This will be very technical, but if you commit to reading it, it should bring a glimmer of tinsel and mistletoe. So, get comfy and put on your thinking cap.
HILO Index, Our Hope indicator?
One indicator we look at to measure the overbought/oversold state of the market is the NYSE High Low Index. The HILO index is a 10 day moving average of those stocks in the NYSE that are making new highs relative to those stocks that are making new lows. This reading most recently crossed back below the 10% level, which is typically looked at as the threshold where we would begin to expect the market to begin going back up.
What Can We Hope For?
Don’t get bogged down in the overwhelming numbers on the chart below, lets focus on the bottom line….the S&P 500 has average returns of of 37.65% 1 year following the index crossing this 10% threshold level. More conservatively, when the forward returns from 2008 and 2009 are removed, we are still left with an average return of 18.55%.