Market Timing: The Two-Second Indicator

One of Cabot’s three technical indicators for market timing, the Two-Second Indicator is so named because that’s how long it takes to read: just two seconds, every day. This market trend signal measures the number of securities on the NYSE that reach new 52-week lows on any given day. We use the data from the Wall Street Journal, but the same information is readily available in most major newspapers.

When it comes to market timing, the Two-Second Indicator is most adept at detecting market tops. When the number of daily new lows on the NYSE is greater than 40, and the major indexes are rising to new peaks, look out! This says that, internally, sellers are in control of most stocks, and the indexes are masking this weakness. We call this the Leaky Boat Syndrome—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.

If there are more than 40 new lows after the indexes are five days or longer off their peaks, however, it’s not as big a deal. In this case, the Two-Second Indicator is simply telling you that the market in entering a correction. Now, you will still want to exercise caution, as the correction could be deep, but the chances that the market is entering a real bear market at that point are slim.

When new 52-week lows are less than 40, that’s a sign of a healthy, robust market. This says that the buyers are firmly in control of most stocks. As a market trend signal, the Two-Second Indicator is simple, but we’ve learned that the simplest indicators are often the best, and this one certainly fits the bill.

Michael Cintolo is Vice President of Investments at Cabot Heritage Corporation, and Chief Analyst of Cabot Market Letter and Cabot Top Ten Trader. He is also a frequent contributor to Cabot’s free e-newsletter, Cabot Wealth Advisory, and blog, The Iconoclast Investor. 

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