Where the Dow tends to move after winning streaks
For just the third time since 1950, the Dow Jones Industrial Average (DJI) is on a 12-day winning streak. The last such streak was over six years ago, in February of 2017. This week I’m looking at how the index has tended to perform after both winning streaks and losing streaks. Let’s see if there’s a popular point at which buyers or sellers seem to step in.
Next Day Returns
From 1950, this chart shows the average next day return after winning and losing streaks for the Dow reach certain levels. If the Dow has an up day after a down day (a 1-day winning streak) then the index averages close to a 0.1% return the next day. If it’s a down day after an up day, then it averages a slight loss the next day. As the winning streak moves forward, the next day average return moves lower and lower, except a pop after a seven-day winning streak for an unknown reason. Currently, we’re at that eight+ days winning streak at which the next day return is barely above breakeven.
As far as losing streaks go, buyers have tended to step in after five straight days of losses. The average next-day return goes from a slight loss to a decent average return of close to 0.1%. Buyers get even more antsy after six straight days of losses with the Dow averaging a return of over 0.25% the next day. The longer the losing streak, the better the Dow tends to do the following day.
This next chart is like the one above except it shows the percentage of positive days after winning and losing streaks. It’s interesting that the streak seems to get exhausted after six days whether it’s a winning streak or a losing streak. After six straight losses, the Dow was positive 60% of the time the next day, the highest on the chart. After a six-day losing streak, the Dow was positive less than half the time (48%), the lowest percentage on the chart. After the streaks get to eight or more, there has been about a 50% chance of a positive next-day move, whether it was a winning streak or losing streak.
This next chart shows, for the corresponding winning and losing streak, the average return for the Dow when it was positive. As winning streaks get longer, you can expect less upside the day following. As losing streaks get longer, the buying pressure builds, and you can expect bigger moves higher.
And this chart below shows the average return for down days for the different streaks. As winning streaks get longer, down days tend to be less extreme. Based on the chart above and this chart, as losing streaks get longer, you can expect more extreme market moves whether it’s up or down. After long winning streaks, like now, you can expect less significant moves.
Finally, this table lists the only 12-day winning streaks for the Dow going back to 1950. The streak reached 13 days one time out of three but a week after the streak, it was positive all three times. The longer term returns after these streaks were very good, as the index averaged 6.3% over the next three months and 11.6% over the next six months while being positive all three times.
