Stocktake: Have stocks run too far, too fast?

The fundamentals may have improved lately (Covid vaccine news, US election results), but the sheer speed of the recent market gains will unnerve some. Is it risky to be buying at these elevated levels?

Certainly, indices are extended right now. Last week, 85 per cent of S&P 500 stocks were trading above their 200-day moving average, the most since August 2013. Almost half were trading at six-month highs last week, notes All Star Charts analyst Steven Strazza, the highest level since the 1990s.

However, that's not cause for concern – the last two times readings exceeded 45 per cent came just after bear-market lows in 2002 and 2009, says Strazza, prior to strong multi-year rallies. Similarly, Baird Investment's Willie Delwiche notes 72 per cent of S&P 500 stocks were trading at 20-day highs last weeks. Again, that's an extreme reading, but Delwiche's data indicates this is bullish, not bearish.

Since 1976, there have been 26 instances where readings exceeded 55 per cent. Six months later, stocks were higher on 22 occasions. Nine and 12 months later, stocks were higher on all but one occasion, averaging gains of 13 and 15 per cent, respectively. “Nothing is foolproof,” says Delwiche, but these kind of thrusts higher “tend to be a sign of sustainable stock market strength and a shift in odds toward opportunity and away from risk”.