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Tackle Today: New Highs Shouldn’t Create Vertigo

March 25, 2021

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What Goes Up Must Come Down?


Does it make you nervous when you see headlines about how stocks are at all-time highs? Do you conflate “high” with “risky” and “low” with “safe?” If so, knock it off. It isn’t true. At least not in the short run.

Quite the contrary, the stock market has generated much better 3-month forward returns after 20% of stocks in the S&P 500 make new 52-week highs. You can find all the beaming details in today’s chart below. For those that aren’t math geeks, let me break it down for you.

The grey area chart shows the normal distribution of 3-month returns for the S&P 500. The mean, or average, is 2.86%. In contrast, the red area chart shows the distribution of the S&P 500 after 20% of the stocks in the Index registered new 52-week highs. Notice how it is shifted considerably to the right. The mean is 4.25%.

The takeaway is simple. New highs should be loved, not loathed. If your time horizon for trading is a few months, buying when the market is at a 52-week high generates better returns, on average.


Chart of the Day

Red, give me red!

The average 3-month returns of the stock market are way better after 20% of the Index notches new 52-week highs.

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