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We’ve seen a lot in the last two weeks: Manias, Panics, and All-Time Highs.
Dry Ships Inc. (a shipping company) went from $4 to $102 in 4 trading days following the election, an astounding gain of over 2,000%. There were a wide variety of reasons attributed to the advance (Trump is bullish for growth/shipping, a positive debt restructuring, a rally in the Baltic Dry Index, an epic short squeeze, etc.). The reasons doesn’t matter so much except that they create a fundamental rationalization for the mania to take place.
As Dry Ships was approaching $100, I conducted a poll on twitter asking where it was headed next ($200 or $50). This was the response…
Interesting. Most said lower but 37% said it would double yet again.
What happened next? Dry Ships was halted on the 16th and when it reopened on the 17th it proceeded to fall 85%, giving back almost all of the gains.
Following the election, we saw a good old-fashioned panic in global markets. At one point, S&P 500 futures went “limit down,” a 5% decline. Gold was up over 4%, 30-year Treasuries were up 1% (yields down), and the Dollar Index was down 2%.
Did it stick?
No. Literally everything would soon reverse course, except for the sharp decline in the Mexican Peso. U.S. Stocks rallied, the Dollar surged, Gold declined, and Treasuries sold off (yields spiked).
By the next morning, S&P 500 futures were flat. The market opened as if the overnight panic never happened.
The S&P 500 hit an all-time high today (total return). Does that mean anything?
Perma bears are saying it does: “this is a sign of a frothy market; it will not end well.” They have being saying so since April 2012 when the S&P 500 first hit a total return high following the worst bear market since the Great Depression. Since then we have seen 176 more all-time highs, including today.
The truth is that all-time highs, by themselves, are signaling nothing other than a market that has been going up. Just because every bear market has started from an all-time high doesn’t mean that every all-time high is followed by a bear market. Far from it.
The S&P 500 (total return) is at an all-time high roughly 8% of the time since 1928. The forward returns following all-time highs are actually slightly above average from 1-month through 5-years (exception: 3 years). The percentage of positive forward returns is above average from 1-month through 1-year and slightly below average at 3 years and 5 years forward.
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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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