Here and in the Trading Psychology Weblog, I typically take a short-term look at markets. At the end of a month, however, let's take a big perspective.
Since 1971 (N = 414 months), we've had 152 months in the Dow Jones Industrial Average that have touched 12-month new highs. This was the case during May. Twelve months later, the Dow was up by an average of 11.74%, with 120 months up and 32 down. That's quite a performance.
During the remainder of the months in the sample (N = 262), the Dow was no slouch, but not nearly so robust. The average gain was 7.01% (172 up, 90 down).
What this tells us is that, historically, strength has begotten strength in equities. It also points out a reality that we're apt to forget in the welter of negative news and scandals: long-term investment in American equities has, on balance, been a favorable proposition.
How about when the Dow has made a 12-month low? We've only had 41 months fit that bill. Twelve months later, the Dow was up by only 4.13% on average (23 up, 18 down), compared with an average gain of 9.25% (269 up, 104 down) for the remainder of the sample.
Buying a twelve month low in the Dow has, on average, led to underperformance.
There is an element of fear and volatility in the market that we haven't encountered for a while. And after we've made a 12-month high, probably any market looks overbought and ripe for decline. Nonetheless, these strong markets have been the ones with the most favorable outlooks 12 months out.