Stocktake: Don’t be shocked by new market highs

For some investors there is nothing quite as sickening as all-time highs.

If one includes dividends, the S&P 500 hit fresh all-time highs last week, something that triggered much carping from wrong-footed investors.

"We are in an environment where negative economic data, negative earnings growth and even a drop in oil are now shrugged off," said Channing Smith of Capital Advisors.

“Human emotion, which is the biggest wild card in investing, can surprise you.”

Is it so surprising? As Urban Carmel from the Fat Pitch blog noted, markets are largely following the historical script. Equities usually decline and then rebound following the first interest rate hike; bear markets rarely occur outside recessions, but the United States economy is still growing; bearish sentiment hit extreme levels in February, the kind usually seen prior to strong market rallies.

There are sound arguments on the bearish side, but many amount to little more than this: there are problems in the world so stocks should not be rising.

Thing is, there are always problems. Nevertheless, the “boring reality”, as Carmel puts it, is that stock markets rise most of the time.

Rally continues to look healthy

Market rallies have stalled at current levels many times over the last year, not least last December, just before stocks suffered a sizable shellacking.

Technically, however, the recent advance has looked much healthier than its predecessors.

In December, a small number of high-flying large- cap stocks were masking broader weakness.

In contrast, Bespoke Investment Group notes that for the first time since September 2014 all 10 S&P 500 sectors are currently above their 200-day moving average. Small-cap stocks, which were already in bear market territory last December, have outpaced their large-cap counterparts during the recent rally. The number of advancing stocks is higher than it was at last May's all- time highs, while international indices are also breaking higher.

Quite simply, market breadth has been very impressive.

Sceptics may question the fundamental rationale for the advance, but there’s precious little evidence that a serious retreat is at hand.

‘Sell everything’ a time to buy

Stocks' reclamation of last year's highs will presumably come as a shock to RBS analyst Andrew Roberts, who instructed clients to "sell everything" in January, when stocks were roughly 10 per cent below today's levels.

Stocktake cautioned then that this was lousy advice, but commentators who today cite Roberts’s call as evidence of the perils of market-timing are partly missing the point. Roberts’s warnings of Armageddon had been ignored in previous years; the very fact his hyperbolic call made global headlines was telling you that real fear and panic was in the air.

In other words, not only was it not the time to sell everything, it was very much a time to get busy buying.

Lottery stocks for ‘informed investors’

“Investors” with a taste for excitement might like Hong Kong’s Growth Enterprise Market (GEM), the scene of some recent lottery-like share price gains.

In March, building contractor and market debutante Ching Lee Holdings rose almost 700 per cent on its first day of trading.

An even bigger first-day gain was recorded this month by the appropriately named Hypebeast, an online fashion store that jumped as much as 2,000 per cent before ending the day with an eight- fold gain.

Another April Initial public offering, Luen Wong Group, enjoyed a 45-fold rise in little over a week – not bad for an old-economy civil engineering contractor.

Such action is not new: last October, a wine supplier gained 826 per cent on its market debut.

“Because of the higher risks involved”, the exchange’s website says, “GEM is designed for professional and informed investors.”

Judging by the recent trading, it appears to be attracting a somewhat different clientele.