Profiling Winning And Losing Streaks For The US Stock Market

Is the stock market’s trending behavior changing? Are the winning streaks running longer and the corrections becoming shorter?

Let’s run some numbers for some perspective, starting with a 20% trigger for the S&P 500 Index. The first chart shows the length (in trading days) of upside trends without a 20% countermove. By this standard, there’s nothing unusual in recent history.

Looking at downside events for a 20% trigger, however, suggests that an unusual run of short corrections (or bear markets, as 20%-plus corrections are commonly labeled) have prevailed since the financial crisis in 2008-2009.

The caveat is that 20% moves are relatively rare and so it’s hard to distinguish between signal and noise. Let’s address this to a degree by lowering the trigger threshold to 10% to generate more events. The next chart suggests that longer 10%-plus winning streaks for the S&P 500 are becoming more common, based on a clustering of these events over the past decade.

On the flip side, eye-balling the 10% downside streaks suggest a modest run of fading for these events in recent years.

Although this data isn’t overwhelmingly convincing, it does point in the direction that winning streaks are running longer while losing streaks are shorter.

The bigger question is what forces are driving these changes? Any number of possibilities are on the short list, including a rise in momentum-based trading, increased institutional/professional trading, and a growing use of computer-based algorithmic/high-frequency trading.

For most investors, this sounds like good news. If the stock market goes up for longer and suffers fewer, shorter corrections, that’s a net plus for the buy-and-hold investor.

But if this is a new regime, the obvious question arises: How long will this bullish evolution run? Something less forever is the likely answer. Unfortunately, no amount of number crunching can provide wipe out the uncertainty on timing. Some aspects of modeling market risk are overly dependent on guesswork and speculation, and this is probably one of them.

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By James Picerno

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