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S&P Record High Retest Could Signal Low Volatility

Rocky White

Stocks have been on a tear since bottoming last Christmas Eve. The all-time high on the S&P 500 Index (SPX) now looms just overhead. A lot of market technicians see that as potential resistance. In other words, they believe there’s an increased chance of a pullback or at the very least a pause in the rally. This week I’m looking at prior instances of the S&P 500 testing all-time highs to see if the data supports their suspicions.

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Methodology & Signals

To test this, I looked at the S&P 500 since the Great Depression. I considered times the index pulled back at least 20% from its previous all-time high. Then I considered it a signal when it gets back to the arbitrary level of within 1% of the high. The table below shows each of the signals -- the most recent one occurring just yesterday.

Typically, it seems to take a week or less for the all-time high to actually get breached. The last two times, however, it took considerably longer, as the index struggled when getting within striking distance of the previous high.

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The Numbers for S&P Record Highs

The table below summarizes how the S&P 500 Index performs after each of those signals listed above. The returns over the next month are in line with typical market returns -- perhaps some slight underperformance. The longer term returns after these signals, however, look better than the anytime returns. 

Three months and beyond after a signal, the index was higher after 10 of the 11 signals. Average returns are also higher after signals. Volatility, after these signals, is noticeably lower than usual. Based on the study, I don’t think there’s much to worry about as far as the S&P 500 running up toward its previous all-time high.

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