Messages From the Highs and Lows

• ByTim Melvin, RealMoney.com Contributor
• On 1:30 pm EDT, Thursday September 24, 2009

It has been a while since I scanned the list of 52-week new lows. As the market has surged higher, I have concentrated on locating "too cheap not to own" stocks and staying on top of conditions at companies that I already own.

This morning, I decided to scan the list and see if I could find a few ideas, or at least information. When I look at the past several trading days, I see that the list of stocks making 52-week new lows is still primarily reverse bearish ETFs and small banks.

The few non-banking companies on the list continue to point to a weak economy. USA Truck just hit a new low as earnings swung from a profit to a loss. The dry freight carrier is still dealing with excess capacity and price competition, as are other trucking companies. For the most part, the new-low list pointed to a weak economy, with continuing very poor conditions for community and regional banks.

This piqued my curiosity a little, so I headed over to the list of 52-week highs and lows to see what I found. Apparently we are eating a lot of chicken wings, as Buffalo Wild Wings hit new highs this week. Soft drinks are strong both in Europe and the U.S., as both Dr Pepper Snapple and Coca-Cola Hellenic Bottling are at their yearly price highs.

If I look at stock price, retail is doing very well, as Polo Ralph Lauren, American Eagle and Jos. A. Bank all trade at 52-week highs.

This does not at all square with my view of the world right now, so I dug a little deeper. Jos. A. Bank I can see at new highs. The retailer just turned in a great quarter with growth on both the top and bottom line, one of the few companies to do so. Then again, if the future is so bright, why have officers and directors sold over 300,000 shares recently?

I can ask the question about Polo as well. Insiders there, including the company's president, have sold more than 700,000 shares. The stock fetches a 17 multiple on earnings, which I find a bit steep for a company that has declines in both revenue and earnings. American Eagle has falling revenue and heavy insider selling.

JOSB was also on the new all-time high list, so I got really curious and went to the company's Web site. The answer leaps off the page. The company is basically a discounter. Shorts are 2 for 1, as are dress slacks. Men's suits are "buy one and get two free." Add the fact that discount retailers TJX Companies and Ross Stores are also making new all-time highs, and the strength in the stock makes more sense.

The all-time list is shouting that consumer shopping habits have changed toward cautious and inexpensive clothes shopping, and that trend is going to continue. This makes me skeptical of the upper-end stocks like Polo that are hitting highs for the year on the basis of hope of a recovery.

The all-time low list, on the other hand, pretty much confirms the message of the annual low list. It is all ETFs and smaller banks. The number of leveraged bear funds points out just how dangerous these vehicles can be. They need to be regulated like options and futures to protect uninformed traders from themselves. Small banks will continue to dominate the new-low list until real estate stops falling in value, and that is still not happening. A lot of capital is going to have to be raised to shore up tattered balance sheets before it is safe to buy them.

One of the few technical measures I ever bother to check is the high/low ratio put out by Investor's Intelligence. Right now we are at levels not seen since the 2007 highs. The level is also right where we made annual highs in both 2005 and 2006 as well. On the Nasdaq, the high/low ratio is above the last several market highs.

This ratio has been pretty effective at finding highs and lows in the stock market. In fact, I wish I had checked it back in March, as it had fallen to its lowest level in over five years and might have led me to be a little more heavily invested. Had I listened to it then, I could have closed the books for the year and headed south for the winter. This now becomes a weekly check for me.

There is a lot of useful information in the high and low lists. Right now it is telling me that the shift in consumer habits is firmly in place and that the short-term excitement in upper-end retailers is probably misplaced. Small banks are still struggling, and it is too soon to invest in my favorite sector for the next decade. Most importantly, the market is at levels that usually indicate that the high is in place, and my sense of caution is ramped even higher than normal.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider USAK to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Buzz up!