Be wary when markets split (by SentimenTrader)

In mid-March, headlines were dire. Stocks were plunging, inflation was picking up, and headlines were filled with the potential of nuclear war. During this mini-panic, the "smart money" became the most confident in a rally in years. In the weeks following those extremes, buyers entered in force and triggered several breadth thrusts and impressive internal momentum. Those developments have a long and compelling history of preceding even more gains in the months ahead.  Not everything is hearts and roses. There are some worries, including the fact that the market environment hasn't been able to turn healthy. The best thrusts tend to see little give-back from the initial surge, while this time, we've seen a persistent leak almost from the get-go. One of the requirements for a healthy environment is that 52-week highs on the NYSE have to outnumber 52-week lows. That's not happening with any consistency. Not only that, there is currently a remarkable split in the market, with too many securities at both extremes. The HiLo Logic Index was above 4% again on Friday, meaning more than 4% of NYSE issues hit a 52-week high, and more than 4% of them fell to a 52-week low. That is not what bulls want to see.

What the research tells us... The S&P 500's annualized return when the HiLo Logic Index is above 4% is a miserable -22.1%. A similar split is happening within the S&P 500 and on the Nasdaq exchange. At the same time, investors are pulling back on leverage after a big surge.