This post may fall into the “Dog bites Man” bucket, but I will see if I can’t shed a little more light on the phenomenon. Here’s the question: “When do we see new highs in the stock market most often?” The punchline: “After a recent new high.”
The red squares above show the probability of hitting a new high so many days after a new high. The black line near it is a best fit power curve. The blue diamonds above show the probability of hitting a new high so many days after not hitting a new high. The green triangles above show the ratio of those two probabilities, matching up against the right vertical axis. The black line near it is a best fit power curve.
As time goes to infinity, both probabilities converge to the same number, which is presently estimated to be 6.8%, the odds that we would hit a new high on any day between 1951 and 2015. Here’s the table that corresponds to the above graph:
