Triple index breakout

Three major US market indices broke out yesterday. The S&P 500 US large cap index, the Nasdaq 100 US OTC index, and the Russell 2000 US small cap index all hit new highs on Tuesday. Click on the charts to see the details.

Technical analysis tends to suggest, all things being equal, a breakout to new highs supports greater upside potential in the future. Exceptions to this tendency occur when markets have reached a bubble-peak, and are set to implode (i.e. long-termed overbought and overvalued fundamentally).

I don’t think this is the case right now.

Research by statistical guru Jason Goepfert of www.sentimentrader.com shows since 1979, when the S&P 500, Russell 2000 and Nasdaq Composite all rallied at least +1% to a new 52-week high on the same day, the S&P 500 tended to have weaker near termed performance. However, the S&P also tended to display strong long termed performance after a month of softer returns. Here are the statistics, according to Goepfert:

S&P 500 gain (loss)

• Day after triple-highs:    0.1%
• 1 week later:                      (0.1)%
• 2 weeks later:                    (0.5)%
• 1 month later:                   (0.4)%
• 3 months later                   3.3%
• 6 months later:                 5.2%

I might note that in years where markets experienced significant corrections/bear market conditions (e.g. 1987), the 3-months and 6 months follow-up numbers were decidedly negative, despite the positive averages noted in Goepfert’s study. Thus, if the markets do in fact experience a significant correction of greater than 10% this summer (as I have suggested may happen on this blog) the positive bias of yesterday’s high may be delayed a while. That said, markets tend to experience significantly stronger 4^th quarters in years where significant Q2 / Q3 corrections occur.  Thus, I view yesterday’s highs as a bullish sign for the longer term.

Keith on BNN

I will be on BNN television’s “MarketCall Tonight” show on Tuesday March 11^th at 6:00pm EST. Phone in with your questions on technical analysis during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for me) to [email protected]