Indicator of the Week: Why Stocks Are In for a Bumpy Ride

The S&P 500 Index's (SPX) losing streak is over, but stocks could continue to underperform in the near term

Senior Quantitative Analyst
Nov 9, 2016 at 7:15 AM
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The S&P 500 Index (SPX) recently went on a losing streak of nine straight trading days, or nearly two weeks. What's more, the CBOE Volatility Index (VIX) spiked by more than 50% during that time. This week, I'll take a look at how the stock market has historically behaved after similar occurrences.

Losing Streak Ends: When the S&P 500 Index gained over 2% on Monday, it broke a nine-day losing streak for the index. That was the longest losing streak since 1980 and just the 13th losing streak of that length since 1930. The table below summarizes how the S&P performed after those streaks were broken. Note that investors do not know in the middle of the streak when the last day will be -- obviously -- so that's why I'm looking at the returns following the first positive day.

SP After losing streaks

Stocks tend to struggle after the losing streaks end. Over the next week to one month, fewer than half of the returns are positive. The average return is negative out to three months after the end of the streak. The one-week average return is positive, but that's due to heightened volatility after these streaks end, which is shown by the wide range of average positive and average negative. Based on this data, you could expect stocks to be volatile and choppy going forward.

The table below shows the individual occurrences when the S&P 500 broke a streak of at least nine down days. The recent streak yielded a very mild loss in the index, relatively speaking. During the last nine-day losing streak, the S&P 500 lost just 3.08%. The only other streak enduring such a small loss was in 1963. If it's any consolation, stocks did pretty well after that streak ended.

SP Breaks a losing streak

VIX Spikes: When stocks fall, the VIX, which measures implied volatilities on S&P 500 options, tends to move higher. Therefore, it's no surprise that the S&P 500 losing streak was accompanied by a large, record-long nine-day spike in the VIX. We have VIX data since 1990, so I went back to then and found each time the VIX spiked by more than 50% in less than two weeks. The table below shows returns after the VIX spikes, and the next table is for comparison and shows anytime returns for the S&P 500 since 1990. 

VIX spikes

Looking at the average return, you again see some underperformance after these signals. The percent positive matches pretty close to typical returns. Therefore, the underperformance has generally been caused by more volatility to the downside after these events. The average negative return confirms this.

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