Near-term Market Outlook Hangs in the Balance of New All-Time Highs
By: Jeffrey Hirsch & Christopher Mistal
May 24, 2016
Last Friday we posted on our blog that there is a 76.9% Chance of Bear Market Decline Exceeding 20%. As the S&P 500 was reaching the 1-year anniversary of making its last all-time high, we examined the previous times the benchmark had gone more than a year without marking a new high. 
Starting with the S&P 500 all-time closing high in 1929, there were 13 previous times where S&P 500 spent more than 1-year before closing at a new all-time high. With the exception of 1994, there was always a bear market using our preferred Ned Davis Research definition of a bear market which requires a peak to trough decline of 13% or more after 145 calendar days or a 30% decline. Using the arbitrary 20% definition, S&P 500 avoided a bear market just 3 times out of 13 (shaded in light grey in the table). In other words, previous all-time-high 1-year dry spells suffered a 20% or greater S&P 500 decline 76.9% of the time.
Prompted by an inquiry from a reader we have delved a bit deeper. In the table below we have added when the Ned Davis Research (NDR) bear was reached on DJIA, when the S&P 500 hit the -20% level and where the S&P 500 was at the 1-year mark. This presents two different scenarios for the current situation in 2016. The current market clearly bears some resemblance to the 3 light grey highlighted years above in 1960, 1984 and 1995 where the market suffered mild declines, avoiding the 20% bear and rebounding relatively quickly, resuming the overarching up move of a secular bull market.
Click table to view full size in new window…
SP500 Time Since All-Time Highs Table
On the flipside, the current market also bears close resemblance to the 3 years shaded in light pink. At the 1-year mark in 1957, 1969 and 1981 the market was in the midst of a much larger decline that had yet to materialize. In 1957 the market had barely dropped, not yet reaching the NDR bear-level. But in 1969 and 1981 trouble was brewing. NDR bear levels had been reached, but 20% declines and more we still in store.
A new high in the near term would be rather encouraging and likely be a sign that at a minimum the market will mark time, move sideways and give up little ground. On the contrary, should the current rally fail to produce a new all-time high, which would suggest underlying weakness and greater odds of a 20% bear market in the next 6-12 months.