Market momentum suggests there is more upside ahead

The S&P 500 has gained more than 15 per cent already this year, its best start to a year since 1997. Is that cause for concern?

Before last week’s dip, stocks were technically overbought following their recent winning streak – the most overbought since November 2004, according to Bespoke Investment. However, Bespoke notes prior winning streaks resembling the recent one didn’t tend to represent long-term peaks.

More importantly, a strong first half to a year usually means a strong second half, says the Carson Group’s Ryan Detrick. When the S&P 500 was up at least 10 per cent in the first half of the year, says Detrick, the second half of the year enjoyed median gains of 10 per cent. As for first-half gains of 15 per cent, Detrick notes this has happened seven times since 1989. The worst full-year return in those seven years was 26.3 per cent.

“In other words,” says Detrick, “this isn’t bearish.”

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JPMorgan is also encouraged. In its midyear outlook, it notes that in the last 11 bear markets, after stocks rallied back 20 per cent the S&P 500 recorded average gains of 22 per cent over the next year. Fomo – fear of missing out – “could act as a cue to start rebuilding equity portfolios after last year’s de-risking”.