Dow's upward streak ends. Now what?
From July 13 through Tuesday, the Dow Jones Industrial Average rose every day. History suggests we might see another streak soon.
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Short-term investors who sold a month later would have hit the market's peak and pocketed a 3.5 percent profit. But those who held on for three months would have lost a stunning 25 percent because of October's "Black Monday" crash, the Dow's worst one-day percentage drop in history.Skip to next paragraph
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Investing in streaks at the early stages of a market upturn helps minimize the risk. It's like a Bactrian camel, says Tom McClellan, a well-known technical analyst and editor the McClellan Market Report, in an interview. "If you're on your way up the first hump, that's a great place to be. If you're on your way up the second hump, you're going to slide down the tail. So knowing which hump you're on is terribly important."
Even then, world events can intrude. In July 1973, the Dow fell to a 19-month low and then quickly went on a 10-day, 5.7 percent upward tear. Normally, that would bode well for further gains. But in August, Libya began nationalizing oil companies and the Nixon administration imposed price ceilings on some oil production. Within a month the index was down 3 percent. Three months later, it would fall sharply as OPEC initiated its first long oil embargo.
For the record, Mr. McClellan doesn't think this streak bodes well for very long. He says the Federal Reserve was actively pumping money into the economy in late 2008 then slammed on the brakes on 2009. His data show that it takes eight months for that phenomenon to show up in the stock market, which is one reason for this month's market euphoria and could lead to more in August.
"I predict that we're going to blow off in August and have ugliness in September and October," he says.
Looking out much further than that using a single factor, such as a market streak, is problematic because so much else is happening, McClellan says. "Randomness is with us, also."
Still, here's a final thought for those who like to puzzle over rare events: Only three times since 1970 have streaks of seven days or better occurred within four months of a bear market low (meaning the Dow had fallen at least 20 percent). In each of the first two cases (July 1970 and April 1975), the markets had surged one year later, up 33 percent and 21 percent, respectively. The Dow streak that just ended is the third such occurrence.
- Readers should consult their financial adviser before making any investment decisions. The writer likes to investigate trends and you can follow his musings on Twitter. He is not a stock analyst.