Monday, March 21, 2016

S&P 500 Up 5 Weeks In A Row - (Studies)

Last week marked the 5th consecutive positive week for the S&P 500.  Going back to the beginning of the bull market in March 2009, there's been 25 prior instances where the index has been up 5 weeks in a row or more.  

Below are all of those occasions broken out by year and the number of times such a streak occurred in that year.  We then looked at the returns on the S&P going out 1, 2, 5 and 10 weeks.

Zooming in on 2014 & 2015 specifically, notice the increased choppiness and downward bias that followed the various 5-week winning streaks (6 in total) during those years.

What seems evident from these results is that the market should be due to take a breather here in the near-term.  At the very least, a pause would give it a chance to work off the overbought conditions that have been built up over the course of this rally.

Looking longer term however, history suggests that cases of extreme strength like this have eventually been followed by more gains.  Ryan Detrick from LPL Research touched on this topic and he showed the eventual bullish implications of 5-week streaks where the index was up more than 1% in each of those weeks.  In the 11 prior instances since 1950, the index, after some very short-term (1-week) weakness, has gone on to post further gains 4 and 12 weeks later.  Strength begetting strength.

What does this all mean?  We've been patient and cautious throughout this run and wont be looking to aggressively chase strength at this point.  For us, the more prudent course of action would be to wait for a constructive consolidation before adding further long exposure.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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