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Scott Phillips: The dramatic significance of all time highs in the stock market


I’ve been properly unmotivated this last week. I get up, place my orders and then have a giant bowl of “couldn’t be bothered”. I injured my back deadlifting, and I’ve devoted most of my waking hours to annoying my wife complaining about it (and my back brace, and the 40 degree heat here, and my new diet which I hate. I’m a veritable bundle of joy right now I tells ya)

Current system research has stalled (I have a load of backtesting on my plate), I haven’t traded the new scalping system all week. Basically I’m a grumpy, whiny, fat man. And I’m so hungry all the time. Dieting sucks.

If I’m being honest this never ending levitation rally is boring as hell. And I totally missed it, even shorted into it (at the start) so I’m now biased. Which is always idiotic, but when it happens you can’t do anything but not act on it.

And try and have a cup of shut the hell up about my dumb biased opinions.

What I “feel” is “screw this rally, I hate this garbage” but objectively the evidence is clear. It’s a historically strong rally, either at or nearly at all time highs depending on the index (and almost certain to break out).

So what’s next? Logically the market never makes it easy on either side, so we are probably going to shake out the idiots who hated it at the lows but all of a sudden love it at the highs.

But after that, the stage is set for a historic rally.

This is the rallies for the last 5 years, marked from lows to the first tradeable pullback.

This shows very clearly that we are on the outer limit of what we could expect without a “shake out the idiots” pullback.

But not totally unprecedented. Note that the rally which kicked things off was the strongest in the last 5 years, and that makes strength at this late in the game a little weird to say the least. I’m putting it down to the Fed being a captured resource at this point.

So there is no reason to get short, yet. Quite obviously we are vacuuming to the top of the trading range and bears will be pinning their hopes on a double top.


What’s wrong with double tops? After all I have a setup in the Price Action Masterclass which is designed to capture and profit from them!

You see, stock markets have an inherent upside bias. Economies expand over time (that’s what they do, with periodic crashes and deleveraging) and the indexes hold only the successful stocks.

That idea, that the S&P 500 is the 500 biggest stocks (or whichever index you follow) means that if a stock starts to become a dog, it either never makes it in the index or it gets thrown out. Do not underestimate the strength of this effect, it in effect makes the stock indexes a momentum system.

And it means that once at all time highs, a stock index is likely to keep going, and going.

All time highs in a stock market is a magical time, where everyone is a winner. Everyone holds a lottery ticket in their pocket, there’s no telling how high they might pump it. So fewer people sell, which means more upward pressure, more confidence, more breathless press fawning over the rally. All this works in a positive feedback loop driving it up and up.

So I’m afraid the potential fake out double top at all time highs is a very low probability outcome.

But as usual low probability outcomes cause BIG moves. Consider this. Of the last 10 times the market broke to all time highs, the double top worked only once.

Kicker is that the one time it worked was 2008.


The only thing that makes me think twice about all this is the commitment of traders data. What this tells us is that Hedge Funds are expecting further declines in the VIX (which usually means more rally).

Of course they are but sentiment is a weird beast. Sentiment measures aren’t that useful except at extremes, and usually that level of complacency is a red flag.



So what’s the conclusion?

There should be some profit taking at the old highs, which are four-fifths of a fly’s foreskin away.

The first pullback should be eagerly bought by all. If they do NOT buy the first pullback that would be highly suspicious.

But they probably will. I’d like to believe that the bears have some small chance here, but to be fair that’s probably bias and wishful thinking.

In my view this is a very dangerous market to trade before we have a pullback, either long or short. Remember, cash is a position too.

Enjoy your week


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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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