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David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980... More
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Daily State of the Markets
  • Does The Dow's Winning Streak Mean Anything? 0 comments
    Mar 15, 2013 8:07 AM

    Daily State of the Markets
    Friday, March 15, 2013

    Good morning. Anyone paying attention knows that stocks are on a roll. The DJIA hit a fresh all-time high on Thursday, as did the Small- and Mid-cap indices. In addition, it is worth noting that the Dow has finished higher for 10 consecutive days now and has been up 12 of the last 13 sessions. What makes this interesting is that the Dow hasn't enjoyed either a 9- or a 10-day winning streak since November 15, 1996.

    While this sounds like a relatively rare event, it should be noted that there have been 40 winning streaks of 9-days (or more) since 1900. So, up until 1996, a 9-day winning streak occurred about every two and one-half years. However, in the last 16+ plus years, we've seen only one 9-day streak.

    A 10-day winning streak however, is a much rarer bird. Over the last 112 years, there have been only 17 such events. The last 10-day streak was also in 1996 and the one before that took place in 1992 (and the one before that occurred in 1987). So, including Thursday's new 10-day streak, there have been just 3 runs of 10 consecutive green finishes in the last 25.2 years.

    Rarer still is a string of up closes totaling 11 days or more. Since 1900, there have been only 6 of these winning streaks. So, if the bulls manage to put up another green finish today, it will be only the 7th 11-day streak since 1900.

    What about 12-day winning streaks for the DJIA, you ask? There have been just two: 1987 and 1970. And as for a lucky-13 stretch, there has been only one - a streak that ended on 1/20/1987. Thus, it turns out that the Dow's 13-day win streak in 1987, while it did lead to BIG gains after the streak, wasn't exactly a lucky omen for that year.

    I know what you are thinking. What about streaks longer than 13 days? Well, there hasn't been one. So, I guess the bulls have something to shoot for.

    While this data may qualify as "fun facts to know and tell" and the numbers are mildly entertaining (well, to me anyway), it doesn't really help us much in terms of what to expect next. Thus, the question of the day is what does a 9-, 10-, 11-, 12-, or 13-day winning streak mean for the coming days and weeks?

    The good news is that the predictive value of a DJIA win streak improves dramatically as the streak grows longer. For example, with a 9-day winning streak, Dow was up 10 trading days later 70% of the time and sported an average gain of +0.56%. This return is more than double the Dow's average return for 10 days periods of +0.25%. One month later however, the Dow was higher just 60% of the time and get this - the average gain was just 0.12%, which is less than one-quarter of the Dow's average gain of 0.52% for all one-month periods. This tells us that when the Dow's winning streak is stopped at 9 days, stocks tend to rally for the next two weeks and then pull back.

    However, when the Dow's winning streak has been 10 days or more (check), the situation changes. Two weeks after a 10-day win streak, the Dow's sports a gain 71% of the time and the average gain is just about double the normal two-week return. But unlike the 9-day streaks, there is no sign of a correction one month after the streak ends as the Dow has been up 71% of the time, with the average gain now at +0.85% vs. +0.52%. Eight weeks later, the average gain is +2.35% vs. +1.05%. And three months out the Dow is up +2.75% vs. +1.59%. So, while the winning streak does have positive implications, it is easy to see that the benefit of the streak diminishes as time goes by.

    It is also interesting to note that when the DJIA has sported a winning streak of 10 days or more, the average gains after the streak during up periods are much stronger. As I mentioned above, in years that contain a 10-day (or greater) streak, the average gain two weeks after the 10th day are about double the average. But in the years that the two week period following the 10th day are positive, the average gain is +1.59%, which is 6x better than the +0.25% average. For the 1 month period following the 10th straight up day in years when the period is up, the average gain is +2.61% vs. +0.52%. For the 8-week period in up years: +5.71% vs. +1.05%. And for the 3-month period in up years: +6.18% vs. +1.59%. The point is that if the period following a 10-day winning streak is positive, the returns tend to be quite strong.

    Should the Dow manage to put up a green number today, the odds and the returns are even better as the win streak would be at 11. And while there have only been six occurrences to look at since 1900, the Dow has sported gains for the 10-day, 1-month, 8-week, and 3-month time frames following the streak... wait for it... 100% of the time. And as you might suspect, the gains for these periods are significantly higher than the average. Here are the numbers... 10 days after: +1.6% vs. +0.25%, 1 month: +3.29% vs. +0.52%, 8 weeks: +5.77% vs. +1.05%, and 3 months: +6.93% vs. +1.59%. Not too shabby, eh?

    Before you go fire up the margin account again if DJIA win streak continues today, let's remember that historical tendencies are just that - tendencies. But the bottom line is this: In this game, strength tends to beget strength and new highs tend to lead to more new highs. Unless they don't, of course! And THAT is why we play the game each and every day.

    Turning to this morning... The DJIA will be gunning for an 11th consecutive day of gains while the S&P 500 is looking to top its 2007 all-time high. However, futures in the early going don't look promising on either count as Europe is lower across the board this morning. Traders in the U.S. will get some big numbers to take their cues from in the early going on this quad-witch Friday.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    - Shanghai: +0.34%
    - Hong Kong: -0.38%
    - Japan: +1.45%
    - France: -0.66%
    - Germany: -0.12%
    - Italy: -0.15%
    - Spain: -0.31%
    - London: -0.53%

    Crude Oil Futures: +$0.34 to $93.37

    Gold: +$1.10 to $1591.80

    Dollar: higher against the yen, lower vs euro and pound

    10-Year Bond Yield: Currently trading at 2.038%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -1.13
    - Dow Jones Industrial Average: -17
    - NASDAQ Composite: +1.90

    Thought For The Day...

    "To understand one thing well is better than understanding many things by halves." - Johann Wolfgang Von Goethe

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave

    If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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