The Costliest Myth About Bull Markets

Submitted by Wall St. Daily as part of our contributors program

In the last week, the Dow came within 15 points of its all-time closing high of 14,164.

Lest you think the S&P 500 Index isn’t keeping up, it’s sitting within reach of its record high, too.

Given that the current bull market has lasted for almost four years, though, both indices’ proximities to their record highs must mean that we’re nearing the end. So now must be a terrible time to buy stocks, right?

Well, the mainstream financial press would like us to believe that. But let’s not jump to any conclusions.

Instead, since this is Myth-Busting Monday, let’s do our own due diligence to find out.

Hint: If you’ve been stuffing cash under the mattress since the last market crash, you might want to finally go deposit it in your brokerage account. Here’s why…

New Highs, But No Sign of a Top

The number crunchers over at Ned Davis Research wondered what happens when the S&P 500 Index hits new all-time highs, too.

Believe it or not, it’s happened 13 times since 1950. Now, if 13 is an unlucky number for you, it’s important to note that the findings are anything but ominous.

You see, after bull markets reach record highs, the rally tends to continue for another 644 days, on average. That’s almost two full years.

Better yet, it translates into another 40.3% in profits.

Like I said, there’s nothing ominous about that.

Other studies, including one by our colleagues over at Stansberry Research, come to similar conclusions.

After analyzing almost a century’s worth of weekly data on the S&P 500 Index, Dr. Steve Sjuggerud found that the Index rises an average of 9.2% in the 12 months after hitting a new 52-week high.

Granted, 9.2% isn’t nearly as much as 40.3%. But it’s still a respectable gain. And it sure beats the alternative.

Now, what if we extend our analysis to examine the performance of individual stocks hitting new highs? Sure enough, the same phenomenon holds true.

And once again, we have Ned Davis Research to thank for the statistical enlightenment.

The firm studied the High Low Logic Index, which tracks the number of new 52-week highs and new 52-week lows – each expressed as a percentage of the total number of stocks traded.

It found that bull markets peak long after the new 52-week highs top out. (About 30 weeks after, on average.)

Ultimately, this means that even if the January 25 reading for new 52-week highs on the NYSE of 24.8% represents the peak, the bull market should last at least until August.

Bottom line: While history is never guaranteed to repeat itself, it’s the only guidebook we’ve got. And based on the data, it’s not too late to invest in the current bull market. Even if the major market indices hit all-time highs. So don’t believe the myth that record highs indicate a market top.

For those of you who might be leery about putting too much weight into statistics, make sure you tune in tomorrow. I’m going to share five fundamental reasons why we can expect the bull market to keep charging higher.