The reality of new market highs

With Apple (AAPL) $1 trillion in the rear-view mirror, the milestone of the moment is the S&P 500’s (SPX) run at its January 26 all-time high of 2872.87.

The SPX has teased traders by inching higher after pivoting off a seven-day intraday low on August 2, posting four consecutive up days, and trading to within 0.33% (on Tuesday) of its record peak before yesterday’s slight down day:

S&P 500 (SPX), 1/21/18–8/8/18. Sneaking up on a record.

Source: OptionsHouse

Some traders may argue that 0.33% is close enough—after all, what’s so special about the SPX ticking another 10 or 12 points higher when it’s already rallied more than 325 points (around 13%) off its February low?

Ah, but that ignores the realities of market sentiment, and the anticipation many market players are feeling about the SPX wiping out—once and for all—its correction from earlier in the year, and joining the Russell 2000 (RUT) and Nasdaq 100 (NDX) in the New All-Time High Club.

What’s likely to happen after the SPX makes a new all-time high has been overshadowed by the chase itself. There’s no way to be certain, of course, but looking at similar episodes from the past may give traders a useful reference. And that doesn’t mean just looking at what the NDX and RUT did after they first topped their January highs on March 9 and May 16, respectively, although both of those events offer good lessons about the range of possibilities. Instead, let’s look at what’s happened after the SPX has done what many people think it will do again in the relatively near future.

For the sake of argument, let’s say the SPX had made a new record close and high yesterday. That would mean it broke out to a new 134-day high. So, let’s simply see what the SPX has done after making other 134-day new highs/closes. (Regardless of whether the index hits a new high today, tomorrow, or six days from now, this will still be a representative value.) But let’s also throw in the condition that the new high day has to be preceded by at least 10 consecutive days that weren’t new 134-day new highs, since our goal is to see what’s happened when the SPX first hits a new high after trading lower for a while.

S&P 500 (SPX) after new 134-day highs, 8/8/68–8/8/18. Initial bump, then…

Source: OptionsHouse (data)

The chart above shows what the SPX has done, on average, after the 89 new highs of this type that have occurred over the past 50 years. First, here’s how things boil down:

●The SPX had a tendency to get a short-term bump in the first several days after making this type of new high.

●The index then had a tendency to underperform over the next several days.

Now the nitty-gritty: The top half of the chart compares the SPX’s average return (blue line) from the close of the new high day to the closes of the next 10 days; the black diagonal line is a benchmark that represents the average SPX return for all one- to 10-day periods.

The blue line is above the black line in days 1–5 (i.e., the average gains after new 134-day highs are larger than usual for the SPX), but below the black line in days 6–10, meaning the average gains after the new highs were smaller than the index’s typical returns

The horizontal bars at the bottom of the chart represent how often the SPX closed higher at each daily interval, both after the new highs (dark green bars) and for all one- to 10-day periods (light green bars). Again, the SPX closed higher more often in the first five days after making a new 134-day high, and less often than usual in days 6–10.1

How this time plays out will be dictated by any number of unique factors. But even though the past is an imperfect guide to the future, traders can’t afford to ignore it.

Market Mover Update: Tesla (TSLA) may make electric cars, but the stock went nuclear this week. In early May, Tesla CEO Elon Musk warned non-believers (i.e., short sellers) that the “short burn of the century” was coming soon.2 Then, in mid-June, he even threw in a time window for the event, saying that short sellers had “about three weeks” before their positions exploded.

Well, it was a little late, but on Tuesday, Musk fulfilled his own prophecy by tweeting that he was thinking of taking the company private at $420/share.3 TSLA rocketed more than $45 to $387.46—a couple of bucks below its September 2017 all-time high—before closing at $379.58 for an 11% gain on the day. Yesterday, the stock pulled back (around 2.4%) amid some doubts on the Street regarding the real-world chances of such a move.4


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1 Supporting document available upon request.

2 Musk Delivers $1.1 Billion ‘Short Burn’ Touting Model 3 Progress. 6/6/18.

3 MarketWatch. Tesla confirms intention to go private, sending stock up 11%. 8/7/18.

4 As Tesla Considers Going Private, Wall Street Wonders How. 8/8/18.