In our daily work we monitor the intraday price action of the major stock indexes in an effort to gauge investor conviction. A string of strong stock market closes is one indication of strong investor conviction, and vice versa. As such we developed some tools to help us measure strong and weak stock market closes, which we call our GaveKal Capital Market Close Indicators.

In a post about two months ago we opined that weak stock market closes were on the rise because our Weak Close Indicator had troughed and had begun to move higher. That is not exactly how things have played out. Instead, weak closes have diminished and strong closes have turned up, which has led to our Net Close Indicator turning back up to near a record high. Our Net Close Indicator simply subtracts the value of the Weak Close Indicator from the Strong Close Indicator.

This is an important development because the Net Close Indicator for the S&P500 hit a level two days ago that has only been eclipsed three other times in the previous 30 years (May 2013, March 2011 and July-February of 1995-1996). That level, a reading of 32, also happens to be two standard deviations from the mean, which demonstrates just how extended the Net Close Indicator is at the moment. Since this is a mean reverting series with no trend, if history is a guide we should now expect weak closes to pick up and strong closes to diminish. Such action in the past has coincided with weakness in the stock market, though not always. In 2013, for instance, the Net Close Indicator fell from a record 45 to 7 while the market marched significantly higher. Nonetheless, it is something to monitor.