For over four months, the stock market has given us an increasingly rosy outlook for the future. Yet while the market has a long way to go before most investors will be anywhere near recovering their losses, some stocks haven't bothered to wait for the all-clear before pushing strongly higher.
Yesterday, the S&P 500 closed at its highest level since last November. But what may be far more important in the long run is that more stocks hit new 52-week highs on the New York Stock Exchange yesterday than on any day since late September, during the height of the stock market panic last year.
What's up
Here's a sample of stocks from both the NYSE and Nasdaq exchanges that reached new 52-week highs on Monday:
|
Stock |
1-Year Return |
|---|---|
|
Aeropostale (NYSE:ARO) |
18.7% |
|
Green Mountain Coffee Roasters (NASDAQ:GMCR) |
170.3% |
|
Oshkosh (NYSE:OSK) |
46.4% |
|
Human Genome Sciences (NASDAQ:HGSI) |
98.6% |
|
China Life (NYSE:LFC) |
14.6% |
|
priceline.com (NASDAQ:PCLN) |
17.7% |
|
Elbit Systems (NASDAQ:ESLT) |
19.1% |
Source: WSJ, Yahoo! Finance.
As you can see, many of these stocks have been on an upward tear for some time. Yet as the markets have churned ever higher, more stocks have added themselves to the new-high list.
Looking for momentum
That, in turn, has made a strong contribution to the psychology of the stock market recovery. Recall that in 2008, it was hard for investors to find anywhere to hide -- the vast majority of stocks fell sharply. Even those who had widely diversified portfolios didn't escape the brunt of the fall. Faced with the prospect of a market in which it was virtually impossible to preserve capital, the only choice seemed to be to pull out of stocks entirely.
In the eyes of many, the recovery hasn't made much headway so far. Sure, the recent rally has pulled stocks up more than 40% from their March lows. But it's still almost 40% below the record highs set in late 2007, less than two years ago. Any illusions that the effects of the bear market would disappear as quickly as those following the 1987 stock market crash have mostly been dispelled.
But what these strong gainers and their new highs show investors is that there is a way to make money in this market by owning stocks. Of course, 67 new highs on the NYSE and 80 on the Nasdaq aren't huge numbers in comparison to the roughly 6,000 publicly traded issues on the two exchanges.
Nevertheless, after months of seeing virtually no new highs, the recent pop is definitely a step in the right direction.
Are new highs good investments?
The most important question for investors, though, is whether stocks making new highs are still good investments. On one hand, many stocks that produce strong returns for shareholders will go through a long series of setting new highs on a regular basis. Yet some fear that new highs indicate that a stock is in danger of being overpriced and is ripe for a fall.
Trying to apply a general rule to stocks setting new highs is dangerous. Each stock rises for a different reason, so you need to do specific research on each company that interests you. In the above list, Green Mountain Coffee Roasters and priceline.com have been consistently delivering strong results for years, while Oshkosh needs further gains just to get back to its 2007 levels.
New highs are a good sign that the recovery has made substantial progress. Whether it will continue, though, depends on whether these stocks can act as leaders for the broader market. If they do, then look for them to keep rising well into the future.
For more on smart investing:
- Find out about the best buys in today's market.
- These five losers will be tomorrow's winners.
- Five stocks to avoid right now.
