It's been 10 years since it took so long for the SPX to surpass its record peak
When the S&P 500 Index (SPX) reached a new all-time high last Friday, it marked the end of a streak lasting over two years without such highs. This sustained period without new highs hasn't been observed since the financial crisis of 2008. Notably, the S&P 500 achieved an all-time high in October 2007, and it took more than five years to surpass that peak, finally doing so in 2013. So, it’s been 10 years since it took so long for the index to surpass its previous high. This week, I’m looking at past instances when the S&P 500 went at least a year with no new highs. The goal is to examine whether such periods prompt a pause in stock activity or serve as a wake-up call for investors to consider buying opportunities.
Overtaking Previous Highs
The first table below summarizes the S&P 500 returns after notching its first all-time high in at least a year. The average return and percentage of positive returns is higher after these occurrences compared to typical returns for the index. The longer-term results are especially bullish, with the S&P 500 averaging a 14% return over the next year with 13 of the 14 returns positive. It seems the news of a new high for the index has been an "all clear" signal for investors to get into the market.
Option Returns vs. Buy and Hold
Buying the S&P 500 after these signals would have generated an average return of 14%. I thought it was an interesting exercise to see what if instead, we purchased options. I looked at option prices on the SPX at the close last Friday when the new high occurred. Specifically, I looked at the 4850-strike price for the call and put options that expire on January 17, 2025. Then I calculated the option returns given the one-year SPX returns after each signal.
For each signal, you can see the call and put returns along with the return if you bought a straddle (buying equal dollar amounts of both the call and put). Given these returns, the call would average a gain of over 80% with 64% of the returns positive. Furthermore, four of the 14 call returns would have seen the investment more than double. The average positive return for the calls would have been about 150%. Since the S&P 500 declined only one time out of the 14 signals, there was only one positive return if you had purchased put options. Finally, buying straddles would have led to a very small loss on average of 2% with 36% of the returns positive.
