The S&P 500 and Dow Jones Industrial Average both notched new all-time highs this week. The tech-heavy Nasdaq 100 has been flirting with its record high set on August 5.
Normally, I love seeing new highs. New highs typically beget new highs. The average investor, on the other hand, becomes skittish when a stock or major index hits a new high. They believe that the end is near. If they own the stock in question, this often prompts them sell far too soon. If they haven’t invested in a stock that’s reaching a new high, they take one look at the chart and walk away. They think they’ve missed the boat on that company.
Why New Highs Aren’t Necessarily Bad…
As my longtime readers know, just because we have missed some gains on a stock as it hits new highs, it doesn’t mean we can’t still make money…
In just a moment, I’ll explain why this time may be different. But first, I want to delve into this concept of new highs a little further.
One of my favorite examples of this is a trade we made on Southwest Airlines (NYSE: LUV) for my Maximum Profit service back in the day…
In 2014, Southwest was creating new highs on a near-daily basis. When we entered the trade (in May) the stock was already up 40% on the year. Again, most investors would likely scoff at the idea of buying a stock that’s reached a new 52-week high or was up big on the year already.
But that didn’t stop us… we entered the trade and rode the stock as it continued to make new 52-week highs. When that momentum stopped, we exited the trade and made a handy 40% gain. For comparison, the S&P 500 returned only 11% over the same time period.
As you can see, the second time we saw a bearish divergence in late 2007 where the market peaked, but the AD Line didn’t confirm the bullish trend, the market once again tumbled.
In the fall of 2018, I once again used this breadth indicator to illustrate that there was softness in the bullish trend.
Here’s what it looked like then…
Now, I do want to point out something important. Like most indicators, this one isn’t bulletproof. With that being said, it does have a darn good track record.
But considering that this breadth indicator is flashing warning signs that a correction is on the horizon, it pays keep an extra close eye on your stocks. I’m going to be watching this indicator closely in the days to come for more insight.
If this turns out to be a head fake, then I’ll certainly look to add to my portfolio in the future. I’m going to remain cautious in my approach to the market for the time being, and I suggest you do the same.
In the meantime, I have a question to ask you…
Wouldn’t it be nice to have some holdings in your portfolio that would allow you to sleep at night? That’s where my colleague Nathan Slaughter’s latest research comes in…
Nathan just released a brand-new report on 5 “Bulletproof” stocks that have a proven track record of holding up in any market. These stocks enrich shareholders year after year — delivering a powerful combination of capital gains and dividend increases. Even better, after an incredible bull market, they still yield more than 5% right now — and all of them are “buys” today.
Go here to learn how to get your hands on these picks now.
