Time To Fear An All-Time Highs As The S&P 500 Breaks 3,400?

The stock market reached another new all-time high this week. For the first time ever, the S&P 500 traded above 3,400. Measured since the March low, this has truly been an impressive rally. The S&P 500 has vaulted over 50% in just five months. This one of the strongest bulls ever.

(Click on image to enlarge)

Naturally, rallies like these make a lot of investors nervous. After all, how much higher can it go? Many investors are surprised to learn that history tells us that this is actually a good time to invest. Let me explain.

A few years ago, I crunched the numbers. I wanted to see how well the market does when it’s at an all-time high. I took all the days in which the stock market was at an all-time high. I then isolated the next day’s trading.

From 1950 through the middle of 2015 (when I ran the test), there had been 1,026 trading days following a new high. That’s about 6.2% of the time of one new high every 16.1 days.

(To be technical, we could say this goes back to 1929. Why? Because the market didn’t surpass its 1929 peak until 1954. Yikes!)

Those 1,026 days is roughly the equivalent to four years of trading. I found that the combined return of those days was 95.6%. That works out to more than 18% per year. In other words, if you had only invested in days following all-time highs, you would have had a much better average return than the overall stock market.

Of course, in practical terms, it’s pointless to dart in and out of the market so frequently, but our point is to study the market’s behavior. The market clearly likes an all-time high.

But, to my mind, the truly amazing stat isn’t the market’s return. Instead, it’s the market’s volatility. When the stock market is at an all-time high, it’s a lot calmer than it is during other times.

Check out this chart of the daily changes in the S&P 500 for the last several months. Before COVID, volatility was almost non-existent. But in the spring, daily volatility exploded. Why? Because the market was plunging. There were several days where the market moved by more than 5%. Since June, however, volatility has chilled out in a big way. Why? Because the market is moving higher.

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