Rare Signal Could Mean Big September for Nasdaq

The COMP sports a 100% win rate a month after the last seven four-week losing streaks

Aug 21, 2017 at 1:51 PM
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As stocks sold off, the Nasdaq Composite (COMP) suffered a fourth straight weekly loss on Friday, marking the longest such losing streak since May 2016. Prior to that, you'd have to go back to October 2014 to find a four-week losing streak for the tech-rich index. Against this backdrop, we decided to take a look at how the Nasdaq performs after a four-week stock sell-off -- and bulls may want to take note.

Nasdaq's Recent Drop Relatively Mild

The COMP gave up 2.68% in the most recent losing streak, which is relatively mild -- the third smallest of all 62 similar streaks, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Below is how the Nasdaq tends to perform after suffering a loss of less than 5% during a four-week losing streak. 

The Nasdaq's one- and two-week returns are more than three times the average return, looking at data since 1972. The COMP's one-month average gain of 1.26% after a signal is also significantly higher than its average anytime one-month return of 0.84%. Ditto for the COMP three months after a signal, where the index gained an average of 3.27%, and was higher 76.5% of the time. That's compared to an average anytime three-month return of 2.88%, with a 64% win rate.

nasdaq 4 week losses under 5 percent

nasdaq since 1973

Weekly Losing Streaks Rare in the Past 5 Years

The longest-ever weekly losing streak for the COMP was in late 1973, when the index went a whopping 10 weeks in the red, losing 21.54%. From 2000 to 2012, there were six losing streaks of at least six weeks. Since 2010, there have been seven streaks of at least four losing weeks, three of which occurred in 2011 alone. In other words, these signals have become relatively rare in the past five years.

Nasdaq last 20 4wk losing streaks

nasdaq signal

Nasdaq Higher 100% of the Time a Month After Signal

Looking at Nasdaq data since 2010 has bullish implications, if you believe past may be prologue. After a losing streak of at least four weeks, the index was higher 2.56% and 4.02%, on average, one and two weeks later, respectively. That's roughly nine times and seven times the COMP's average one- and two-week returns of 0.28% and 0.55%, respectively.

The Nasdaq's average one-month return after a signal is 7.22% -- more than six times the index's average one-month return of 1.13%. What's more, the COMP was higher 100% of the time one month after the last seven signals.

And looking three months beyond a four-week losing streak, the COMP was up 8.06%, on average, with a win rate of 85.7%. That's more than twice the Nasdaq's average three-month return of 3.68%, with a win rate of 74.9%.

nasdaq losing streaks since 2010

No Better Time to Utilize Options

In conclusion, if history repeats itself, the Nasdaq Composite could be headed for new highs again in no time. However, as Schaeffer's Senior VP of Research Todd Salamone wrote earlier today, traders may want to keep an eye on the tech-heavy PowerShares QQQ ETF Trust (QQQ), which is pulling back to its 80-day moving average -- a significant trendline since the election.

Plus, "Whether it is the Federal Reserve, tensions with North Korea and/or Russia, terrorism, debt ceilings, future tax policy -- or all of the above -- many uncertainties linger," he said. "[A]s one that is intimately close to the options market, I cannot think of a better time to be utilizing options as part of your overall investment strategy."

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