Dow, S&P Have Done This Just 4 Times in History

Stock market strength could beget strength, if past is prologue

Sep 26, 2017 at 2:42 PM
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    It's been a great quarter for the S&P 500 Index (SPX), which popped above 2,500 for the first time ever. The third quarter has also been kind to the Dow Jones Industrial Average (DJIA), which touched a record high as recently as Thursday, Sept. 21. Both indexes are set for an eighth straight quarter in the black, with the SPX and DJIA pacing for gains of 3.3% and 4.7%, respectively. Below, we take a look at how the S&P 500 and Dow tend to fare after eight-quarter winning streaks -- which have happened just four other times in history.

    8-Quarter Rallies Typically Turn Into 9-Quarter Rallies for SPX

    While the S&P enjoyed a nine-quarter winning streak as recently as 2012-2014, it'll be just the fourth time ever the index has enjoyed a run of at least eight positive quarters. The SPX's longest quarterly winning streak occurred during the heart of the dot-com boom, ending at the close of 1996 after a 14-quarter rally.

    spx 8 quarter winning streaks since 1995

    If history is any indicator, strength begets strength for the broad-market barometer. The SPX has notched a ninth straight quarterly win after each of its last eight-quarter surges, averaging a gain of 2.46%, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. What's more, the S&P 500 has been in the black 100% of the time six months (two quarters) after its last eight-quarter win streaks, and the average return of 8.62% is nearly twice the SPX's average anytime six-month return of 4.07%, going back to 1955.

    One year after an eight-quarter win streak, the S&P was up an average of 9.28%, with a 75% win rate. That's stronger than the index's average one-year gain of 8.09%, with 70.9% positive.

    SPX after 8 quarter win streaks

    Longest Dow Rally Since the Dot-Com Boom

    The Dow Jones Industrial Average also boasts just four other eight-quarter winning streaks, the last -- and longest -- ending in December 1996, after 11 positive quarters. Prior to that, you'd have to go back to the 1960s for a winning streak of at least eight quarters.

    Dow last 8 quarter win streaks

    The Dow's post-signal stats aren't as impressive as the S&P's, as the already-tiny sample size is skewed by the data after the Dow's first eight-quarter win streak, in the 1930s. After that initial run, the DJIA was in the red three, six, and 12 months out. As such, the Dow's average returns after its last eight-quarter win streaks are 75% positive across the board and not much to write home about, compared to the Dow's anytime returns since 1937.

    Dow after 8 quarter win streaks

    However, excluding the initial streak, the returns are much more promising. The DJIA was obviously higher across the board at each of the aforementioned checkpoints, averaging a one-month return of 4.02% -- more than twice the Dow's average anytime return of 1.81%. Six months after the last three streaks, the DJIA was up a whopping 11.27%, on average -- more than three times its average anytime return of 3.72% over six months. At the one-year marker, the Dow was up a stronger-than-usual 9.63%.

    dow after last three 8 quarter streaks

    Trading Strategies for 4Q Bulls

    In conclusion, while the S&P and Dow data looks promising, keep in mind that we're working with a very small sample size. For traders who want to roll the dice on more upside for the stock market, but who don't want to put a lot of capital on the line, consider buying call options. As Schaeffer's Senior V.P. of Research Todd Salamone recently pointed out, "Call options continue to be a great way to participate in upside, as the leverage provides you sizable money-making potential, while reducing your dollars at risk."

    Meanwhile, for individual stock and options ideas in the short term, these 25 stocks tend to outperform in October, while these are historically the best stocks for the fourth quarter.

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