With recent all-time highs in for the S&P 500, Dow Jones Index, and Nasdaq Composite it’d be fair to question just how much higher the indexes could go in the short-term.
According to Tom Leveroni at Nautilus Investment Research, based on the new entrants into the stock market, there’s still room for the averages to climb.
“Another example of investors’ increasing willingness to assume risk is the surge in IPOs these past few weeks,” wrote Leveroni in a note to clients Monday. “The Bloomberg IPO Index (BIPO) is up over 10% this month to boost its relative strength vs. SPX above its two year downtrend.”
Essentially, stocks making their debut are doing better than the broader market. IPOs are typically risky investments since there is no price or performance history for the firm.
Thus, as more people have an appetite for IPOs, it would appear that they are willing to take on risk, which is usually seen as good news for demand for stocks.
Based on Leveroni’s research, there have been 8 times since 1994 in which the ratio of the BIPO index to the S&P 500 has hit a 200-day high after not setting a record in the previous 200 days. In the three months after that happened, the S&P 500 has been higher seven out of the eight times with an average gain of 4.93%.
So there may be more good news for stocks to come.
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