This morning, I noticed a commentary piece that identified we now have had 12 document highs for the S&P 500 prior to now month. A document is often a giant deal, and I typically get calls to touch upon what all of it means. However I’ve to confess, I didn’t notice there had been that many prior to now month. So, what does this sequence of highs imply, if something?
Not Magic, Simply Math
In step with my common coverage of being the onion within the fruit salad, I don’t suppose it means all that a lot. If you consider it, each time we hit a brand new excessive, each single excessive after that can also be a brand new excessive. And, if the market retains transferring increased over a month or extra, meaning we get numerous new highs. Nothing magic, simply math—and customary sense.
Taking a look at historical past bears this concept out. When the market hits new highs, it could go increased. Then once more, it could drop. Typically talking, a string of recent highs displays each optimism and powerful demand for shares, and that development is prone to proceed. However that development is often the case, and it has nothing to do with a sequence of recent highs.
A Blow-Off Prime?
One other opposite meme that’s spreading is that the string of recent highs means the inventory market is now approaching a blow-off prime, when it runs up after which collapses. I’ve just a little extra affinity for this one (it speaks to the onion in me). This concept can also be according to a number of the issues we now have seen lately, such because the collapse of WeWork. However right here, too, the historic knowledge merely doesn’t bear it out. We didn’t see related habits, for instance, earlier than both the 2000 or 2008 crashes. It makes a fantastic story, however the knowledge merely doesn’t help it.
Wanting on the “Information”
And that, I feel, is the true message of this sequence of highs: we will view it as a fantastic story, and use it for example no matter level we are attempting to make. However while you truly look exhausting on the knowledge? You discover nothing.
Most of the inventory market “information” comply with an analogous sample. One thing might have occurred as soon as, and perpetually after that “reality” will resonate. However we should contemplate whether or not there’s a actual motive beneath these so-called information. If not, it’s seemingly coincidence or, as on this case, basic math. The underlying trigger shouldn’t be at all times apparent, as with the seven-year market cycle. When you look exhausting sufficient, it’s best to have the ability to discover it. If not, be very cautious how a lot you depend on that indicator. As at all times, nevertheless, it isn’t that easy. Some inventory market information do certainly appear to carry persistently, and not using a seen and even hidden trigger. In that case, you would possibly need to depend on them (once more, be very cautious).
If this kind of factor was straightforward to determine, everybody could be doing it. With the string of recent information, it does appear to be straightforward—and possibly all people is doing it. Which might be attribute of a blow-off resulting in a market prime.
Whoops. We have come full circle!
Editor’s Notice: The unique model of this text appeared on the Unbiased Market Observer.