Two-Second Stock Market Indicator

The Two-Second Stock Market Indicator is a way to quickly identify positive broad market divergences during prolonged declines.


two-second indicator

The Two-Second Stock Market Indicator

The Two-Second Stock Market Indicator was developed by Carlton Lutts, founder of Cabot Wealth Network. Carlton came up with the idea in the early 1990s when flipping through a bunch of historical chart books (nothing was online back then)—he noticed that at nearly every major market top, the number of stocks hitting new lows expanded before a bear market began, often providing weeks or months of warning signals before the sellers took control.

For three years, he studied reams of data covering every day’s trading activity. The data he reviewed went back as far as the beginning of 1962 … covering all of the bull markets, the bear markets and the do-nothing markets during that time period.

Here’s what he found: As long as the number of daily new lows did not exceed 40, the market was sound and in no danger of falling significantly. And remarkably, this specific threshold of 40 new lows remained the same over the entire 50 years he studied.

After further digging and a lot of research, the Two-Second Indicator was born, and for 25 years it helped investors turn defensive ahead of many sharp declines (and spot numerous major bottoms, too).

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To use it, all you have to do is find (in your newspaper or online) the number of stocks on the NYSE that hit new 52-week price lows on the previous day. This single number, when properly interpreted, will give you a very good idea of the health of the current stock market.

Nothing is black and white. There is a judgment factor involved in the interpretation of this indicator. But it is not complicated. Success comes from watching this indicator and interpreting it in the context of the actions of the entire market.

Is this indicator perfect? No.

Limitations of This Indicator

In recent years, the Two-Second Stock Market Indicator has lost its luster, at least in terms of spotting market tops. (It remains a very good measure, however, of identifying positive broad market divergences during prolonged declines.) Maybe it’s the addition of so many “non stocks” like preferred stocks, ETFs and bond funds. Maybe it’s because many sectors act as interest rate proxies (utilities, REITs, MLPs, etc.) and interest rates may have ended a 30-plus year decline. Maybe it’s the addition of a bunch of foreign stocks to the NYSE that dance to their own drummer.

Whatever the reason, the Two-Second Stock Market Indicator (even when looking at “only” common stocks) flashed a lot of yellow and red lights during fruitful and relatively smooth periods of time. Possibly more important to growth investors is that the action of the broad market is often out of gear with growth stocks, at least in the short term— we’ve seen many sharp rotations with the Two-Second Indicator actually improving when growth stocks got hit.

Do you have a preferred stock market indicator? What is it and why do you like it?

 

 

 

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