Indicator of the Week: Searching for an S&P Streak Trade

Breaking down the SPX's historical performance following win and loss streaks of various lengths

Senior Quantitative Analyst
Oct 7, 2015 at 7:00 AM
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The S&P 500 Index (SPX) ended a five-day winning streak yesterday. Interestingly, the winning streak was preceded by a five-day losing streak. This made me curious if consecutive up or down days had a significant effect on the next day. Theoretically, there should be no effect, or there would be profit opportunities to exploit. This week, I'll take a look at the quantified data.

Average Daily Returns Based on Streaks: For the analysis, I went back to 1928 on the SPX. I simply found the daily index returns based on the number of consecutive up or down days. On the first chart below, the X-axis is the consecutive number of trading days that the SPX was up or down. The green bars show the average daily index returns that followed the corresponding streaks. Following a zero-day winning streak -- better known as a down day -- the SPX has averaged a loss of 0.04%. Once the index has one up day, then it averages a gain of 0.12% the next day.

As you can see, as the streak gets longer, the average return drops some until you get to a five-day winning streak. Then there's an increase in the average return (though it didn't work out this time around). I thought this was interesting. To summarize, after a down day, the index has averaged a loss the next day. After an up day, or any streak of up days, it averages a gain.

For losing streaks, it's similar until you get farther out in the streak. After an up day (or a zero-day losing streak, for our purposes), the SPX has averaged a gain. After a losing streak from one to four days, the index averages a loss the next day. Once you get to a five-day losing streak, the index has tended to revert higher.                                    

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Percent Positive: As a winning streak gets longer, do the odds of an up day the next session increase or decrease? The chart below provides an answer. After any down day, the index has been positive less than half the time the following day. An up day after a down day (a one-day winning "streak") leads to a subsequent up day 57% of the time. Then, as the winning streak continues to days two and three, the odds of an up day decrease. After that point, it increases a bit -- but when the streak gets to six days or more, the chance of a positive return falls to about 50%.

When you look at the chart above and the one below, I find it curious that the best day for the SPX is the session after one up day (a one-day winning "streak"), and the worst day is the session after one down day (a one-day losing "streak"). Also, on a daily basis, any reversal day (an up day after a down day, or vice-versa) typically has follow-through to the next day.

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Standard Deviation: A third chart, immediately below, did not surprise me. It shows the standard deviation of the returns, based on winning or losing streaks. It's a measure of volatility -- and, as we know, there's typically more volatility to the downside for stocks than to the upside. This is evident in the chart. As a losing streak increases, so does the volatility of the returns. As a winning streak increases, the volatility declines.  

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Finally, for those who like to see the numbers, below are tables of the summarized data.

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