What's Going to Happen Next

Don’t Leave Yield on the Table

I’m not a huge fan of seasonal trends in the stock market. Not all of it is entirely useless, but a lot of it is.

Today I want to shine a light on one particular brand of signal that I do find compelling. I like data that is based on our behavior, not the calendar.

This chart is Exhibit A (sorry, couldn’t help it) of what I’m talking about, and it comes from SentimenTrader via Daily Chartbook. It shows what happens when the S&P 500 closes at a 6-month low and then experiences consecutive days where 90% of the index is positive.

Why do I pay attention to stuff like this? Because the crowd behaves the same today as it did one hundred years ago. It’s the only data from the 30s and 40s that has any relevance.

The table shows an environment where the collective mindset of the crowd goes from, “Oh shit. Things are bad and getting worse,” to, “Everyone back in the pool!”

This type of price action has happened 17 times in the past. So pretty rare, but not so rare that the forward-looking data is meaningless. What caught my attention about the chart is that the stock market was higher 100% of the time two months later.

While I respect this type of work, like everything else, past performance is no indicator of future returns. Things that never happened before happen all the time in the market.

Plenty of backtests had a 100% hit rate until they didn’t.