Monday, March 31, 2008

Stock Market and S&P 500 Bottom Indicator Based on Extension from 52 Week Low and 52 Week High

Is there a stock market (or S&P 500) bottom indicator based on the current (S&P 500)index value in relation to the 52 week high and 52 week low?

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:
  1. 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.

  2. 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.


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 HOLUOne 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
  1. Stocks above 50 and 200 Day Moving Average
  2. Put-Call Ratio
  3. New High-Low Index
  4. Ratio of Stocks Above 200 Day Moving Average to 50 Day Moving Average.
  5. Bull Bear Ratio and Bullish Percentage
  6. Oscillators

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