Short-term Outlook:  Neutral  From Feb 19, 1112 SPX

Equity Indicators - Updates and Extremes

Russell 2000 Streak

Without question the most popular question I've received over the past couple of days is the possible meaning of the recent streak of consecutive up days in the small-cap Russell 2000.  It was broken in relatively dramatic fashion on Tuesday, which generated another round of questions.

It's certainly more common on an index like the Russell 2000, which had 47 streaks of 9 or more straight positive days since 1979.  In that time, the S&P 500 enjoyed 9 such streaks, the DJIA only 5 and the Nasdaq 100 had 10.  So the Russell blew all the other major indexes away in terms of "streakiness".  

That's descriptive and not predictive, so let's try to find some meaning in that.  Let's go back over the past 30 years and look for any other time the Russell's streak of at least 9 straight up days was broken by a loss of at least -0.5%, and look at how it performed going forward.

 

Russell 2000 Performance After A Streak Of At Least 9 Up Days Is Stopped By A >-0.5% Loss
Date	Days In Streak	Days 'Til Recovery	Worst Loss 'Til Recovery	1 Week Later	1 Month Later	3 Months Later
12/18/79	10	5	0.0%	0.9%	8.0%	-5.8%
01/22/80	12	1	0.0%	2.7%	1.5%	-15.2%
10/14/81*	12	12	-0.6%	0.5%	3.8%	-1.7%
10/25/82*	14	6	-0.5%	3.8%	7.8%	16.0%
01/16/87	11	11	-1.0%	-1.0%	7.4%	7.9%
03/10/88	21	4	0.0%	1.4%	3.4%	4.7%
06/16/88	9	4	-0.1%	1.3%	2.3%	0.5%
02/07/91	13	2	0.0%	3.8%	9.1%	15.4%
09/03/91	9	12	-1.3%	-1.1%	0.1%	-0.3%
05/13/93	12	4	-0.1%	1.1%	1.3%	5.3%
07/18/95	12	6	-2.2%	0.9%	3.4%	3.1%
09/15/95	11	77	-6.3%	-1.3%	-3.7%	-1.2%
05/02/96*	10	6	-0.2%	1.5%	4.8%	-6.2%
09/05/00	10	2	-0.5%	-0.9%	-6.7%	-12.6%
06/06/03	12	4	-2.0%	0.8%	5.1%	13.9%
08/22/03*	10	4	-0.3%	4.5%	4.6%	8.3%
Average	12	10	-0.9%	1.2%	3.3%	2.0%
* Streak-breaking loss was greater than -1%

On average, it did surprisingly well, especially in the short-term.  It took less than two weeks (and usually less than a week) before the Russell completely recovered its loss and closed at a price higher than when the streak ended.

There was only 1 instance out of the 16 precedents that it took longer than 12 days for the Russell to recover.  And the drawdowns were very modest, with only four maximum losses greater than -1% before the recovery.

Only two of the occurrences led to any kind of meaningful decline a month later.  14 out of the 16 showed a positive return, averaging +3.3%.

The table suggests that when we see this kind of momentum from the higher-risk smaller-cap stocks, it's representative of a risk-taking mentality that doesn't die easily.  With really only one failure, we saw stocks recover quickly and without too much interim pain.  Yesterday's rally *almost* wiped away Tuesday's losses, but didn't quite make it.  According to this table, anyway, it's only a matter of time.