Wednesday, June 8, 2016

New Highs Are In Sight & What That Might Mean

There's been much talk lately about the length of time that the S&P 500 has now gone without making a new high.  In fact, May 19th marked the 252nd consecutive trading day (equals one calendar year) in which the index had gone without registering a new high mark.  With the S&P now just 70bps (currently 2,118) away from eclipsing its all-time high of 2,134, we wanted to look at past instances where the index had gone at least a calendar year without setting a new peak and how it performed once it did gain new high ground.

Going back to 1950, there have been 13 instances where the S&P went at least 252 trading days without making a new high.  However, once the index has been able to gather the steam to breakout to the upside, the forward looking returns have been rather encouraging.  We looked at 1, 3, 6 and 12-month returns and the average, median and max performance are all very strong and can be seen in the table below.

S&P 500 Performance: When Index Goes At Least 252 Trading Days Without New High

We then took the study a step further in an effort to account for the environments in which these moves occurred.  By our count, 9 of the 13 episodes happened in the midst of secular bull markets.  As you can see in the stats above, the average returns for those periods alone are even more powerful with forward 12-month returns sitting at nearly 18%.

In the 4 occasions where the index took at least 252 trading days to make a new high while in a secular bear market (end dates: 1972, 1980, 2007, 2013), the average performance, while still positive, was much weaker than the total sample size.  Forward 12-month returns averaged just 3.28%. Also note the huge divergence in time taken to make a new high between secular bulls vs bears.

We've shared some charts of the secular bull/bear periods for the S&P and Dow below for further reference:

If stocks are able to stay firm here and make a sustained push through the 2,130 level, history suggests that favorable odds for further gains could be in the offing.  This would be a nice set of data for bulls as they seek to combat all of the negative seasonal conditions that are prone to occur in the summer months aka Sell in May & Go Away...

In looking at many of the recent sentiment and participation measures it's easy to see that very few investors had anticipated or positioned for the market to be testing new highs.  Particularly given that markets were making fresh 12-month lows just a short time ago in mid-February.  But perhaps there's more time to participate in this latest up-move.  Jason Goepfert of SentimenTrader noted in Barron's over the weekend that, going back to 1928, there have been 14 years in which the S&P posted 3 consecutive months of gains after making a 12-month low (which is what we had this year where 12-month low made in February and then March, April, May all logged gains).  In 12 of those prior 14 years, the market continued rally for at least another 3 months.

"Goepfert sees parallels between now and 1953, when stocks underwent a minor correction after a multiyear bull market.  Then, as now, the advance/decline line hovered near its all-time high and market breadth was strong.  Mimicking 1953 would be the best of all scenarios: The S&P rose 24.7% in the nine months following the 3-month signal and went on to return 83.8% two years out."

We're not quite ready to be that optimistic but the market has certainly flashed some encouraging signs as we head into the historically challenging summer months.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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