Rare Stock Market Signal Flashing for First Time Since 2013

The Dow just wrapped up a four-week win streak, while the Nasdaq lost two in a row

Jun 19, 2017 at 1:59 PM
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While tech stocks are charging higher today, it's been a rough couple of weeks for the sector. In fact, the Nasdaq Composite (COMP) ended a second straight week in the red -- something that's happened just one other time, in 2016. On the flip side, the Dow Jones Industrial Average (DJIA) just wrapped up its fourth straight weekly advance, and is exploring record heights today. Against this backdrop, we decided to take a look at how the Dow and Nasdaq perform after these relatively rare signals.

Dow/Nasdaq Signal Flashing for First Time Since 2013

The last time the Dow notched a four-week winning streak at the same time the Nasdaq suffered a two-week losing streak was November 2013, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Prior to that, you'd have to go back to the pre-financial crisis heights of mid-2007, which was the first signal since the dot-com boom of 1999. What's more, the COMP's two-week loss of 2.44% is the steepest of these signals since May 1999, when the tech-rich index suffered a 3.36% drop.

dow nasdaq chart 1

Blue Chips Quietly Outperform After Signals

Following these signals, the Dow has outperformed, especially in the next month. One week after a signal, the blue-chip barometer averaged a gain of 0.4% -- more than double its anytime one-week return since 1972. At the two-week and one-month markers, the DJIA was up an average of 1.20% and 1.58%, respectively, with a stellar positive rate of 85.7%. That's compared to an average two-week and one-month return of 0.31% and 0.63%, respectively, with win rates below 60%.

Three months after a signal, the Dow was up 2.19%, on average -- still better than its anytime three-month return of 2.03%. However, the percent positive is slightly lower after a signal, at 57.1%, compared to 64.2% anytime. Another notable data point is the lower-than-usual standard deviation after a signal, which indicates lower-than-usual volatility in the near term.

dow chart 2 outperformance

Tech Stocks Could Resume Quest for Record Highs

Coincidentally, the Nasdaq also tends to outperform after these signals, even more so than the Dow. One week after a signal, the COMP was up 1.45%, on average -- a whopping seven times its average one-week gain of 0.21%, going back to 1972. The COMP is well on its way to achieving this goal once again, last seen 1.1% higher and pacing for its best session since April.

Two weeks after a signal, the Nasdaq was 1.9% higher, on average, with a 100% win rate. For comparison, the COMP averages a two-week gain of 0.42%, with 58.2% positive, looking at anytime data.

In fact, the Nasdaq's win rate doesn't fall beneath 71% at any of the checkpoints after a signal, with the COMP in the black 85.7% and 71.4% of the time, one and three months later, respectively. The one-month post-signal return is more than double the average, and the index's three-month post-signal gain of 4.27% is much higher than usual. And as with the Dow, the Nasdaq tends to be quieter than usual after these signals, as evidenced by the standard deviation row.

nasdaq chart 3 underperformance


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