This Dow Alarm Also Sounded Before Black Monday, Financial Crisis

The last time the index went two years without three straight 1% drops was in August 2015

Mar 8, 2018 at 1:32 PM
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After a quiet churn to record highs in 2017, the U.S. stock market started 2018 with a jolt of volatility. In fact, the Dow Jones Industrial Average (DJI) recently suffered three straight losses of 1% -- the longest such stretch in more than two years. What's more, similar signals preceded both the financial crisis and the Black Monday sell-off.

Last Back-to-Back-to-Back 1% Drops Since 2016

Since 1960, there have been 45 times in which the Dow dropped at least 1% in three consecutive sessions. The last time this happened was in January 2016. Below are all the signals since 2000, courtesy of Schaeffer's Senior Quantitative Analyst Rocky White.

dow after 3 straight 1pct drops

One week later, the DJI was up 0.89%, on average -- more than six times its average anytime one-week gain of 0.14%. Three months later, the Dow was higher by 3.65%, on average, and in the black two-thirds of the time. That's nearly double its average anytime three-month return of 1.88%, with a win rate of 63.8%, looking at data since 1960.

dow after 3 1pct drops vs anytime

Lengthy Stretches Between Big Drops Have Been Bearish

However, when the Dow goes a lengthy stretch between signals, the returns are much more grim. There have been just 10 other times the Dow went at least two years without three consecutive 1% down days. The last time it went that long without such a steep losing streak was the August 2015 sell-off. Prior to that, you'd have to go back to early 2008 -- just before the financial crisis -- to find a similar signal. Further, the same signal sounded in mid-October 1987, just days before Black Monday.

dow after two years wo 1pct drops

As you might imagine, returns after those signals were not good for the blue-chip index. One week later, the Dow was down 0.13%, on average -- flipped from its average anytime one-week gain of 0.14%, looking at data since 1960. One and three months later, the DJI sported much smaller-than-usual average gains, and the index was higher just 40% of the time at the three-month marker. That's compared to an anytime three-month win rate of 63.8%.

Dow after signals vs anytime since 1960

In conclusion, not only is the Dow flashing the same signal it did before two of the most notorious stock market drops in history, but the current bull market is reminiscent of the one that preceded the Great Depression, as White recently noted. On a positive note, though, the current rally still mostly resembles the 1988-1997 uptrend.

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