Over the past five months, the major stock market indices have been in a steady uptrend. How have similar uptrending periods resolved themselves? Do we get further strength, or do we see evidence of reversal?
I went back to June, 1989 (N = 4326 trading days) and found 337 periods in which the S&P 500 Index was similar to today's market: up by more than 10% over a 100-day period; up by over 5% over the last 50 days; and up by more than 2.5% in the past 25 days, with the gains over 100 days exceeding those of 50 days and those of 50 days exceeding those of 25 days. These have been steady uptrend occasions.
Twenty five days later, the S&P 500 Index was up by an average of only .16% (200 up, 137 down). That is weaker than the average 25-day gain of .90% (2609 up, 1717 down) for the entire sample. When we look 100 days out, however, the average gain following the uptrending period has been an impressive 6.00% (276 up, 61 down). That is stronger than the average 100-day gain of 3.60% (3030 up, 1296 down) for the entire sample.
What we're seeing, of course, is that the market has been highly bullish since 1989--some decent bear moves notwithstanding. After we've already had a trending up move for 100 days, returns have been subnormal over the next 25 days, but have actually been quite healthy over the next 100 days. The reversal effects that we've seen in short-term market movements have not occurred when we look as far out as 100 days.
This has implications for investment--as opposed to active trading--strategies and for traders interested in diversifying their returns by holding over a variety of time frames. About 80% of all uptrending 100-day periods since 1989 have been higher 100 days later. Interestingly, however, seven of the last ten occasions--those since December, 2003--have lost money. Even at the longer time frame, the most recent market regime has not rewarded trend followers.