This Rare Event Could Suggest Much Higher Equity Prices for the Rest of This Year

Something extremely rare happened last week and it could be potentially bullish for equities over the remainder of the year. The volume on the New York Stock Exchange (NYSE) is broken down by advancing and declining volume. On Tuesday and Wednesday of last week, 90% of the total volume went to advancing issues. Historically, this sudden burst of strength has been a positive sign for equity returns going forward.

Since 1970, there have been only 158 90% up volume days going back to 1970. Incredibly, only seven times have there been back-to-back 90% up volume days, and once in the summer of 1984 there were three straight. The strongest day ever was a 97.8% up volume day on June 10, 2010, when the S&P 500 gained 2.9%. The worst ever? Not surprisingly, it was the Crash of 1987 on October 19, 1987, which saw only 0.2% of all the volume on the NYSE advance that day as the S&P 500 dropped more than 20%.

So, what happens after two consecutive 90% up volume days? Looking at the six previous times this has happened, the S&P 500 is up a median of 4.5% a month later, with three-month and six-month returns of 5.9% and 13.3%, respectively. Usually we only see these kinds of buying days when the S&P 500 is at least 10% off of an all-time high. This type of buying thrust could be a key signal that future gains are coming, based on past history. Breaking it down by where the buying thrusts happen, only the January 1987 event happened closer to new highs. Those next 10 months were some of the strongest in stock market history. But this is only a single data point, and thus, can’t be given too much weight.

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We continue to think there may be higher equity prices during the second half of this year, and this study further confirms the likelihood of just that. Be on the lookout for our Midyear Outlook publication, set to release next week, for much more on what we might see the rest of this year.

 

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The economic forecasts set forth in the presentation may not develop as predicted.

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