Indicator of the Week: What the S&P's Hard-Won Record High Means for Stocks

What does the S&P 500 Index's (SPX) new record high mean for stocks?

Senior Quantitative Analyst
Jul 13, 2016 at 6:30 AM
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The S&P 500 Index (SPX) notched a new all-time high on Monday, finally eclipsing 2,130, which had held as the all-time high since May of last year. Going back to 1928, it's just the 14th time an all-time high has held for over a year. However, while the SPX remained below 2,130, it spent much of that time flirting with a new record. In fact, since reaching 2,130 over a year ago, the index has closed within 5% of that level two-thirds of the time. This week, I'll take a look at how stocks have tended to behave after touching new all-time highs, layering on criteria to make it relevant to today's environment.

Highs Hold For Over a Year: As I alluded to above, there were 13 other times the S&P 500 Index took over a year to make a new all-time high. The first table below shows how the SPX performed following these new all-time highs. The second table shows typical SPX returns since 1954 -- the year of the first signal. That year, stocks finally made it back to where they were just before crash of the Great Depression in 1929. 

These 13 occurrences tended to be catalysts for more gains. One year after overtaking the long-standing high, the SPX averaged a 14.9% return and was positive 12 of 13 times. The returns after a signal outperform the "anytime" returns by all accounts with less standard deviation. By this analysis, there's a good chance at a bull market over the next year of trading. 

                                    Chart 1 SPX After First New High In Over a Year

Hanging Around New Highs: The break of 2,130 finally occurred after over a year of chopping around just below that level. As I mentioned earlier, two-thirds of the closes over that year were within 5% of the all-time high; the SPX just couldn't manage to break through. I wondered if this was an indicator of pent-up buying pressure that might be unleashed when the all-time-high resistance was finally broken.

There was only one other time the SPX went a full year without a new all-time high, while trading within 5% of its highest level at least 60% of the time. Therefore, I made the criteria less stringent by looking at times when the all-time high held for at least three months rather than a full year. In that case, there were 11 other occurrences. The returns after these occurrences are in the table below, with the second table showing anytime returns since 1956 -- the year of the first such signal. Once again, you get outperformance from these signals.  

I included the average positive and average negative returns in these tables, as I thought they were interesting. They indicate that the break of the new high didn't lead to a surge of buying, as I thought might be the case. I conclude this because the average positive after a signal is pretty close to the average positive anytime. The outperformance is due to a higher percent positive and -- especially in the case of the one-year returns -- a small average negative. The consistency of the positive returns has been the key.  

                                    Chart 2 SPX Close to All Time High

Above, I mentioned that there was one other time where the SPX went a full year without reaching its all-time high, yet closed within 5% of that level 60% of the time. It's encouraging to note that was in February 1995, and the SPX went on to gain 37% over the next year. The table below shows each of the occurrences where the index went three months without reaching its all-time high, yet closed near it (within 5%) at least 60% of the time. 

                            Chart 3 SPX All Time High Held for 3 Months              

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