The stock market, as measured by the Dow Jones Industrial Average has done something that has only happened twice in history – it has had 10 straight days of closing at an all-time high. The only other time this has happened was in January of 1987. Many are finding this to be an uncomfortable place to be and are waiting for a seemingly inevitable decline.
While there is nothing wrong at all with taking some profits at this steep market level, it isn’t inevitable that the only market direction going forward is down. There have been 4 times that the Dow has closed at a new high 9 days in a row. Dorsey Wright, a market research company has done an analysis on what happened next and it is quite interesting. The following table shows that the Dow has produced a gain more often than not after these record levels. On average, the Dow has had a gain in the near term and the gain grew as time went on.
Each day-count category is based on trading days as opposed to calendar days. Sixty trading days is about 3 months, so on average, record highs do not indicate a coming crash, at least not in the short term. This is consistent with the fact that generally, the Dow moves higher more often and to a greater extent than it moves lower.
Using history as a guide, this is not necessarily the time to abandon the stock market. That being said, there is never a wrong time to take a profit, particularly if after this increase, stocks make up more of your portfolio than your risk tolerance indicates. At some point there will be a decline, so allow your risk tolerance to tell you when it is time to trim your positions, rather than market records.