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Is a Record-Breaking Market Something to Fear? .

What happens after a record high market is more interesting than the record itself.

Is a Record-Breaking Market Something to Fear?

By Amy Kemp / Senior Analyst Dorsey, Wright & Associates, a Nasdaq Company

One of the more vivid memories I have from grade-school was during our weekly class trips to the library. Although I can’t recall the first thing about the Dewey Decimal system or how to properly cite my sources in MLA format, I do remember the "mad dash" we’d all make to the shelf containing the volumes of The Guinness Book of World Records when it was time to check out a book. Whoever was lucky enough to get their hands on one for the week would flip through the pages as the rest of us peered over his or her shoulders in awe at all of the outrageous world record holders. It was always a combination of impressive and grotesque. Between the tallest man alive, or the longest fingernails on one hand (which, in case you are wondering, is presently held by a man in India who had more than 29 feet of fingernails growing on his left hand alone in 2014!), each page had something impressive in its own right. The book itself is even record-breaking, as it is the best-selling copyrighted book of all time, excluding religious texts1. When you think about it, this makes sense, because society as whole is often consumed with trying to be the biggest, best, or fastest. It’s human nature.

When the market breaks records, however, the perception is all too often negative rather than positive. We are currently in a “record-breaking market,” simply based on the fact that it sits higher today than it has at any point in history. As we watch the S&P 500 and the Dow Jones Industrial Average (the Dow) move higher and higher into uncharted territory, we are fielding more and more calls from advisors who are apprehensive themselves or are looking for pointers to use with apprehensive clients. Just yesterday, I spoke with an advisor who has been with us for many years who shared with me that his clients don’t want to buy anything. All they want to do is sell and take profits.

As of press time (February 23, 2017), the Dow had its 10th consecutive day of new all-time closing highs. There have only been four times in history that the Dow has closed nine days in a row at a new all-time high, and only one other occurrence of 10 or more consecutive days (a 12-day run from 1/15/1987 - 1/20/1987). While accomplishing this feat in and of itself is noteworthy, perhaps what will be of more interest is what occurred in the market after each of these prior accomplishments. The table below outlines the performance for the Dow in the weeks and months following the previous "record" runs. Each day-count category is based on trading days as opposed to calendar days.


On average, the Dow has gone on to produce a gain in each of the time periods tested after completing nine consecutive days of new closing highs. In fact, the average return managed to grow the further out in time we went, with the largest average return falling 60 trading days (or about three months) after the ninth high was made. In order to put the numbers above into perspective, we also compiled the same performance data for the Dow using every data point available back to the 1900s. The table below summarizes the complete data set.


Notice that the table above also offers positive average rolling returns for the Dow. This is to say that the market moves higher more often and to a greater extent, than when it moves lower. However, the average returns following one of the historic nine-day record highs has been greater than the all-encompassing average. So, while you may be managing the emotions and expectations of fearful investors day in and day out as the market pushes higher, using history as a guide tells us there may still be additional upside potential from here before we see any meaningful decline. As always, we will lean on our market indicators and the objectivity of price data to direct us moving forward. As long as the weight of the evidence remains bullish, so too will we.

1Guinness Book of World Records

This line should be: To learn more the DWA Research Platform, click here to request a free demo. To learn more about the Dorsey Wright Relative Strength strategies, download our Point & Figure Relative Strength Strategies white paper or contact us here.

This article was prepared by Dorsey, Wright & Associates, LLC, a Nasdaq Company. Dorsey Wright is a registered investment advisory firm. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities. The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
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