The Stock Market Just Did This for the Third Time Ever

Stocks have been hitting new high after new high

Senior Quantitative Analyst
Oct 11, 2017 at 6:45 AM
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The consistency of daily stock increases has been remarkable lately. This is true for the four major indexes -- S&P 500 Index (SPX), Dow Jones Industrial Average (DJIA), Russell 2000 Index (RUT), and the Nasdaq Composite (IXIC). It has been great for portfolios, but can it last? This week I’m looking at a couple measures that highlight this consistency to see how sustainable it can be going forward.

Winning Streaks

Each of the four major indexes has had an eight-day winning streak over the past month. Since 1979 -- the first year we have data on all four indexes -- this has only happened two other times. The last time was July 1989. Markets did quite well over the next three months, with the Russell 2000 gaining 4.3%, the Dow gaining 9.3%, and the other two indexes falling somewhere in between, but closer to the Dow’s return.

To get more data points for my analysis, I’m going to look at times each of the indexes had winning streaks of at least seven days within a month's time, instead of eight. Also, I’m going to go back to 1972 -- and disregarding the Russell 2000, since we don't have data on it until 1979. Using this as a signal, the table below shows how the S&P 500 did over the next two weeks, one month, and three months. The last eight times in a row, the index was higher over the next month. However, looking out three months, the index was lower the last two times.

SPX after 8day streaks

Summarizing these returns shows that stocks have done especially well after these signals, especially over the short term. The month after a signal, the S&P 500 has gained an average of 1.67%, with 80% of the returns positive. Compare that to the typical average return of 0.68%, with 60% of the returns positive.

spx signal

Combined Positive Days for Stocks

If you add the total positive days for all four indexes over the past 20 days you would have gotten a total of 63 days out of a possible 80. Since 1979, there have been 15 other times the total was that high, including three other times since the current bull market started in 2009. Two of the past three times, the S&P 500 was lower one month and three months out. It’s a limited sample size for sure, but it’s not good considering the strength of the market.

SP500 index

The tables below show what you get when you summarize the data in the table above and compare it to typical returns since 1979. In these instances, stocks have underperformed on average going forward. Over the next month, stocks typically gain 0.8% and are positive 62.5% of the time. After these signals, though, the S&P 500 has gained just 0.29% on average, with barely over half the returns positive. Looking three months out, there has also been underperformance after a signal.

SPX today

On a positive note with this signal, while the S&P 500 underperforms as we saw above (and so does the Dow and Russell 2000), the Nasdaq has been slightly better than normal. The index on average gains 1.93% the month after a signal, with 80% of the returns positive. Usually, the index gains about 1%, with just over 60% of the returns positive.

nasdaq signal


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