Is the Dow's Hot Streak About to Cool Off?

The Dow is on the verge of its sixth straight session of gains, but that doesn't bode well for next week

by Alex Eppstein

Published on Mar 18, 2016 at 1:54 PM

The Dow Jones Industrial Average (DJIA) is on track for its sixth straight daily win -- its longest hot streak since October. During these six sessions, the Dow has gained nearly 3.5%. So, what does this mean for blue-chip stocks going forward?

To answer that question, Schaeffer's Senior Quantitative Analyst Rocky White looked at all of the six-day Dow win streaks since 2009. A summary of the returns is in the chart immediately below, followed by a chart showing the index's anytime returns, for comparative purposes:

160318dow1

As you can see, the Dow tends to underperform in the immediate aftermath of six-day win streaks, with an average next-day return of negative 0.08% versus an anytime gain of 0.04%. This underperformance lingers for a week, but two weeks out, the average post-signal returns are better than the anytime returns (0.6% vs. 0.4%), as are the percent positives (72.2% vs. 60.8%). Interestingly, lower volatility is seen across the board following these win streaks, as measured by standard deviation.

Below, White breaks down the above data into individual occurrences. You'll notice the last time the Dow had a six-session win streak, the returns were very strong in the ensuing days and weeks. Historically, though, this hasn't always been the case -- as the charts above demonstrate.

160318dow2

 

Having examined the lackluster returns following six-day win streaks, we wanted to see how that pattern may be affected by a weekend. Specifically, how does the Dow fare on the first trading day of a week when it was on a hot streak on the last day of the prior week? 

The chart below seems to affirm our initial findings that a Dow breather could be just around the corner. Following a win streak of six days or more over the past 20 years, the first day of the next week (usually Monday) averages a return of negative 0.08%, with just 25% positive. By contrast, the typical first-day return is 0.07%, with 54.2% in the black.

160318dow4


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