equal to 10%.
When we use a larger cutoff HOLU value of 20%, we get even better results, 18.26% to 8.82%. If we have HOLU Values greater than 30%, we have the largest gain, an average one year forward S&P 500 return of 22.13% (compared to 8.97%).
So the HOLU Function/Equation above appears to generally true. With HOLU Values above 10%, 20% or 30%, we increase our chances of having a good one year forward return if we can assume that history holds. We can use a high HOLU Value above 20% or 30% as a stock market (S&P 500) bottom indicator.
Sample Bottom Days
Here is a sample of the 59 days where the HOLU Value is greater than 30%.
| Date | HOLU | One Year Fwd Return | % Below 52WeekHigh | % Above 52WeekLow |
|---|---|---|---|---|
| 10/9/2002 | 33.75% | 33.79% | 33.75% | 0% |
| 7/23/2002 | 34.65% | 22.70% | 34.65% | 0% |
| 9/21/2001 | 33.84% | -12.68% | 33.84% | 0% |
| 12/4/1987 | 33.51% | 22.23% | 33.51% | 0% |
| 10/19/1987 | 33.24% | 22.41% | 33.24% | 0% |
| 12/6/1974 | 30.48% | 34.75% | 34.86% | 4.38% |
| 10/3/1974 | 44.11% | 34.16% | 44.11% | 0% |
| 9/13/1974 | 41.49% | 28.51% | 41.49% | 0% |
| 5/26/1970 | 33.03% | 46.21% | 33.03% | 0% |
Please note that October 19, 1987 is Black Monday!
Today's Value
As of March 31, 2008, the S&P 500 is 1322.70. 52 Week high is 1565.15 and 52 Week Low is 1273.37 (Closing Low).
HOLU = (% Below 52 Week High) - (% Above 52 Week Low)
= 15.49% - 3.87%
= 11.62%
While we would like HOLU values greater than 30%, 11.62% seems like a decent HOLU value if we look forward one year to the future.
Other Bottom Indicators
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