Should Investors Be Afraid of New Highs?

1.) STRENGTH – Strength can be seen in markets in a number of ways. But one that tends to stand out is share buybacks, and right now US companies are stepping up those share buyback announcements. That’s a sign of balance sheet strength that returns cash to shareholders and helps support stock prices. For investors, that's a constructive signal. Another positive sign of strength is when the sectors that should be leading are leading, and the ones that usually lag are lagging. That’s happening now as well, and the relative strength picture actually looks even stronger on an equal-weighted basis (2nd chart).

2.) HIGHS – It’s always interesting how so many people seem to be afraid of new highs in the market. They “feel” things are too expensive, etc. They "feel" that the next thing to happen will be a massive drop, and that is as predictable as the rising sun. But markets don’t care how you or I “feel.” Since 1989, buying the S&P 500 at new all-time highs, for example, has led to better forward returns than buying on a random day. The thing everyone is afraid of has consistently been the place with the highest probability of success. Higher highs tend to lead to even higher highs, because that is what uptrends do…trend.

3.) RATES – What’s the next “worry”? To some, it’s rates/yields. To be fair, bond yields are rising in most developed economies despite accommodative central bank strategies, signaling inflation. As you can see in the chart below, the US 10YR Yield isn’t out of control. It’s not a worry yet. How do I know? Volatility and bond issuance. While yields have continued to rise, the bond market’s volatility metric – MOVE Index – is calm at 68. That is down from 115 late last month! Could bond vol spike a tad from here? Of course! But if it did, I’d expect 75 to 80 to be the area where it would turn back down again. Also, U.S. corporate bond issuance is very strong at about 30% growth. If there were serious worries of default, issuance would not likely be that high.