While we are preparing our weekly premium report, we thought it is a good idea to share an excerpt about the nine-day losing streak in S&P 500. We are surprised by the large number of professionals who have paid attention to this random event.
Below is the excerpt from our next premium weekly report.
There is a lot of talk in the financial media and blogosphere about the nine-day losing streak in S&P 500. However, this is more related to unnecessary hype. When there is uncertainty and price action is random, long losing streaks have no causal connection to future direction.
The chart below shows negative nine-day arithmetic returns of the S&P 500 since 1950:
The current nine-day losing streak is a 3.07% drop. It is also larger than the average of 2.17% by less than 1%. The standard deviation is 2.11% and three standard deviations away from the average are at -8.55%. Therefore, the current streak is a random event with no significance. We could even get 12 or 15 down days in S&P 500 with no causal connection to future direction.
We are also surprised by the large number of market analysts and professionals who point to the fact that the index has gained considerably a few months after nine-day consecutive losing streaks in the past. There is a serious conflation here that involves the longer-term upward bias of the stock market, which is partly due to price increases and dividends and partly due to continuous index rebalancing and a random pattern that is similar to those one gets occasionally from tossing a coin.
This is the question that these analysts should answer first: Is the longer-term upward bias of the market intact? If it is, then at some point we will see higher prices but that will have nothing to do with the nine-day consecutive losing streak random pattern. But no one knows the answer and we remain cautious. It is easy to justify high returns in hindsight even in the presence of a 55% drawdown, as it was the case in 2003 and 2008. But when these large corrections occur they hurt and are unbearable to many investors.
If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY
Charting and backtesting program: Amibroker
Technical and quantitative analysis of Dow-30 stocks and 30 popular ETFs is included in our Weekly Premium Report. Market signals for longer-term traders are offered by our premium Market Signals service. Mean-reversion signals for short-term SPY traders are provided in our Mean Reversion report.