Markets have been on a record-breaking streak. This Thursday, the S&P 500, Dow, and Nasdaq were all trading above their all-time highs.
In the last two weeks (or ten trading days), markets have set new all-time closing highs an impressive five times.
But instead of celebrating, some commentators are now sounding the alarm. Markets have gone too high, too fast, they say. This is the peak, and a long fall is next.
But the key indicators that I watch (and history) say otherwise.
Now, it’s only natural to be worried. After all, every downturn can be traced back to a peak (talk about stating the obvious). And 32.2% of consumers are bearish on stocks right now.
That’s more than the 31.7% who are bullish.
But the facts suggest this string of highs is about to continue, at least until the end of the year.
Here are the three reasons why…
1. Market Highs Create More Market Highs
First of all, market highs are not all that rare. They happen about on about 5% of trading days. And they tend to send stocks higher, not lower.
The Dow, for example, reaches about 12 new highs a year. Even better, one year after a market high, the Dow’s performance is no worse than average.
Now, the reason market highs can seem rare is that the other 95% of trading days, when markets are trading below their highs. That can easily make it seem like the markets are always pulling back, always struggling to make people any money.
When the truth is that they simply trade sideways most of the time.
But as traders, a sideways market can still create plenty of profit opportunities.
As such, market highs are no reason to worry.
But as the next point shows, other people worrying can actually be a good sign…
2. Traders Worrying is a Good Sign
Economic data has been a mixed picture for a while now. Unemployment continues to be at record lows and falling, but other metrics have been a bit more negative.
As I’ve explained before, the S&P 500 is in an earnings recession, with this earnings season expected to be the third straight quarter of falling year-over-year earnings. Consumer confidence is growing more slowly, with October being the fifth back-to-back month of slower growth – but very importantly, even if the growth in confidence of the mighty consumer is slowing – it is still growing.
Investors have parsed this data, including the age of the current bull market, and now have a negative outlook on the stock market. As I mentioned above, 32.2% of Americans think stocks will go down over the next year, and only 31.7% think they will go up, according to Bespoke Investment Group.
Now, it’s normal for the pessimists to outnumber the optimists. After all, markets spend 95% trading below all-time highs.
But for there to be this many bears when markets are hitting high after high is unusual…
And it’s actually a very good sign for the markets.
Only eight times since 1987 has a market high coincided with investors being bearish about the stock market. And every single time, the S&P 500 has gained over the following 12 months, anywhere from 4.5% to 20.4%.
When traders decide markets are set to go down, good news can seem like a surprise, and quickly shift that narrative. Another run to the upside is likely.
Especially this time of year…
3. Markets Get into the Holiday Spirit Too
Historically, if the Dow is up by 15% or more by the end of October, it rises by on average 5.55% over the rest of the year. And with its recent record-breaking highs, the Dow was up 15.94%.
The S&P 500 follows a similar pattern. When it is up 20% or more by the end of October, it (on average) gains another 6.21% through the end of the year. The index was up 21.17% through October.
So instead of being scared that the market will fall from these heights, get ready for some more upside to the markets for at least the rest of the year. November and December are historically two of the strongest months of the year, helping the bullish case.
There will be volatility, for sure. The UK is holding an election in December that could decide the fate of Brexit. Any bit of news or rumor coming out about the U.S.-China trade deal could have markets going haywire. And as we’ve seen this week, those impulsive moves could go both ways.
So the game plan in this environment is this: a bullish prognosis keeps us buying pullbacks and the volatility coming from headline risks keep us trading shorter trading timeframes.
Great trading and God bless you,
D.R. Barton, Jr.