This Setup Indicates Higher Stock Prices

A rare setup in US stocks, which occurred in early October, suggests significantly higher US stock prices from here.

The beginning of the month commenced with stocks up seven consecutive days (based on the Dow Jones Industrial Average), and this strength continued throughout the month. Interestingly, the Dow closed trading at new highs on 12 separate occasions during the month, this occurrence is rarely seen. See the table below produced by Stansberry Research:

Date

Index Value

10/1

16,272

10/2

16,472

10/5

16,776

10/6

16,790

10/7

16,912

10/8

17,051

10/9

17,084

10/12

17,132

10/13

17,082

10/14

16,925

10/15

17,142

10/16

17,216

10/19

17,231

10/20

17,217

10/21

17,169

10/22

17,489

10/23

17,647

Source: Stansberry Research

With share price performance like this, the obvious question to ask is, “what is this likely to mean for US stock market performance in the future?” Surely such short term strength must mean stocks are due for a period of subsequent weakness? Well history suggests otherwise…

Dr Steve Sjuggerud, from Stansberry Research’s Daily Wealth newsletter, analysed the historical performance of US stocks over the past 25 years to see how many times the Dow Jones Industrial Average experienced the same seven or more days of consecutive new highs during that time, and the results he uncovered were quite surprising.

The results indicated this pattern is extremely rare. “It has only happened 24 other times in the past 25 years. But when it does happen, the Dow tends to outperform over the next several months. On any given day, the odds that stocks increase or decrease are roughly 50/50. But rarely – when markets are in strong trends – the market can go “up” or “down” for multiple days in a row. That’s what happened from October 1 to October 12. The Dow increased in value for seven straight sessions” said Dr Sjuggerud. (Source: Dailyweath.com Newsletter)

[metaslider id=6431]

This historical Dow Jones data provides us with a window into its potential future performance. And what it shows is that rather than being cautious, in the expectation of an impending correction of that strength, rather investors should be getting aggressive. In fact, after such a move the Dow Jones tends to experience a significant period of historical outperformance in the months and year to follow. See the following table below:

Holding Method

1-Month Return*

3-Month Return*

6-Month Return*

12-Month Return*

Typical Dow

0.8%

2.4%

4.8%

9.8%

After Dow Extreme (Avg)

1.4%

3.9%

7.2%

14.1%

* Since 1990    

Source: Dailywealth.com.au

Dr Sjuggerud said “The typical Dow returns in the table are what buy-and-hold investors would have returned since 1990. As the table shows, after stocks go “up” for seven straight days, they tend to outperform over multiple time frames. Over a year, these extremes led to an increase of more than four percentage points. That’s serious outperformance! Buying and holding for three months after this extreme led to positive gains 75% of the time. And if you held for a year, you almost never lost money… Holding for 12 months led to positive gains 96% of the time.” (Source: Dailyweath.com.au)

Here at UGC, we see this as further confirmation and validation of our bullish outlook for US stocks and US real estate over the short to medium term. With the US Federal Reserve now almost certain to begin raising interest rates in December, investors should also note that history indicates that shares and real estate tend to outperform historical performance in the early phases of a rate raising cycle. This is a sign that the economy is starting to stand on its own two feet and is strengthening. Refer to our article on this topic for further comment on this phenomenon.

If you would like to learn how you can benefit from this great opportunity, contact United Global Capital today and speak with one of our financial strategists for a No Cost, No Obligation consultation on 03 8657 7640 or email [email protected] to learn how you can take advantage of the opportunities available to you.

The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

Recent stories

Age Pension and government benefits

When you retire, you may be eligible for government benefits such as the Age Pension or a concession card. The…

Read more

Super, death, and avoiding taxes

By Tony Kaye, Senior Personal Finance Writer, Vanguard Australia Having enough superannuation to enjoy a financially comfortable lifestyle in retirement…

Read more

Starting strong: Your 2021 Tech To Do list

In a year where simply keeping the doors open was a challenge for many businesses, finding the funds for tech…

Read more

Annuities

An annuity, also known as a lifetime or fixed-term pension, gives you a guaranteed income for a number of years.…

Read more

Budgeting 102: Sticking to your budget

Budgeting for a holiday or saving for a deposit? Even the best budget can unravel if the right tools are…

Read more