Friday, July 24, 2009

My Take On the Nasdaq Streak

The Nasdaq’s winning streak reached 12 on Thursday. It's all over the news. In Tuesday night's Subscriber Letter, when the streak had hit 10, I posted the following commentary. I think you may find my take a bit different than others who have examined the streak.

I have seen much written about the Nasdaq’s current winning streak. As of Tuesday the Nasdaq has now closed higher for 10 days in a row. I ran a study to examine performance following such runs since the inception of the Nasdaq.

(click table to enlarge)

These results appear to be quite bullish. Rather than just taking them at face, though, let’s give it some further thought and consideration. A closer examination of the results would show that the last occurrence was in 1997, which means it happened 26 times in 26 years and then not again for 12 years. Let’s consider what might cause this to happen and what this suggests about the above results. I’ve shown the Trend vs. Chop chart many times for the S&P 500, but never for the Nasdaq Composite. I decided to produce that for examination below. As a quick refresher, a downward moving line suggests the market is dominated by chop while an upward trending line suggests daily follow through is more prevalent.

For those who would like to read more on the Trend vs. Chop concept you may click here.

As you can see the Nasdaq saw a strong and steady tendency to follow through on a day to day basis during the 70’s, 80’s and much of the 90’s. Strong follow through means that strength suggests more strength. Therefore, the fact that the results were bullish over the 1971-1997 period shouldn’t come as a surprise. From a Trend vs. Chop perspective the nature of the market is so different today than it was during that period, that I don’t think it would be reasonable to extrapolate the results of the above test to the current environment. This essentially means that there is no historical precedent for 10 consecutive up days in a choppy trading environment...

My inclination was that in a mean-reverting environment, results would likely be worse than those above. To this point that hasn’t proven to be the case. I’m still expecting some short-term weakness, though.


Daniel said...

Many UP days, some large daily gains. Much percentage gain. Up day down day, what matters is not so much a "streak", but the MOVEMENT-- and the point where IT stops, reverses, and is measured and booked as a MOVE.

EXPANSION is the current movement. It will eventually be supplanted by contraction. At what point, though, is the key question.

Truth A: Breadth Thrust occurs at blowoff Fin-de-Siecle reversal points. SELL.

Truth B: Breadth Thrust occurs at the birth of any signif. new bull run. BUY with both fists.

Investing is the art of long-term estimation of a durable earnings stream, and the application of a discount multiple to that estimate. Against that backdrop, which of the above is the Thing to Do?

Are we really at a sustainable multiple on forseeable earnings? If the answer is no, choose A above.

As for "chop", I believe that the nearly complete elimination of SPREADs btw bid and ask, and the drastic reduction in online commissions, have made 'reversion-to-mean' trading much more affordable to everyone. Who could trade intra-day back in the 70s and 80s-- there was so much slippage?

So that makes a “winning streak” nowadays that much harder-- but aside from the interest as a "sports story", as above, the real focal question, in my opinion, is Blowoff or Breakout.


Anonymous said...

It's not complicated. Look at QQQQ from it's high in 2000, to present. What pattern do you see? A descending triangle? We are just about to finish D of the triangle. Notice how all the primary moves had 3 waves? Once we hit triangle resistance it will be down for E. Now someone pay me please :)

Anonymous said...

I am waiting for the pundits to say: It's different this time.

The elevators are filling up...on the top floor.

The Small Fish said...

I had posted a similar study last tuesday and wednesday pertaining to the nasdaq composite and nasdaq 100 streaks. In both cases i found like you, the results to have positive implications.

The same can be said for the DOW streak last week.

There are numerous studies i have performed that are arguing for a higher market in the next 2 to 3 weeks...from RSI to Breadth studies.

Strength begets Strenght so to speak. A market that moves higher in overbought condition or that defies short term odds, is a strong market and one that is likely to find buyers on dips.