Over 50 years ago, on February 12, 1966, the S&P 500 reached a new weekly high of 93.81. Weekly highs in a rally are almost always good news – except for the last high of the cycle, which I call a Peak. A new high is a Peak if it is followed by a decline of 10% or more. That high in February of 1966 turned out to be a Peak because it was followed by a 22% decline. Since then, the S&P 500 has registered 10 more weekly Peaks. Some declines were severe (56% from 2007 to 2009). Some declines were shallow (11% from 1983 to 1984). In some cases, after the low was reached it took many years to get back to a new high (6 years after the 1974 low). In other cases, a new high was achieved a few months after a low (3 months after the 1998 low). The table below shows some interesting information about each Peak from 1966 to 2015.
The most recent weekly Peak was on July 15, 2015. The subsequent low was reached on February 13, 2016 after a 12.3% decline. Last Friday, the S&P 500 reached a new weekly closing high and a new 52 week high. (Remember the doomsayers just three weeks ago who said the world was coming to an end after Brexit?)
What does the future hold when a new weekly high is reached after a 10% decline? The past is no guarantee of the future, but below are the results of the prior 10 instances of a 10% or more decline followed by a new weekly high:
Only once was there a loss after 6 months and after 1 year. Although the statistics are compelling, the sample size of new highs following a 10% or more decline is too small to draw firm conclusions. We are still faced with slowing growth, global uncertainty and a nasty, depressing election. That being said, unless the high last week turns out to be a Peak, it is good news.