It was a long time coming – 414 days for the S&P to be exact – and in the meantime, investors were forced to endure a frustrating trading-range market.
Almost exactly one month ago, I penned an article (Will New Highs Bring Clear Skies for Stocks?) that explained why new highs at long last could be a very bullish sign for the market.
It’s worth revisiting the details of this bullish buy signal to see what could be in store for the stock market in the months ahead.
|Stock markets continue their march to record highs.|
History shows that whenever stocks take “a long pause” between 52-week highs and then finally manage to break out to the upside, the S&P 500 goes on to post even bigger gains over the following year, according to Merrill Lynch research.
The data shows that whenever stocks go more than 300 calendar days between 52-week highs:
One year later, the S&P 500 is up 91% of the time, posting average gains of nearly 16%. That compares with an average gain of just 7.5% for any other one-year period since 1929 …
It’s a rare ultra-buy signal for stocks, which has only happened 23 other times going back to 1929 …
Finally, this signal has been remarkably consistent, producing very big gains for stock investors nine out of 10 times in the past!
The chart below, from Merrill, shows the path stocks are likely to take going forward based on previous ultra-buy signals in the past. It’s a rocket ride to the upside …
So what could go wrong?
In spite of the powerful precedents, remember that historical market patterns don’t always repeat. And there is a laundry list of things that could “go wrong,” making it a long, hot summer for stocks:
The Brexit drama, plus contagion fears if other European nations are emboldened to break free of the EU’s bureaucratic tyranny.
Then there is the ongoing earnings recession in the U.S., plus the tricky economic transition that China is attempting to pull off.
But here’s the clincher for me that tips the scales in favor of more upside ahead:
Since the post-Brexit bottom, the buying stampede we’ve witnessed has been epic!
In fact, over the past 12 trading days alone, the S&P has rallied over 8%. Throughout this entire bull market since 2009, there have only been six other periods when equities have enjoyed such a sharp rally over such a short time. They all led to substantial added gains.
What’s more, the ratio of daily up-to-down volume for NYSE stocks averaged more than 70% to the upside for the past two weeks.
That’s a very rare level of buying power not seen since the initial thrust off of the 2009 bear market bottom.
Here’s the bottom line: Now is the time to watch carefully to see what the stock market actually does, rather than listen to what the talking-heads on CNBC say about the market.
Take another good look at the chart above that shows the historical performance pattern after the S&P hits a new high after a long pause and you’ll see what I mean.
Notice how the initial rally off the bottom is nearly a vertical ascent without much of a pause, much less a meaningful correction along the way.
So if stocks continue to power higher in the weeks ahead without much of a pullback, it makes a strong case that we are in the midst of a new upside bull-run – a buying stampede – that could last for the next year, and perhaps carry the S&P 500 to 2,400 or higher!
Here’s another positive sign: Sentiment still stinks. In last month’s article, I pointed out that:
Investor sentiment is so BAD right now, that it’s probably GOOD news for stocks!
Institutional and retail investors alike have been consistently selling stocks all year. And when the Dow and S&P notched new highs, the event was greeted with a downbeat mix of skepticism and outright distrust.
You could almost hear the boos coming from the cheap seats.
As I said at the time: “From a true contrarian’s perspective, it doesn’t get much better than this. When investor confidence turns this negative, usually the opposite happens from what everyone expects.
“Remember, Mr. Market likes to fool most of the people most of the time. Right now that would mean a new high for the S&P 500 followed by – not another correction as so many expect – but a further rally to even higher highs.”
Keep a watchful eye on the pace of this rally. If it looks like the train is leaving the station post-haste, don’t get left behind.
Savings at the pump: In its latest outlook, the Energy Information Administration said that gasoline will average $2.25 a gallon for regular through the summer, some 2 cents less than the agency had forecast just last month and 39 cents below prices from a year earlier. Gasoline is expected to average $2.12 a gallon for the entire year and rise to $2.28 next year. Have you noticed the savings in your life? Or have other price hikes offset any savings you might have realized at the pump? Comment below.
Not too diplomatic: Theresa May, the new prime minister of the U.K., made a controversial choice for her top diplomat, naming Boris Johnson as the foreign secretary. Johnson, who led the Brexit campaign and initially was a potential candidate to replace PM David Cameron, is known for his bombastic comments and has hurled insults at everyone from President Obama to Donald Trump. Many Europeans are taken aback by the man they’ll have to negotiate international matters with.
France’s foreign minister declared that the British Brexit campaigner had “lied a lot” during the push to break with the European Union, the Washington Post reports. “I have no worries about Boris Johnson, but you know well what his style is,” French Foreign Minister Jean-Marc Ayrault told France’s Europe 1 radio. “He lied a lot during the campaign.” That refers to a range of later-discredited claims by the anti-EU campaigners before the June 23 referendum, including the level of Britain’s payments to the European Union.
Meanwhile, Johnson’s German counterpart, Frank-Walter Steinmeier, also took a dim view of the British diplomat. Steinmeier criticized him, without using his name, attacking “irresponsible politicians” who lured Britain toward Brexit, then “didn’t take responsibility, and instead played cricket,” the Post reported.
Rio de Janeiro will deploy some 85,000 soldiers and police to secure the upcoming Summer Olympic Games, which run Sept. 7-18. That’s about twice as many as were used in London four years ago. About 10,500 athletes are expected for the Games, along with up to 500,000 foreign tourists. “We won’t have a problem during the Olympics,” Rio Mayor Eduardo Paes said. “I’d say Rio will be the most secure place in the world during this period.” The deployment has already started – armored cars and trucks carrying troops were spotted in the city, accompanied by soldiers in camouflage gear and helmets, with rifles slung over their shoulders. Full activity will start July 24, officials said.
Are you saving at the pump? Has it changed your finances? What about the political turmoil in the U.K.? Are you Americans and others following the action? How about those of you in Britain – what’s your take? Share your views with fellow readers below.
The Money and Markets team
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