Sunday, May 07, 2006

Five Straight Up Weeks in the Dow: What Comes Next

We have had five consecutive up weeks in the Dow Jones Industrial Average, gaining over 4% during that time. Recalling the last blog post, let's focus on that unusual event and see what happens next.

It turns out that the event is quite unusual: it's only occurred 69 times since January, 1978 (N = 1474 weeks). During that time, the average five-week change in the Dow has been 1.03% (910 up, 564 down). When the Dow has been up five weeks in a row, the *next* five weeks have averaged a gain of only .02% (39 up, 30 down).

Just out of curiosity, I looked at what happens after we have five consecutive *down* weeks in the Dow. That is an even more unusual event (N = 24). Five weeks later, the Dow averages a healthy gain of 2.0% (18 up, 6 down).

In short, buying into five consecutive weeks of strength has led to underperformance five weeks later; buying into five consecutive weeks of weakness has led to outperformance.

But wait, there's more:
  • Between 1978 and 1982, we had five periods of five consecutive up weeks in the Dow only five times. Four of those times, the Dow was down five weeks later.
  • Between 1985 and 1987, we had 11 periods of five consecutive up weeks in the Dow. Eight of those times, the Dow was up five weeks later.
  • Between 1995 and 1998, we had 19 periods of five consecutive up weeks in the Dow. 17 of those times, the Dow was up five weeks later.
  • Between 1999 and 2002, we had 10 periods of five consecutive up weeks in the Dow. 9 of those times, the Dow was down five weeks later.

You get the idea: We're more likely to have five consecutive up weeks in the Dow during bull markets than bear ones, but when we do get five up weeks in a row in those blue chips, the odds of being up the *next* five weeks are much greater in bull markets than bear ones.

Which brings us to the 2003 - 2006 period. We've had seven periods of five consecutive up weeks in the Dow during that time; five of those periods, the Dow was up five weeks later.

But the last two occasions have been the two times when the Dow has fallen after five consecutive up weeks.

The bottom line: If this is truly an extension of the bull market, we should see the market hold its recent gains. If we return to the recent trading range that we broke from on Friday, I'm willing to entertain the notion that the bull is aging. I'll be tracking this on my personal site; also check out my column for Trading Markets on Monday.

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