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State of the market: What does 10-day winning streak mean?

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.

Dave Moenning

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.