Don’t Fear Big Gains, Run with Them

The last two years have been exceptional for stocks.

The S&P 500 gained 24.2% last year and 23.3% in 2023. That comes to a 53% gain in total, which is the best two-year run since 1997–1998.

I have no doubt that a lot of investors missed out on at least some of those gains because they seemed too good to be true.

Stocks can’t keep going up forever, right?

Of course not. But they can keep going up a lot longer than anyone expects.

Consider this: The S&P 500 closed at an all-time high 56 times last year. That’s more than once a week.

The benchmark index hit a new all-time high on December 26, 2023, climbing back to where it had been two years earlier. It went on to gain an additional 25%.

It wasn’t a straight shot higher, which gave investors plenty of opportunities along the way to say, “I’m cashing out. This must be the end.”

Or, “I’m not going to put any new money in stocks after this run.”

And yet, most of the time they keep right on running.

Perhaps the biggest lesson I learned when shifting to quantitative analysis and removing my emotions from investing is to embrace strength.

The data clearly shows that strength begets strength, and new highs lead to more new highs. In the market overall and in individual stocks.

And no, the market and stocks won’t keep going up forever. Of course not. But in the long run – and every person’s investing horizon is important – you’re better off investing into strength than avoiding it.

Nobody can accurately pick tops or bottoms, which is why I rely on data.

And the data shows that now is a good time to be in stocks.

One Good Year Leads to Another

I wouldn’t blame you for being a little hesitant after two strong years in a row.

Those two years are the bulk of the latest bull market, which started on October 12, 2022, when the S&P 500 bottomed at 3,577.

It has soared 65% since.

That can’t continue, right?

Data tells us it can. Maybe not at that pace, but we don’t need a raging bull market to make good money.

Bull markets last an average of 5.5 years. By that measure, we still have about three more good years ahead of us.

Some last much longer, like the 11-year run from 2009 to 2020. That’s the longest bull market in history, so it’s an anomaly, but we know it’s possible.

And most fitting for where we are right now, stocks tend to do well following a strong year. In fact, they tend to do better after a big year.

When the S&P 500 gains more than 20% in a year, the average return the following year is 11.5%, which exceeds the historical average.

To paraphrase Sir Isaac Newton’s First Law of Motion: a stock in motion tends to stay in motion. Momentum yields more momentum the vast majority of the time.

It’s natural to be concerned that you might invest at a top. Nobody wants to overpay and then get burned, but the data tells us that investing into strength increases your odds of success.

Higher and Higher

That’s true of individual stocks as well as markets, which is why I made technical strength a critical component of my quant stock-picking system.

As regular Power Trends readers know, my Quantum Edge system produces a Quantum Score for each of roughly 6,000 stocks. I’ll let you in on a little secret…

The technicals count a bit more in a stock’s rating than the fundamentals.

Don’t take that to mean the fundamentals aren’t important. They most definitely are. Fundamentals tell us how good the underlying business is, and you want to invest in strong, growing, and profitable businesses. Data tells us they are the most likely to make you money.

There are multiple algorithms in my system, but generally speaking, the technicals account for about 58% of a stock’s Quantum Score and the fundamentals 42%. By technicals, I don’t mean technical analysis, though it’s related. I mean the trading characteristics of a stock, which my system analyzes using 17 inputs (12 inputs on the fundamentals).

Strong technicals raise the odds of more new highs. That’s in part because Big Money buying also factors into the technicals. Institutional money pouring in can’t help but impact a stock’s trading… for the better.

Let me give you one quick real-life example – a stock currently in our Quantum Edge Pro portfolio.

We added this lesser-known company named Celestica (CLS) on June 5, exactly seven months ago. Celestica helps customers with product life cycles – from design/engineering to product introductions to supply chain services, testing, manufacturing, fulfillment, and even after-market services like repairs and returns.

CLS had already gained 80% the first five months of the year, and shares are now up another 70% since we got in. They pulled back over the summer but more than doubled the last four months.

We booked juicy partial profits in December, locking in some big gains while holding on to most of our shares for more upside.

CLS is a stock that many investors would have avoided after its big run, but as long as the data aligns – the fundamentals, technicals, and Big Money inflows – I don’t fear buying into strength.

In fact, I embrace it because it has served me so well. If you invest in high-quality stocks with the right data, I expect it will serve you well, too.

Something to think about in what’s shaping up to be another year of new highs.

Sincerely,

Jason Bodner
Editor, Jason Bodner’s Power Trends