What the Dow's 5-Day Losing Streak Could Signal in the Short Term

The Dow Jones Industrial Average (DJIA) is on pace for its fifth consecutive daily loss

Jan 19, 2017 at 2:36 PM
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The Dow Jones Industrial Average (DJIA) -- the U.S. stock market's blue-chip barometer -- is on pace to finish lower for a fifth consecutive day, slumping as anxiety creeps higher ahead of Donald Trump's inauguration tomorrow. This marks its longest losing streak since early November. Schaeffer's Senior Quantitative Analyst Rocky White compiled data on Dow losing streaks of five days of more, going back to 2010, comparing the returns over subsequent weeks and months to the blue-chip index's anytime returns.

Dow After 5 Day Losing Streaks January 19

As you can see in the tables above, the Dow has tended to outperform following a streak of at least five down days. The percent positive for returns in the session immediately following a five-day losing streak is slightly lower -- and below 50% -- suggesting that there's an increased chance the streak continues to at least a sixth day. But, at every time frame further out, the post-losing-streak Dow is positive more often than the anytime Dow, with higher average returns.

In fact, three months after a losing streak of at least five days, the Dow has averaged a return of 4.7%, and been positive 81.8% of the time -- a significant outperformance compared to the index's three-month anytime average return of 2.3%, positive 70.1% of the time. Plus, standard deviation after a losing streak remains more or less in line with its anytime figures, suggesting little change in volatility is to be expected.

Dow 5 Day Losing Streaks January 19

In this table, you can see the return after each losing streak of five days or more, going back to 2010. This encompasses 23 prior signals in all. The two most recent streaks saw a negative one-day return, indicating the Dow's losing streak extended beyond five days. In fact, both of these occurrences saw the Dow drop for seven days in a row. But per the table below, which shows the longest losing streaks since 2010, the Dow has not closed lower for more than eight consecutive sessions, going back to 2010.

Dow Longest Losing Streaks January 19

Even though the longer-term outlook appears optimistic after a losing streak of at least five days, there is still reason to be hesitant in the near term. After all, the Dow Jones Industrial Average has historically turned in a negative performance the week before AND the week after a presidential inauguration, going back to 1937. 

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