Stocktake: Huge gains are bullish, not bearish

Indices had massive gains last month but that’s par for the course, says LPL Research

In the US, energy enjoyed its second-biggest monthly gain  in November. Photograph: Michael Nagle/Bloomberg

In the US, energy enjoyed its second-biggest monthly gain in November. Photograph: Michael Nagle/Bloomberg

 

November was a stunning month for stock markets – the best month ever for the US small-cap Russell 2000 index (up 18.3 per cent) and the best month for the Dow (11.9 per cent) since 1987.

Looking at US sectors, energy enjoyed its second-biggest monthly gain (28 per cent) while the industrial and financial sectors soared 16 and 16.8 per cent respectively, their biggest monthly gains since the nadir of the global financial crisis in April 2009.

Commentators who assume massive monthly gains are unsustainable forget that indices enjoyed similarly huge gains in April. They kept on gaining in the following months and that’s par for the course, says LPL Research’s Ryan Detrick.

Looking at other months where the S&P 500 gained at least 10 per cent, Detrick found stocks were higher more than 80 per cent of the time six and 12 months later. Strong returns are typical, especially over a six-month horizon, with average six-month gains of 11.5 per cent.

Huge monthly moves, says Detrick, “tend to be the start of a new bull move, not the end”.

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