MARKET ALERT: Time to Buy Stocks Like It’s 1989

It’s been a frustrating week for investors.

After posting a new all-time high just a couple of weeks ago the stock market seems to have slammed on the brakes thanks in part to renewed trade war talk.

Five of the last six trading sessions have ended lower for the big S&P 500 index.

That leads to an important question: When’s this gravy train finally going to derail?

And how long can the longest bull market in history keep rallying?

It’s a question we’re bound to see more of soon — anytime this market takes a momentary pause, the CNBC talking heads who’ve been bearish for the last 10 years start popping up, shouting that the sky is falling.

It’s inevitable.

Then again, this rally has to end sometime… right?

Let’s see what the data have to say about it.

Today, we’ll take a look at just how long the market can stay at highs.

(Spoiler alert: a lot longer than most people probably think it can.)

Back in 2013, we ran a study that looked at the S&P 500 going back all the way to 1950. What we found is that, contrary to popular belief, hovering around highs is actually the “normal mode” for the stock market.

To get an even better picture of what that means, I’ve updated the study with market data that stretch from 1927 into May 2019.

With those data in tow, we looked at drawdowns — how much the S&P has pulled back from all-time highs.

Not surprisingly, the larger data tell the same story our 2013 study showed: The normal mode for the market is hovering at or near all-time highs.

Over the 91-year stretch we examined, the S&P spent nearly half of its time within 10% of all-time highs.

That’s pretty remarkable when you consider it includes brutal market sell-offs like the Great Depression, 1987’s Black Monday, the dot-com bubble and 2008’s financial crisis.

When you consider the fact it took 2,011 days — or about 5 and a half years — for the S&P to regain its 2007 highs after the financial crisis, the fact that the market can be within 10% of its all-time highs half the time, on average, is pretty impressive.

But looking at all-time highs still only tells part of the story.

A more telling statistic (especially following bear markets) is whether the market is at relative highs, such as six-month highs. In other words, what percentage of the time are stocks pushing up, even if they’re not breaking new records?

It turns out that since 1927, the S&P has spent 67% of its time within just 7.5% of six-month highs.

Again, that suggests moving higher is normal territory for the market.

What about the argument that this rally is becoming unsustainable?

Our drawdown data provide some insights about that, too.

The chart below shows the S&P since 1960, with red shading placed anywhere where we’ve seen at least 100 days go by since making a six-month high:

S&P500 6 month

Source: Seven Figure Publishing, Bloomberg

Simply put, those red areas indicate when the market is failing to “work.”

We expect those dots to be scattered randomly on the chart — occasional corrections are healthy, after all.

But what’s interesting is that those red dots have actually been pretty accurate indicators of market tops.

Leading into the top of the dot-com bubble and 2007 market peak, we saw extended stretches without any of these cool-off periods before a brutal bear market.

The good news is that’s not what we’re seeing right now.

Instead, we’re seeing a pretty uniform distribution of cool-off periods for the market that looks a lot more like how things looked in the early 1990s than in 2000 or 2008.

And it doesn’t take a data scientist to figure out that 1990 was a time to buy stocks with both hands. It’s how many, many fortunes were made.

Bottom line: This rally could have a lot more staying power. Don’t panic, and stay invested.

For Technology Profits Daily,

Jonas Elmerraji
Chief Quantitative Expert

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Jonas Elmerraji

Jonas Elmerraji, CMT, is Seven Figure Publishing's in house quantitative analyst. He is also a contributor to Technology Profits Daily. Jonas has been with Agora Financial/Seven Figure Publishing since 2009. In 2017, his proprietary trading strategy beat the markets by over 20%.

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