Statistical Evidence for a Continuation of the Bull Market in Stocks
Analysis of stock market historical patterns can serve up food for thought as to the probabilities for future gains or losses. For instance, the S&P 500 has closed higher in each of the six months leading up to April 30, 2013. The blog Quantifiable Edges, ASSESSING MARKET ACTION WITH INDICATORS AND HISTORY, performed an analysis to find out how the stock market subsequently performed following such strong performance.
Quantifiable Edges discovered there have been 14 instances since 1961 where the market was higher for six consecutive months. Surprisingly, in every single instance the market was positive 10 months later. The gains ranged from one percent to 21 percent.
A closer look at the data, generously provided at the Quantifiable Edges site, shows there were three significant drawdowns of over 10% during the subsequent 10 month period, but none that qualified as a traditional bear market drop of 20 percent or more. The largest drop within the 10 month period was 16.7% following the six consecutive monthly positive period ending April 30, 1998, although the market turned around and ended up gaining 11.4% after 10 months in that instance.
Below is data from the Quantifiable Edges website:
SMA Comment: Recently I’ve expressed the belief that the bull market was likely ending [link]. This data comes as a surprise to me, and is certainly reassuring for those looking for further gains, but only serves as a statistical anomaly that is due to be proven wrong at some point. However, it is admittedly difficult to buck something that has worked 14 times in row. The SMA Portfolio is at its most conservative allocation ever, but a market correction of over 10% would likely result in a Tactical Timing System buy signal and a partial re-entry into equities. Despite the statistical evidence to the contrary, I continue to expect that a significant correction (10% or more), if not outright bear market, is a high probability over the next six months.
Source: Quantifiable Edges