Animal Spirits at Stock Market Highs

Small Stocks (SM75) futures have made new all-time highs 5 of the last 9 trading days (56%). For context, SM75 made new highs just 5% of days going back to 2017. The phenomenon known as “positive drift” dictates that stocks move higher more often than not (+0.05% average daily move in SM75 vs 0% theoretical), sure, but is this recent activity too much?

All 55 all-time high occurrences in SM75 were concentrated into just four distinct spans of a couple weeks, which is to say that new stock market highs cluster. This distribution’s lack for uniformity indicates that the number of recent price extremes is actually quite normal.

To boot, expectations for the few days following a new high should not necessarily be bearish given a historical average next-day reaction of +0.05% Those selling immediately into new highs have not been met with success.

So where does that leave the active trader unwilling to buy all-time highs in stocks? Well...in a tough situation it would seem. Though it may seem counterintuitive to anyone taught to buy low and sell high, traders willing to buy into highs have seen profits as long as they live in the short term as the week following a new high has seen +0.6% on average.

That said, there’s been considerable opportunity for bearish traders capable of holding shorts for a month or longer: SM75’s average monthly move following an all-time high has been -0.6% compared to that of +1.0% for all months.

All-time highs in stocks have benefited the aggressive, short-term bull and the patient, long-term bear. Choose your temperament and spirit animal accordingly.

To learn more about trading the Smalls, sign up for our free weekly newsletter which covers everything from stocks and bonds to commodities and foreign exchange.