All-Time Highs and Stock Prices – Does Momentum Investing Work?

People are asking, “Should I avoid stocks since the indexes are hitting all-time highs?” One way to answer that question is to point out that stocks have been reaching all-time highs for a while, and then they continue to hit new all-time highs.

This article presents that information in a more sophisticated way. It’s basic premise is that momentum tends to continue until something happens to reverse it. All-time highs by themselves are no reason to avoid stocks.

Despite these fits and starts, there is an interesting relationship between all time highs in the stock market. Once you have hit an all time high, the very next month you are likely to hit another all time high. To be exact, of the 356 market peaks, ~67% of them were followed by another market peak in the next month and ~90% of them were followed by another market peak within the next 4 months.

Market peaks cannot go on forever, which is why there can be long periods of drawdowns before a new peak is reached. However, this underscores the important role that momentum plays in the stock market.