The following is a recent article by Norm Conley from the premium portion of thestreet.com
Everyone is calling for and waiting for a correction believing that “the market just can’t keep this up”. Well, the market does what the market wants. And according to this article, historically, there is evidence that it may just keep going.
Rally Has History on Its Side
By Norm Conley (TheStreet.com)
6/1/2007 2:00 PM EDT
- The S&P 500 has gone up 10.3% in 53 days.
- The S&P remains positive 77% of the time for 60 days following such a run.
- Applying historical data to the present, I see little likelihood of a huge pullback.
There is no question that the market has been on a very strong run lately. After scaring the living daylights out of almost everyone with one-day decline of over 3.5% in late February, followed by another two weeks of general declines into the first two weeks of March, the S&P 500 has shot up over 10% since March 14. This winning streak, naturally, has lots of investors wondering when it will end. After all, “what goes up, must come down,” right?
Actually, the answer to that simple question is “no.” The fear that we are due for a painful correction is related to our natural and evolved fear of heights. But while it makes rational sense to be cautious of high places, it is not rational to be fearful of financial markets simply because they are “high” relative to where they were at some arbitrary point in the past.
Before you dismiss this as permabull nonsense, let’s look at some historical stats.
Strength in Numbers
Since Jan. 1, 1950, there have been 14,443 trading days in the S&P 500. In the 53 trading days since the market bottomed on March 14, the S&P has increased by an impressive 10.3%. The strength of this rally is, indeed, relatively rare. To put it in perspective, there have been 14,390 rolling 53-day periods in the S&P 500 since 1950. By comparison, there have been only 1,181 rolling 53-day periods with gains of 10% or greater, which means that the current run has ranked in the top 8% of all 53-trading day periods since 1950.
However, it is important to note that through May 30, 2007, our current bull run was only the 1,072nd-best 53-day run since 1950. It may surprise you to learn that the top 10 53-day periods for the market since 1950 all occurred in 1982. That was before my time as an investor, but that sure must have been a fun time to be a bull.
Anyway, our natural inclination is to assume that big up moves are not only rare but also tend to be followed by corrections in the near-to-intermediate term. But as I alluded to above, this inclination is not actually borne out by the facts. To test this, I looked at the market’s performance in the 60 days after a 53-day upward move of 10% or more.
The data show that the market has posted positive returns 77% of the time in the 60 trading days following big up moves, compared with 65% of the time for the entire date universe. Therefore, statistically speaking, big up moves are followed with continued positive action more often than normal.
Furthermore, the historical data show that the average price return of the S&P 500 in the 60 days following a 53-day increase of 10% or more is 3.32%, which is actually better than the entire universe’s average 60-day return of 2.10%. The median returns were 4.05% and 2.19%, respectively.
What It Means, What to Do
So what is an investor to do? Everyone must answer that question for themselves, but here are a couple of takeaways to ponder:
- Strong market moves persist more often than not.
- Whenever your intuition tells you something, test it with historical data before you act.
- Recognize that the market is rarely binary. It isn’t that simple! As the famous investor and columnist Ken Fisher has long said, markets can go up a lot, up a little, down a little or down a lot. In all but the last case, long-term investors typically win. Cramming your market outlook into two potential outcomes (”up a lot” or “down a lot”) results in unnecessary emotional anguish and high trading costs, both of which are suboptimal to your long-term investment success.
- Market disasters are relatively rare in all cases, but they are even rarer in the periods immediately following a strong up move. Black Monday 1987 is the exception that proves the rule.
- Unless you are convinced that the market is headed for a truly epic pullback, you should not let the recent bull market deter you from staying invested.
From where I sit, I see little likelihood that we are heading for a huge market pullback. As a whole, stocks are neither tremendously expensive nor absurdly cheap, but I believe large-cap stocks are historically inexpensive, especially compared with interest rates. I also believe sentiment on equities is far from ebullient, and the supply of stocks continues to go down as mergers-and-acquisition and buyback activity increases much faster than IPO activity.
In short, I’ve been a bull throughout the vast majority of my time as a site contributor (almost five years now), and I don’t believe that now is the time to change course — no matter how strong the market has been over the last few months.
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