Tuesday, December 1, 2015
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S&P 500 Makes New 1276 Day High. What Happens the Next Year?

The S&P 500 is continuing a steady climb higher. As much as I love to see it, the action is definitely not a surprise. I outlined here and here where I thought the market was headed.

So this is just a fun-to-run study of what has happened after the market makes a huge new high, as it did today. I decided to look ahead 252 days, roughly one trading year, to see what has happened in the past, one year after a new 1276 day high.

I used S&P 500 data, with the first trade taking place on 1.3.1928. This study incorporates over 80 years worth of data and has 39 samples of trades held the full 252 days.


Bullish, eh? Frankly, I was somewhat surprised.

The $SPX Buy-n-Hold graph was created by splitting the data into 252 day segments and then averaging all the segments.

I am now interested in whether this has worked better over the first 40 years of data or the last 40 years of data. Meaning, is the edge growing stronger or weakening? That study will have to come later…

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$SPY Makes a New 79 Day High. Next Up, a New 1267 Day High.

If $SPY can close above $147.24, just pennies above today’s close of $147.08, it will be its highest close since December 31st, 2007. Assuming there are 252 trading days per year, this would equal a 1267 day new high.

What has happened in the past when $SPY was making similar new highs?

It just so happens I have a previous study which demonstrates this.¹


On Thursday, March 15th, the S&P 500 made a new 900 day high. With the S&P 500 re-visiting prices it hasn’t seen in almost 5 years, I thought it would be interesting to look at what happens after the index makes significant new highs.

The Rules:

Buy SPY at the close if

  • SPY closes at a new X day high

Sell SPY at the close Y days later.

No commissions or slippage included. All SPY history used.

The Results:

Thoughts and Caveats:

Because the market was making significant new highs in October of 2007, the results show the impact of the bear market, starting around day 65. As the trades are being held for 100 days, any trade initiated in October 2007 was held through the beginning of 2008. Ouch.

On the brighter side, a new high of 50 days or greater has seen a surge during the last 25 days of the holding period. This surge appears to be the relatively normal result of buying during a bull market.

It should be noted that a new 900 day high generated the highest return.

Sample size grew as the X day new high number decreased.

The Buy-n-Hold return was calculated by chopping SPY performance into 100 day segments and then averaging those segments.

The bottom line is that save for a new Armageddon a la 2008, the market has tended to keep climbing after making a significant new high.

¹ This study does not show the conclusion of the trade that was initiated on March 15th. After 100 days, the March 15th trade was .2% lower. This will bring down the New 900 Day High average trade reflected in the graph.

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Evidence That $SPY Can Go Higher Still

In this recent post Huge New High, Can We Go Higher? I made some educated guesses based on some indicators about what the market would do over the short-term. I finished the post with these remarks:

My best guess, using these indicators? The market consolidates, pulls back slightly, less than 2%, and then continues the up trend. I will start looking for a more meaningful correction if the percentage of stocks trading above their 20 day moving averages gets closer to 80.

That was written exactly one week ago, tomorrow (or today, if you are reading this on Friday the 14th). I’ll save the congratulatory patting-of-myself-on-the-back for later.

What I really want to talk about is the indicator that shows the percentage of stocks trading above their 20 day moving averages. I speculated in that previous post that once that number got closer to 80 that I would be looking for a more meaningful correction. Upon second thought, and testing of that hypothesis, a more meaningful correction has not typically followed readings near 80 or above.

Let me demonstrate.

The indicator on which I am focused is represented by the green line. I have added trading arrows to the $SPY chart to show where the buys are made.

The Rules:

Buy $SPY at the close if

  • the % of stocks above their 20 day moving averages was not above 78 yesterday but is today

I also added a requirement that the % of stocks above their 50 day moving average must be above 75 (but plotted the results separately).

The trades were closed at the close X days later.

The Results:

Caveats: The setup has only enough samples to be statistically significant to 5 days out from the buy. By the time the results get to 50 days, the average is being generated from only 14 samples.

The setup with the added variable requiring the % of stocks above their 50 day moving average to be above 75 reduces the number of samples to 16 on day one and 7 on day fifty.

Ignoring the sample sizes, the intermediate term appears to be very bullish, while the short-term picture suggests that a small pullback is in order.

I am somewhat fascinated by the results shown when the % of stocks above their 50 day moving average is bullish and the % above the 20 day moving average is bullish. When both are in agreement, it suggests a strong trend that shrugs off short-term mean reversion. I suspect that if I ran the same test and required the % above their 50 day moving average to be low or bearish, we could expect a strong pullback in the near-term, but that is only a guess.

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Huge New High, Can We Go Higher?

Today’s high on $SPY is something like a 1000 day new high. These type of events are bullish, as I’ve written about numerous times. I also warned about getting bearish during an abnormally bullish market. I finished that July 30th post with this thought:

It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. Since the June 4th low, we’ve seen fairly predictable swings. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

Since market performance has been consistent with my expectations, what I want to examine tonight is whether it can continue for a while without a pullback or correction. For that examination, I will use some breadth indicators.

Let’s start with a graph of the percentage of stocks above their 20, 50, and 200 day moving averages. For the most part, I only focus on the percentage above the 20 day average.

We are looking at the green line in the bottom pane. Since the bottom in 2009, larger pullbacks and corrections have typically occurred when this line gets near to or above 80. It closed tonight at 71.32. That doesn’t mean we won’t pullback here. It just means that any pullback will tend to be shallow until we get nearer to 80. One caveat is that before the 2008 Armageddon and subsequent March 2009 bottom, larger pullbacks and corrections tended to occur nearer to 70. I’m still of the mind that the crash changed the character of the markets. Therefore, I’m comfortable using 80.

The second measure of breadth to examine is the number of stocks trading above their 5 day moving averages and the percent rank of the number of decliners. Since the chart is covering more than 3 years, it gets a little hard to read, but I think it still makes the point. You can click on it to enlarge it.

As one might expect after such a big day, the percent rank of the number of decliners (green line, bottom pane) is very, very low. After such a low reading, I expect the next day to produce a doji that closes near the top of today’s candle, or a slightly lower close.

The red line is the number of stocks trading above their 5 day moving averages. It closed at 2606. I like to use 2500 as an area of caution. This tells me the market is susceptible to experiencing a shallow pullback that may last a few days.

Both of these readings can go in the other direction after just a few days of consolidation, allowing the market to go higher without much of a pullback.

My best guess, using these indicators? The market consolidates, pulls back slightly, less than 2%, and then continues the up trend. I will start looking for a more meaningful correction if the percentage of stocks trading above their 20 day moving averages gets closer to 80.

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