Past investor behavior tells us the S&P 500 is going higher

With the S&P 500 hitting record levels, the question of the day is whether this bull market will continue or if we’re set for a pause, drop or worse.  At the extreme, some analysts and economists are worried about a bubble.  Outside of the common drivers like valuations and quantitative easing, more than ever the discussion is centered around investor behavior.  For example:  Will individual investors continue to return to the stock market?  Will approaching these milestone levels of 1,800 for the S&P and 16,000 for the Dow give investors pause?

At EidoSearch, our pattern recognition technology allows us to answer this question objectively by looking at how investors have reacted to this type of market in the past.  Specifically, we took the YTD trading pattern in the S&P 500 and looked back to the 1970’s to see when we’ve observed this pattern in history and to identify how investors have reacted.

We found 5 highly correlated instances, all from the last 22 years:  1991, 1993, 1996, 1997 and 2003.  As opposed to looking at year end, we decided to take a bit longer look to see if the market was sustainable beyond year end factors.  In all 5 instances, the S&P 500 (SPX) has been up in the next 3 month period and the average return over the 3 months is 6.84%.

A couple of charts below for visual inspection:

Current YTD price pattern for the S&P 500 Index

3 month return of the S&P 500 AFTER each of the 5 highly correlated historical instances