Traders closely watch stocks that hit new yearly highs or lows because these events suggest a certain amount of bullish or bearish momentum. The idea is that if a stock climbs to a new 52-week high, it might continue rallying, especially if it just broke out of a trading range. The opposite is supposed to hold true for 52-week lows. In bull markets, more stocks tend to climb to 52-week highs than drop to 52-week lows, while the opposite is true in bear markets.

Comparing the number of new highs to lows is one way of measuring the market’s “internal” strength or weakness (breadth) without directly referencing price. Other breadth indicators include the advance-decline line, a cumulative tally of the number of stocks that rose and dropped in an index, and the Arms Index, or TRIN, which compares the number of gainers and losers to their volume.

This study compares the number of yearly highs to lows in the 30 Dow Jones Industrial Average (DJIA) stocks on a daily basis over the past 10 years. The analysis subtracts the number of stocks making yearly lows from those making yearly highs each day and then measures how the Dow Jones tracking stock (DIA) behaved after this value hit extremely positive or negative readings.