Another Nasdaq 100 outside up month

Key Points:

• Momentum is a huge factor in the stock market
• When it gets going in one direction, momentum can propel the market higher or lower for months at a time
• Additionally, sharp reversals in momentum can also be highly significant
• An "Outside Month" involves a higher high and lower low than the month before
• An "Outside Up Month" - i.e., an Outside Month with a monthly close above the close for the previous month can often provide a valuable signal for stock market investors

Methodology

For the Nasdaq 100, we will use the highest intraday high and the lowest intraday low as the high and low for the month.

An Outside Up Month occurs when:

• The high for this month is greater than the high for last month
• The low for this month is less than the low for previous month
• The close for this month is greater than the close for previous month

The chart below is courtesy of ProfitSource and displays the Outside Up Months for the Nasdaq 100 Index since 2009.

The table below shows the price return of the Nasdaq from 1-month to 12-months after each signal since 1990.

In the table below:

• The first line of data displays the percentage of times the Nasdaq 100 Index advanced in price 24-months following an "Outside Up Month"
• The second line of data shows the percentage of times the Nasdaq 100 Index advanced, looking at ALL months since November 1990
• The third line of data displays the difference between the two.

Interestingly, the NDX was higher less often 2 and 3 months after an Outside Up Month than for All Months. All periods beyond three months saw the Nasdaq 100 gain ground a very high percentage of time (86% or more) and significantly more often than for All Months.

Now let's compare post-OUM returns to returns for All Months:

• The first line of data displays the average Nasdaq 100 Index percentage price gain or loss x-months following an "Outside Up Month"
• The second line of data shows the average percentage gain or loss for the Nasdaq 100 Index advanced, looking at all months since November 1990
• The third line of data displays the difference between the two

The key thing to note above is that the percentage price gain for the Nasdaq 100 Index after an OUM was higher for all periods (1-month to 12-months) than the average of All Months measured.

The chart below shows the hypothetical growth of $1 invested in the Nasdaq 100 Index ONLY during the 12 months following each OUM. 

What the research tells us...

The Nasdaq 100 Index experienced an Outside Up Month at the end of October 2021 and March 2022. So does this mean the index is "a sure thing" to stage another rip-roaring advance in the months ahead? Not at all. The market rallied two months after October 2021 but sold off hard during January and February 2022 before bouncing in March.

The bottom line is that an Outside Up Month is not an "automatic" buy signal or a standalone model. It is one more piece of evidence for investors to weigh. Still, the history of Outside Up Months suggests that investors give the bullish case the benefit of the doubt until the market gives them a reason to doubt it.