Markets At All-Time Highs: What It Means Going Forward

Nov. 13, 2019 11:47 PM ETACWI, DBC, EEM, EFA, GLD, IWM, SHY, SP500, SPY, TLT, VNQ19 Comments


  • The S&P 500 index just made all-time highs above 3100 on Tuesday.
  • Understandably, this is generating some concern among investors.
  • However, the statistical data shows that the market tends to continue doing well more often than not after making new highs.
  • Future returns will depend on a multiplicity of variables, and price strength is just one piece of the puzzle.
  • However, it is what it is, and the data shows that all-time highs are a bullish signal.
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Several stock market indexes made historical highs last week, with the widely watched S&P 500 (SP500) index trading above 3100. Understandably, this is generating some concerns among investors. After all, we are always looking to buy low and sell high, so seeing the market at historical highs could be indicating that this is a good time to be selling as opposed to buying.

This idea makes sense from an intuitive point of view, but it's not backed by evidence. On the contrary, the data shows that strength begets strength in the stock market, and buying when the market performing strongly tends to produce superior returns over the long term.

Winning Markets Tend To Keep On Winning

The chart from AllocateSmartly shows the historical backtested performance of a remarkably simple strategy. It goes long the global stocks index (ACWI) when such an index makes a new all-time high at the end of the month, otherwise, the strategy is allocated to bonds.

Source: AllocateSmartly

The strategy produces smaller gains than buy and hold, but it substantially outperforms in terms of downside risk and risk-adjusted returns. The maximum drawdown, meaning maximum capital loss from the peak, is -17.9% for the strategy versus a much larger drawdown of -71.6% for buy and hold investors.

Source: AllocateSmartly

Providing more details, the chart below shows the maximum drawdowns for the trend-following strategy versus buy and hold in the ACWI Index. The benefits in terms of risk reduction are enormous.

Source: AllocateSmartly

The table shown below from EconomPic calculates the returns from this strategy applied to different indexes from 1991 to September 2019. The risk and reward equation clearly improves when buying at all-time highs in different kinds of indexes.

Source: @EconomPic

Risk-Reward and Market Behavior

These kinds of statistics do not predict the future. But the markets

ChartData by YCharts

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This article was written by

Andres Cardenal, CFA profile picture
Proven strategies for superior returns and active risk management
Andrés Cardenal, CFA. Economist, financial analyst, columnist. Naturally flavored.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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