A February Loss Could Mean Big 2018 Gains for Stocks

Why the stock market correction may have been a blessing in disguise

Feb 27, 2018 at 1:23 PM
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Volatility stormed back into the stock market in a big way in February, with the major market indexes kicking the month off with a correction. Of course, stocks have since rebounded from those lows, with the Dow Jones Industrial Average (DJI) and S&P 500 Index (SPX) back within striking distance of all-time highs. Nevertheless, the pair of indexes are on pace to snap lengthy monthly win streaks -- though that could be a bullish signal, if past is precedent.

Dow Hasn't Done This in Nearly 60 Years

There have been just four other times in history where the Dow has snapped a winning streak of at least 10 months, the last occurring nearly 60 years ago, in March 1959, according to Schaeffer's Senior Quantitative Analyst Rocky White. Afterwards, the DJI went on to resume its long-term uptrend in a big way, and was higher 100% of the time one, three, six, and 12 months later.

dow previous 10mt win streaks

In fact, the blue-chip index generated much higher-than-usual average returns across the board, too. A month later, for instance, the DJI was up 3.2%, on average -- more than five times its average anytime one-month gain of 0.62%, looking at returns since 1936. Six months after halting a 10-month winning streak, the DJI was up 10.31%, on average -- nearly triple its average anytime gain. 

Dow after win streaks vs anytime

To give us a bigger sample size, we ran the numbers on DJI performance after snapping a win streak of at least six months. While these returns weren't quite as impressive as the others, they still show the blue-chip index handily outperformed vs. anytime, looking 12 months out. For instance, three months after snapping a six-month win streak, the Dow was up nearly 6% on average, and higher 90% of the time. That's more than triple its average anytime three-month gain of 1.86%, with a 63.4% win rate.

Dow after 6mo win streak snapped

S&P 500 Could Shine After a February Loss

It's a similar situation with the S&P 500, which hasn't snapped a win streak of 10 months or more since February 1959. There have been just three other instances in which the index has enjoyed a win streak that long, going back to 1936.

SPX after 10month win streaks

Again, the SPX was in the black across the board 100% of the time looking one, three, six, and 12 months out. What's more, the stock-market barometer racked up much bigger-than-usual gains afterwards.

One month later, the SPX was up 4.31%, on average -- about seven times its anytime average one-month return of just 0.64%. Three months out, the index was 11.93% higher, on average -- six times the norm. Six months later, the S&P was higher by 18.64%, on average, or roughly five times its average anytime return. And a year later, the SPX was up 21.78%, on average -- close to three times the norm.

SPX after snapping win streak vs anytime

Again, to give us a bigger sample size, we looked at S&P 500 performance after it snapped a six-month winning streak. As we saw with the Dow, the SPX returns in these instances aren't as grandiose, but still indicate notable outperformance. For instance, three months later, the S&P was up 5.24%, on average, and higher 92% of the time. That's still close to three times the average anytime three-month gain of 1.92%, with a win rate under 64%.

SPX after snapping 6mo win streak

Plenty of Sideline Cash to Fuel Future Gains

In conclusion, if history is any indicator, a monthly loss in February could be good news for the stock market, as both the Dow and S&P 500 tend to surge after snapping lengthy monthly win streaks. What's more, recent stock and sentiment indicators indicate that fear has once again taken hold of Wall Street, suggesting there's plenty of sideline cash to fuel higher highs in 2018.


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