Indicator of the Week: Nasdaq Hot Streaks

Does the Nasdaq Composite's (COMP) winning streak mean stocks are overheated?

Senior Quantitative Analyst
Feb 25, 2015 at 8:08 AM
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The winning streak for the Nasdaq Composite (COMP) is now at 10 straight trading days. The last streak of at least 10 days happened in July 2009, just as the current bull market began. That streak lasted 12 sessions. Surely traders are wondering if this is an indication that the market is getting a little overheated. This week, I'll be looking at what these streaks have meant in the past to see if that's true.

First, below is a table of the longest streaks for the Nasdaq since it began trading in the early 1970s. We would need almost two more weeks of gains to catch the longest streak of 19 days. However, the 5.1% return during the current streak isn't all that far off from the 5.6% gained during the 19-day winning streak in 1979.

Longest Nasdaq Winning Streaks

One-Month Returns After Daily Winning Streaks: I found the table below because it refutes any notion that these daily winning streaks pose an imminent threat of a sharp pullback. The table shows the one-month returns going forward on the Nasdaq, depending on the daily winning streak. The further down the table you go, the more consecutive days of gains, and you see higher average returns and a higher percent positive over the next month. Also, the magnitude of the average loss is below 4% when you get to a nine-day winning streak or more. Basically, these prolonged daily winning streaks signal strength going forward, with pullbacks that are less sharp than otherwise. This is probably the opposite of what most people would expect.

Nasdaq 1-Month Returns After Daily Win Streaks

10-Day Streaks: There have been 27 other streaks of 10 days or more since 1971. The returns after those streaks have outperformed typical market returns. Again, these streaks seem to indicate strength in the market, rather than it being overbought.

Nasdaq Anytime Returns vs After 10-Day Win Streaks

Finally, the table below shows the most recent 10-day winning streaks. The 5.1% return for the index during the current streak is the most modest gain over the last nine similar streaks. Interestingly, the peak of the tech boom occurred in March 2000. There were no 10-day winning streaks within 2.5 years of that summit (the nearest one happened in July 1997). At the risk of sounding like a broken record, these streaks have not preceded market plunges.

Most Recent Nasdaq 10-Day Win Streaks

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