Markets are buoyant, but this is not 1999

Is euphoria beginning to grip US markets?

The Dow Jones has surpassed 19,000. The four main US indices – the S&P 500, Dow, Nasdaq and small-cap Russell 2000 – all hit all-time highs on the same day last week, for the first time since December 31st, 1999.

Over a recent 10-day period, small-cap stocks outperformed the S&P 500 by a greater amount than at any time since before the dotcom bubble burst in March 2000. "That ended well," tweeted Wall Street Journal commentator James Mackintosh.

Comparisons to the dotcom era are superficial, however. Current valuations look elevated, but nothing like the craziness of 1999. Nor is there anything ominous about four indices hitting fresh highs. This happened on 47 occasions during the 1990s, LPL Research notes, the first such instance occurring in 1991; stocks gained 252 per cent between then and the final, fateful signal in late 1999.

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As for this malarkey about the Dow and round numbers, note that it took 483 trading days for the index to go from 18,000 to 19,000 – an annualised return of just 2.9 per cent, notes LPL Research.

Stocks have enjoyed a nice but unexceptional rally. Overbought indices may retreat, but any pullback is likely to be shallow. 2016 is nothing like 1999.

Momentum augurs well for stocks

Investors unconvinced by Donald Trump’s presidential credentials may doubt the sustainability of the recent rally, but the stats suggest it won’t peter out any time soon.

S&P 500 gains on the day after elections have been a strong predictor of further advances, according to Nautilus Research. In 10 out of 12 past instances, equities continued to gain over the following one- and six-month periods. Furthermore, returns were well above-average over one-, three- and six-month periods.

Nautilus also examined past cases where stocks hit their first one-year high in three months. Since 1990, stocks were higher a year later in 58 out of 73 instances. Gains averaged 12.7 per cent, well above average one-year gains of 7.5 per cent. Returns were also much higher than usual over one-, three- and six-month periods.

Bears have doubted this rally since 2009, but stocks continued climbing the proverbial wall of worry. Whatever one’s feelings about president-elect Trump, it pays to remember that in markets, the trend is your friend.

Don’t bet on an Alzheimer’s breakthrough

Shares in pharmaceutical giant Eli Lilly suffered their largest intraday decline in 16 years last Wednesday after the company announced that solanezumab, its experimental Alzheimer's treatment, had failed clinical trials.

Investors should not have been surprised. Two previous clinical trials of solanezumab had failed. A recent survey of pharmaceutical investors by ISI Evercore revealed more than a quarter of respondents expected the trial to be a complete failure. Nevertheless, investors took fright – more than $10 billion was wiped off the value of Lilly.

Alzheimer’s has long been a graveyard for expensive drug tests, as Irish investors well know. Elan shares were pummelled on a number of occasions following disappointing data regarding its experimental Alzheimer’s treatment, bapineuzumab (most notably in July 2008, when shares fell more than 30 per cent).

These are not isolated disappointments. One study that examined 413 clinical trials – 124 phase I trials, 206 phase II trials and 83 phase III trials – over the 2002-12 period found the failure rate was a catastrophic 99.6 per cent.

Attention is now focusing on Biogen, which will update investors on its Alzheimer research next month. One analyst described the Lilly news as the final nail in the coffin for Biogen's hopes, but others are taking a "this time is different" stance.

This time rarely is different, however. Betting on an Alzheimer’s breakthrough continues to resemble lottery investing – the payoff would be big, but it’s a low-odds wager.

Cyber hoaxes pose a threat to traders

Shares in €35 billion French construction firm Vinci briefly plunged 19 per cent last week following a hoax press release saying it was restating its results due to accounting irregularities.

Such cyber attacks can catalyse quick gains for market manipulators. Last month, Fitbit shares rose 5 per cent following a fake buyout offer. In 2015, another fake takeover bid drove shares in Avon Products 20 per cent higher. In 2013, a fake tweet regarding an attack on the White House caused panic on Wall Street, briefly erasing $200 billion in market value.

Those at risk of losing out in these short-lived panics are investors using stop-loss and buy-stop orders. The former take you out of a trade when price falls below a pre-determined level; the latter are used by momentum investors who buy if prices exceed a given figure.

A follow-up anonymous email claimed last week’s hoax was retaliation for environmental sins allegedly committed by Vinci. If so, it was a misguided attack. Vinci’s shares quickly recovered; the only losers were the poor souls whose stops were triggered, turning a temporary plunge into a permanent loss.