Indicator of the Week: What the S&P's Quarterly Win Streak Means for Stocks

The first quarter ends this week, and barring about a 5% drop in the S&P 500 Index (SPX) over the next few days, it will be the seventh straight quarter of gains for the index. Streaks of this length are relatively rare. I will look back at those other streaks to see how long they have typically lasted and if they typically end with a bang for stocks or just a whimper.

Breaking Down SPX Returns By Quarter

First, a general overview of how the S&P 500 has performed per quarter. The first table looks at the returns since 1929 (the first full year of data we have). The average return for the index isn't too bad for the second quarter, averaging a gain of over 2%, ranking second among the four quarters. However, the percent positive is the lowest of the quarters and the standard deviation is the highest. It seems the second quarter has been a good quarter overall, but with some significant bumps along the way. The second table shows just the last 10 years of returns. The second quarter, by average return, has been the weakest, averaging a gain of 1.10%. Also, only half of the returns have been positive.

How the S&P Behaves After a Seven-Quarter Win Streak

The table below shows data on SPX seven-quarter win streaks. The first thing I noticed is that this current streak is by far the weakest that we have seen. The S&P 500 is up just over 20% over the past seven quarters. Before this, the index gained at least 38% during these quarterly win streaks. It was the last streak that occurred, in 2014, which saw that 38% gain. The good times continued for another couple of quarters before stocks stalled and were eventually lower the following year.

The streak before that was one that hit seven quarters in 1996. The S&P 500 surged another 37.8% over the next year. That streak ended up being the longest quarterly win streak we have seen. It lasted 14 quarters, finally ending in 1998.

The tables below summarize S&P 500 data after the win streaks versus anytime returns since 1946 (the year of the first streak). The next quarter returns look weak when considering the average is just a 0.13% gain. However, looking again at the table above you see a large negative return after the streak in 1946, and then another negative return after the streak in 1951. Looking at just the four most recent streaks, the next quarter was positive each time, averaging a gain of 5.5%.

Looking out further, again the average returns over the next two and three quarters is suppressed by a single poor performance after the streak occurring in 1946. Disregarding that streak shows only positive returns over the next two and three quarters.

Finally, looking out over the next year shows an average return of over 9.1%, which is slightly better than the typical market return. Again, if you disregard that ancient 1946 signal, the returns look better, with an average gain of over 14%.

I was curious if these streaks indicated an overbought market which tended to correct soon. That does not seem to be the case. These streaks do not seem to foretell a top in the market, either. These returns aside, make sure to check out our list of the best stocks to own in the second quarter.