The S&P 500 is up eight weeks in a row, gaining 17.3% over that period. Do similar periods of rallying suggest further upside or a slowdown?
It’s been a remarkable recovery for the market off lows reached at the end of March. The S&P 500 is back at all-time highs, but even more notable has been the consistency and magnitude of upside over the last two months. The S&P 500 has risen each of the last eight weeks and is currently on track for its ninth consecutive positive week.
There’s a market adage that says strength begets strength, meaning that a market performing well is more likely to continue that trend going forward. At the same time, periods of sharply positive movement can also be viewed as pushing things into overbought territory, giving way to a period of cooling off. Given these opposing forces, do similar periods of rallying suggest further upside or a slowdown?
To start, it’s rare for the S&P 500 to rise so many weeks in a row. There have only been twenty instances where the market has been up for eight weeks in a row dating back to 1950, and this is only the fourth time it’s occurred in the last twenty years. Despite longer streaks being uncommon, the market’s outlook hasn’t changed significantly depending on whether it’s been on a long streak. If anything, streaks around the seven-to-nine-week range have been constructive in the near-term, averaging three-month returns north of 3%. Meanwhile, the market’s one-year return has been around 9 to 11% whether the market declined the prior week or was up ten weeks in a row. Streaks longer than 10 weeks have performed worse, but there are so few instances (only two occasions) that we’d consider it mostly noise. Just because the market has seen consistent gains doesn’t mean that the market has materially strengthened during that period. The market was higher for eight weeks in a row in September 1997, but the S&P 500 only gained 3.6% during that period. As a result, investors shouldn’t adjust portfolios much just because the market is on a positive streak.
While the direction of movement is important, the magnitude of that movement is often a more important factor when evaluating momentum. Thankfully, the recent recovery has been even more notable for its level of upside. Over the past eight weeks, the market has gained an astonishing 17.3%, placing it in the 99th percentile of all eight-week periods. There have only been 16 other occasions in which that market has gained more than 15% in eight weeks, with the last time occurring almost exactly a year ago coming off the Tariff Tantrum bottom. When the market gains so much in such a short period, it’s historically an indication of a strong market. The S&P 500 has averaged a one-year return of 17.5% from those instances, generating positive returns at a similarly above-average rate of 88%.
Overall, investors should certainly consider the overbought posture of the market. But to reiterate recent research, an overbought market can always become more overbought, and a strong market is usually required to push things into extended territory. Strength begets strength, and improvement in the market over the past two months has historically been a sign of positive things to come.
