Don't Bet Against Stocks at New Highs

The Nasdaq closed at a new all-time high on Monday. So did the S&P 500 Index.

Most investors see new highs and get caught up in strong emotions... And those emotions are dead wrong.

At first, it's a good feeling. But it's quickly followed by dread and concern. What goes up must come down, after all.

People are geared to think like this. It's our nature to fear the unknown... to be cautious about anything that seems too good to be true. And new all-time highs seem too good to be true.

That kind of intuition is great in day-to-day life. It protects us. But when it comes to finance and the markets, reality tends to be less intuitive. The truth of the matter is simple...

New highs are a good thing. They tend to lead to higher highs.

Let me explain...

Longtime readers won't be surprised to hear this. Sticking to what's working – to what's in an uptrend – is an idea we write about over and over again in DailyWealth. And we don't do it for kicks. We do it because history proves it's the right move.

To see what I mean, let's take a look at the Nasdaq. Remember, it hit a new all-time high on Monday. What does that mean going forward?

I looked at the full history of the Nasdaq to find out, going all the way back to 1971. Since then, the Nasdaq has closed at new all-time highs 23% of the time... more often than most would probably expect.

History is pretty clear on what happens after these highs, too. The table below shows it...

As you can see, stocks should perform darn well over the next month. The month after a new all-time high is more than twice as strong as a typical one-month return... And the next six months beat the typical return too, by nearly 30%.

A year later, the new-high bump is usually over with. So we can expect things to return to a baseline of typical returns over the next year.

There's nothing revolutionary in these numbers. They don't tell us that stocks will soar 30% by year's end. But they do prove that new highs are a good thing. They happen when prices are moving higher... And that uptrend usually continues.

On the other hand, it might feel smart to buy when stocks are falling. The thrill of potentially catching the bottom is hard to ignore. But the data says it's not a smart bet.

Here's what happens in the Nasdaq after the index hits a 12-month low...

Stocks lose money in the month after a new 12-month low. Losses tend to follow losses.

Sure, things even out after six to 12 months. But trying to call the bottom is usually a money-losing bet. When it goes wrong, you can risk a lot more than slight underperformance... That's why you should always wait to buy until you see the uptrend.

Plus, if your plan is to sit on the sidelines until new highs turn to new lows... you'll risk missing out on months of above-average returns.

The simple truth is that new highs are nothing to fear. They tend to mean more gains are on the way.

The Nasdaq just hit a new all-time high. So this isn't the time to make a contrarian bet against U.S. stocks. It's a time to stay long.

Good investing,

Brett Eversole

Further Reading

"Bull markets don't die of old age," Chris Igou writes. With stocks reaching new highs every day, you might think it's time for a pullback. But history tells us that moves like the ones we're seeing could lead to even higher valuations in the near future... Read more here: This Year's Powerful Start Could Lead to More Gains in U.S. Stocks.

"We've seen some surprising winners in the stock market this year," Chris says. As the high-flying tech sector keeps soaring to new highs, it can be easy to overlook some of the "boring" stocks. But we could see them stage a double-digit breakout soon... Get the full story here.

Market Notes
LOYAL CUSTOMERS BOOST SHARES OF THIS COSMETICS GIANT

Today’s chart shows a strong brand in action…

Regular readers know we’re always on the lookout for uptrends in powerful brands. Customers usually stick with the brands they trust, even if it means paying more for their favorite products. Today’s company shows the strength behind a popular name…

Estée Lauder (EL) is a $120 billion global cosmetics giant. It boasts more than 25 prestige brands of makeup, skincare, fragrance, and more. These include its own brands – like Estée Lauder and Clinique – plus designer names like Michael Kors and Tommy Hilfiger it uses under license. Makeup and perfume aren’t one-time purchases – loyal customers have to keep buying more and more from their favorite high-end brands. Sales hit $3.9 billion in the most recent quarter – up 16% year over year.

As you can see, EL shares have soared more than 250% over the last five years. And they just hit a fresh all-time high. This is more proof that investing in a well-known brand can lead to huge gains…