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A Sell Signal Worth Keeping an Eye on?

Here’s some interesting commentary from Mark Hulbert at MarketWatch regarding a rather obscure indicator (though not obscure enough for Ned Davis to follow it which adds substantial credibility):

The last time this indicator generated a sell signal was in late 2007, just before the Great Recession.

The indicator is called the “High Low Logic Index,” and it was created by Norm Fosback in 1979, then the president of the Institute for Econometric Research, and currently editor of Fosback’s Fund Forecaster. The indicator represents the lesser of two numbers: New 52-week highs and new 52-week lows (both expressed as a percentage of total issues traded). High readings are bearish, while low levels are bullish.

Fosback’s explains the theory behind the indicator: High readings suggest that “the market is undergoing a period of extreme divergence… Such divergence is not usually conducive to future rising stock prices, [since] a healthy market requires some semblance of internal uniformity.” Fosback furthermore found that “it doesn’t matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs.”

Have a look here and let me know what you think. Is it just another useless indicator or is there some merit here?

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