The stock market huffed, and it puffed, and finally made it over the hump, with the large-cap S&P 500 Index (414 days) and Dow Jones Industrial Average both vaulting to new all-time highs. 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.
The comments above and below are excerpts from an article by Mike Burnick (MoneyAndMarkets.com) which has been edited ([ ]) and abridged (…) to provide a faster and easier read.
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…but 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 6 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:
…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.
…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!