Eight losing sessions in a row usually followed by gains
By Mark Hulbert, MarketWatch
Last update: 7:27 a.m. EST Jan. 10, 2008
ANNANDALE, Va. (MarketWatch) -- It's not pretty out there.
Chart of COMP. As one gauge of how bad it is, consider this factoid: The Nasdaq Composite Index (COMP: COMP 2,474.55, +34.04, +1.4%) has now fallen for eight straight trading sessions. The Nasdaq Composite hasn't put together a string of that many losing days in well over a year.
Does an unbroken string of bad days this long mean that the market is about to crash? Or does it instead mean that investors have overreacted, from which the market is likely to rebound?
To find out, I searched for all previous instances in which the Nasdaq Composite declined for eight straight trading sessions.
I looked back to 1971, when this index was created.
To appreciate what I found, it might be helpful first to calculate how often we should expect to see a string of eight losing days in a row. On the assumption that there's a 50:50 chance that the Nasdaq Composite will decline on any given day, we should expect eight losses in a row once every 256 trading sessions. That's about once a year.
It turns out that, over the 36 years since the beginning of 1972, there have been 37 other instances in which the Nasdaq Composite turned in a string of at least eight losing days. That's quite close to what we might expect on the assumption that the Nasdaq Composite's day-to-day gyrations are random, and serves as a powerful reminder that - difficult as the last eight days have been - we should not ascribe more meaning to this string of losses than it can support.
With that proviso in mind, here's what I found: The Nasdaq Composite more often than not rebounded smartly following past instances in which it had declined for eight straight sessions. The data are presented in the accompanying table.
% of time Nasdaq Composite higher in 3 months' time Average Nasdaq Composite gain over subsequent 3 months (annualized) % of time Nasdaq Composite higher in 6 months' time Average Nasdaq Composite gain over subsequent 6 months (annualized)
58% 17.4% 79% 30.1%
To be sure, the results over the subsequent three months are only modestly worth writing home about. For example, three months after past instances in which the Nasdaq Composite fell for 8 straight sessions, the Nasdaq was higher 58% of the time. That's not much better than the odds that exist at any other time.
Still, there is something even in these three-month results in which the bulls can take some solace: Even though the odds of a rising market over the subsequent three months are not overwhelming, neither are there increased odds of a big decline.
The six-month results are more heartening: Six months after past instances in which the Nasdaq Composite fell for 8 straight sessions, the Nasdaq Composite was higher 79% of the time - about four out of five times, in other words. And on average across all instances (not just the occasions in which the Nasdaq Composite rose), this benchmark rose at an annualized rate of 30.1%.
The bottom line? Though the Nasdaq Composite string of eight straight losses has been upsetting and disturbing, to say the least, it is neither historically unique nor reason, in and of itself, to liquidate your stock holdings and retreat to cash. End of Story
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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Mark kind of invited ridicule by choosing to dwell on eight losing days at Nasdaq. Such a losing streak is not significant enough by itself as indicating anything, logically speaking. At best it may just be barely inter...
- Ramesh
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