Over the Top

The term ‘over the top’ has its origins, at least in part, from World War I history.  Unfortunately, it referred to the infantry who, when given that order, had to climb up out of their trenches and onto the exposed battlefield (also known as ‘no man’s land’, another idiom from WWI that stays with us).  The incurred casualties were staggering, and the achieved results, minimal.

Now, as an idiom of the English language, ‘over the top’ generally refers to something extravagant, or in Webster’s terms; ‘excessive or exaggerated degree’.

We suggest that neither of the above two references bring an immediate positive impression to your mind.  We now have a natural bias when a broadcaster say: “The stock market is over the top of any previous level and has set new highs”.  We intuitively think “Oh no, this can’t be good” and we await the Newtonian fall of the apple, but this time dealing with our money.  Therefore, in that light, let me set some history straight.

Mathematically, things that go up 3 times out of 4 have a natural inclination to trend upward instead of down.  There is no secret to the history of stock prices on traded exchanges going up 3 times out of 4.  For reasons beyond this little article, in finance terms this result must always be so or financial markets would not work.  Speaking strictly logically, it is irretrievably then established that it is impossible for stock markets NOT to set new highs.  In fact, setting new highs will happen all the time.  You will note two sentences ago that we did not say ‘speaking strictly emotionally’, for it is in the emotions that we get in trouble.

Lest you think we are simply trying to ignore the obvious, though stock market pricing trends upward 3 times out of 4, you are VERY aware that stock markets go down that other 25% of the time.  Duh, you say!  Good student that you are, you already know I’m going to tell you to forget about the allure of timing the market as a fruitless and impossible endeavor (and costly).  I now want to provide you some newer research that will be useful to you regarding ‘market tops’.

When we look at months where a new market top has been achieved, we are happy for a moment but then wonder when the other shoe (or apple) will fall.  However, over last 90 years following a monthly new top in the S&P 500 index (representing the biggest companies in the US market), the ensuing 12 months after this new market high show POSITIVE returns 80% of the time.  Maybe more startling, approximately 1/3 of the time, one of those following 12 months is ALSO setting a new high.  More important than startling, the predictive aspect of looking at new market highs is poor given that the average subsequent 12 month return of ALL the months looked at (not just the new market high months) were positive 74.7%[i] of the time – about the same as new market high months or a tad worse.

The lesson in today’s class; It is not timing of the market; it is time in the market.

Now you know why.


[i] “New Market Highs and Positive Expected Returns” (Dimensional Fund Advisors, White Paper, January 2017)