Today’s Reality Gap is between what Wall Street Big Shots would tell us about all-time market highs (that they’re bearish) and the reality that the one we just hit is actually bullish. Quite so, actually.
Yesterday, the S&P 500 hit new all-time high during trading, and even after a mild pullback closed at its highest point ever, too.
We’ve finally surpassed the heights from way back in February, just before the coronavirus pandemic sank a very healthy stock market.
Generally speaking, however, new all-time highs are bearish. Stock markets tend to perform worse than otherwise if they’ve just reached a new high. But – the data shows that there’s one exception to this rule. Luckily for us, this exception applies today.
In fact, this exception shows stocks are set to outperform now.
And these two stocks are set up to continue soaring as the market’s up move continues…
History Shows the Longer We Wait for All-Time Highs, the Better
As the chart below shows, the S&P 500’s average returns (left set of bars) are slightly higher than its returns after hitting new all-time highs (middle set of bars):
The exception is when it has been more than five months between the new all-time high and the previous one (right set of bars). When that’s the case, the S&P 500 actually does better than average.
A lot better, in fact.
According to data going back to 1950, the when the S&P 500 hits a new all-time high for the first time in five months or more, it’s net gain for the next year is 30% above average.
For the next six months, it’s 42% higher. And just for the next month, it’s a whopping 86% higher.
It makes sense. After all, if it’s been more than five months since the last all-time high, the S&P 500 has probably had a downturn in between the highs, and is riding momentum during a recovery.
If the last all time high was a day or a week ago, then the market may be running out of steam.
Now, as a trader it’s important to always double-check whether these historical correlations are relevant to today’s markets.
After all, they might just be statistical anomalies that don’t predict anything.
But there are two very good reasons why this bull market is nowhere near over…
There’s Plenty of Money Waiting to Be Invested
First, the incredible monetary and fiscal stimulus we’ve had this year has left plenty of money on the sidelines. Just take a look at this chart of the amount of savings at U.S. banks and thrifts
As you can see, most of that money is still in bank accounts, where it’s making practically zero interest. After accounting for inflation, that money is actually shrinking at the bank.
With interest rates at zero and bond yields depressed by the Fed, there’s no easy place for all this money to grow other than stock markets.
And most of it has yet to move into stocks.
Until it does, this bull market will keep going. There’s just too much fuel sloshing around for it to end.
Second, we’re in a presidential election year. When the sitting president is on his second term, markets generally stay pretty flat in the fourth year of this election cycle.
But in the fourth year of a first-term President from a different party than the previous President, stock markets tend to skyrocket all the way up to Election Day.
That’s exactly the situation we’re in today. It’s the fourth year of President Trump’s first term, and he ran as a Republican, while the previous President was a Democrat.
Historically, that makes for a great year for stocks, at least up until Election Day.
With so much fuel left to fire this bull market, and the historical trader optimism that tends to last all the way to Election Day, stock markets are set to speed past yesterday’s S&P 500 all-time highs.
Two stocks in particular look good to me right now…
Processors and Cybersecurity Will be the Big Winners Now
After Intel Corp.’s (INTC) massive tech slip-up that’s delayed the company’s next-gen processors for a year if not more, Advanced Micro Devices Inc. (AMD) was handed the processor market on a silver platter.
AMD’s new Ryzen Pro line was already getting good technical reviews, and the company is the sole supplier of processors and graphics cards to the next generation of Xbox and PlayStation gaming consoles, both due to launch later this year.
Shares of AMD have been consolidating below recent highs for some time now, and are poised for a breakout. I’m expecting 15-20% upside from today’s prices.
Fortinet Inc. (FTNT) is also looking very good right now. It’s a midcap cybersecurity company that got slammed despite a great earnings and revenue report.
Wall Street punished the stock because current bookings missed by a tiny $600,000.
With millions of people working from home, an election year where cyberattacks are center stage and campaigning is done online more than ever, and numerous high-profile hacking incidents on people’s minds, cybersecurity demand is higher than ever.
Fortinet is a great rebound play in this area. The issue of cybersecurity will only become higher in profile as we head into the election.
Great trading, stay safe out there, and God bless you,