Yesterday was the first time in 23 days that the S&P 500 closed below the prior day's low.  That's the longest streak of not-closing-below-the-prior-day's-low since January 2004, yet another sign of the upside momentum the bulls have been privileged enough to enjoy.

Since 1962, there have been 48 times the S&P managed to go 23 or more days without closing below the prior day's low.  There was some fairly consistent weakness in the short-term, with the index closing positively the next day 42% of the time and three days later 44% of the time.  Nothing major, but weaker than random.

After that, from one to three months later, the S&P showed average returns that were just below zero, but it was positive about 55% of the time.  That average return is below average, but the consistency was nothing to write home about.

The streak began about when earnings reports started rolling in, helping to make this one of the best earnings season performances for the S&P 500 in the past decade.  Let's go back to 1997 and look at the 10 best performances for the S&P during earnings reporting season, and how the index then performed during the subsequent off-season (which lasts about a month and a half until the next earnings season begins).

Recently, the S&P has been doing quite well, thank you very much.  Somewhat surprisingly, there wasn't a whole lot of mean-reversion going on, with these great earnings seasons leading to a positive off-season 80% of the time.  Even more impressively, the average risk during the off-season was smaller than -2%, while the average maximum reward was more than three times as large at +6.6%.

Now let's flip that coin and look at the worst earnings season, and how the S&P fared during the subsequent off-season.

Here the results aren't as definitive, but clearly the market has not been as positive in the off-season than it was after good earnings seasons.  While there were a few big gainers in the sample, the overall return was flat, and the average risk actually outweighed the average reward.

To define earnings season, we use the standard definition of Alcoa's report kicking it off, and Wal-Mart ending it.  Usually that means we begin earnings season about 5 days after the end of a quarter, and end it around 26 days later.

Using those averages, if we estimate earnings season dates going back to 1950, then the same pattern doesn't hold up.  Looking at the 20 best earnings seasons (which averaged a gain of +11.0% while companies were reporting), the next off-season was positive only 45% of the time, and averaged a weak return of +0.3% with an average maximum gain of +4.6% compared to an average maximum loss of -4.5%.

The 20 worst earnings seasons (which averaged a -9.3% loss), however, showed gains the next off-season 70% of the time, averaging +2.6%.  The maximum gain averaged +6.2% compared to maximum loss that averaged -5.4%.  Not gangbusters to the upside, but better than recent history and even better than after the best earnings seasons.

So prior to the past 12 years or so, there was more mean-reversion going on than we've seen lately.  That weakens the overall conclusion of the study - I'd rather see consistent results throughout distant and recent history to rely on this data as a guide. 

Seasonality is an interesting twist here, too.  You'll notice from the table above that none of the best earnings seasons were from the second quarter - most of them were from the first or third quarters.

Out of the 20 best earnings seasons since 1950, 7 of them were from the third quarter, 6 of them from the fourth, and 5 of them were from the first.  Only 2 of the 20 were from the second quarter, so our current instance is odd in that way.  And those 2 instances actually led to a negative off-season.

Any time the S&P showed a positive return during second quarter earnings season, the next off-season was positive 52% of the time with an average return of +0.7%, with an average maximum risk of -3.6% compared to an average maximum gain of +4.0%.  Nothing conclusive there.

Overall, I don't see much here that would be a good guide going forward in our current case.  Lately, good earnings seasons have led to good off-seasons, but historically that hasn't held up, and when they've occurred during the second quarter, go-forward results have been lukewarm at best.

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