Indicator of the Week: The SPX's Quarterly Win Streak is Over -- Now What?

The S&P 500 Index (SPX) recently finished its fourth-longest quarterly win streak ever

Senior Quantitative Analyst
Jul 15, 2015 at 7:05 AM
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When June ended a couple weeks ago, so did the fourth-longest quarterly win streak for the S&P 500 Index (SPX), dating all the way back to 1928. Before the second quarter of this year, the last negative quarter for the SPX was the fourth quarter of 2012. So, there were nine straight positive quarters before the last quarter ended down less than 1% to end the streak. I wondered if those long win streaks indicated an overbought market, and if the first negative quarter tended to snowball into large further losses. 

Previous Quarterly Win Streaks: Below is a table showing all the times since 1928 when the SPX was positive for at least six straight quarters. The last such streak was actually the longest streak on record, with 14 straight positive quarters. That streak ended with a bang when the next quarter saw the index shed just over 10%. This latest streak ended with a whimper, as the S&P 500 was essentially flat, losing less than a quarter of a percent. 

The streak itself was pretty tame compared to other streaks. The index gained just 45% in the nine positive quarters, which is the lowest of all the streaks, except for the one ending in 1946. That streak saw the index gain 44.7%, but that was done in only seven quarters. The recent streak gained 18% on an annualized basis, which was lower than all the others, except for the streak ending in 1965, when the annualized return was 17.9%.

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When the Streak Ends: The first table below shows how the S&P 500 performed after the winning streaks ended. It shows the returns after that first negative quarter ending the quarterly winning streaks. I also summarize the returns, and then show typical returns for the S&P 500 since 1946 (the year of the first occurrence below). Interestingly, stocks tended to do pretty well in the short term after the streaks ended. The S&P 500 averaged a return of just over 8% in the six months following the end of the win streaks. That outperformed the typical six-month return of 4.14%. However, going farther out than that, the returns start to underperform the typical market returns. 

So, according to this data, when extended quarterly win streaks end, the S&P 500 tends to bounce back strongly in the short term, but then lose steam and underperform at longer time frames. However, keep in mind this is based off just six prior data points, so I would consider it a very loose guide.

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