As the market scrutinizes President Obama's State of the Union Address, and looks to Bernanke & Co. for any signs as to when the Federal Reserve's inflationary stance toward monetary policy might be coming to an end, the Dow Jones Industrial Average (DJIA) will be attempting its 9th consecutive weekly gain for the first time since 1995.
For the past 20 years, the Dow has managed countless 8-week rallies which have tended to almost always end very poorly on the 9th week. The only other time we've seen the Dow rally for 9 straight weeks was in the period between January and March 1995. Before that, we would have to go to the 1980's to find a 9 week period of consecutive gains.
So the big question this week will be whether the Dow can buck the 8-week trend or whether we'll see a sell-off to end the week and the Dow streak at 8. What one should notice is how incredibly weak the overall market tends to become after 8 weeks of straight gains.
Below is a list of all the times the Dow gained 8 straight weeks since the mid-1990's, starting with the most recent:
1. March 2001 to April 2001
The Dow gained 8 straight weeks before experiencing a 100% retracement of the gains in a 20% correction which lasted all summer.
2. November 2003 to January 2004
The Dow gained exactly 8 weeks before topping out, trading sideways for 6 weeks and then traded down for nearly 10 months before rallying into year end. That 8-weeks period topped a nearly 9 month which was met with very heavy selling throughout the year.
3. October 2002 to December 2002
The Dow gained 8 straight weeks before putting in a decisive top and losing the entire move over the next 14 week period. The Dow experienced a near 30% slide after putting in a top at 8 consecutive up weeks.
4. January - March 1998
The Dow gained for 8 weeks straight, paused and then rallied a few more weeks before putting in a decisive top which led to a correction that retraced the entire move over the following 15 weeks. The Dow experienced a 25% correction after rallying relentlessly for 5 months.
5. January - March 1995
The Dow rallied 9 straight weeks, had a slight pull-back and then rallied all the way until year end. The market didn't see even a minor correction in all of 1995. The Dow rallied nearly 60% in 1995 alone.
This history should outline just how over-extended this rally is becoming. There are only a few occasions in modern history where the Dow closed up for 8 consecutive weeks, and only 1 occasion in the last 16 years where the Dow closed in the green for 9 consecutive weeks.
There is almost no profit taking in this market, which suggests that a lot of people and institutions have significant built-in gains. One piece of bad news and we're likely to see everyone heading to the exits at once. Rallies that have pull-backs tend to last significantly longer than those where we have months of consecutive weekly gains such as this one.
Without consolidation and profit taking, these rallies tend to end very poorly. It is much healthier to see rallies where the DJIA pulls back every 2-3 weeks than these rallies where the Dow just shoots to the sky for 8 straight weeks. The above cases demonstrate this clearly.
I suspect that this rally is on its very last legs. We should see a very healthy 10% or so correction within the next 1-2 week period. In fact, I believe it's quite possible that the highs of this rally can be put in during the next 1-2 trading sessions. Whatever the case may be, good buying opportunities present themselves in February and March. This market is headed for a sell-off.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in QQQQ over the next 72 hours.