The Two-Second Indicator is so named because that’s how long it takes to read: Just two seconds, every day. Specifically, this indicator measures the number of securities on the NYSE reaching new annual (52-week) price lows on any given day. This data is readily available in most major newspapers, though we use the data from The Wall Street Journal.
The Two-Second Indicator’s specialty is detecting market tops. When the number of daily new lows on the NYSE is greater than 40 while the major indexes are rising to new peaks, look out! It’s telling you that, internally, sellers are in control of most stocks, and the indexes are masking this weakness. We call this the Leaky Boat Syndrome, where, on the surface, things look fine, but in reality you’re taking on water! It’s the same story when new lows expand to more than 40 just as the indexes come down from their peaks – again, not a good sign.
However, if new lows expand to greater than 40 after the indexes are five days or longer off their peaks, then it’s not as big a deal; in this case, the Two-Second Indicator is simply telling you the market is entering a correction. This correction could be deep, and thus you should still practice caution. But the chances that the market is entering a real bear market at that point are unlikely.
Finally, when new lows are less than 40 day after day, that’s a sign of a healthy, robust market – the buyers are firmly in control of most stocks. Overall, it’s a simple indicator, but we’ve learned that the simplest indicators are often the best, and the Two-Second Indicator certainly fills that bill.
More on Cabot Market Timing Indicators
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