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What Happens When the Dow Is Down Eight Days in a Row?

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Bad as things look now, a glance at the index's history suggests stocks will rally sometime in the near future.

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On Tuesday, August 2, the Dow Jones Industrial Average closed down for the eighth day in a row. Is this bullish or bearish? Rather than speculating on what this means, let's take a look at the data and see what has happened in the past when the Dow has been down eight days in a row.

Since May 26, 1896, (the start of the data) the Dow has been down eight days in a row 43 times. However, these 43 times have been in 25 different groups. For example, in January 1968, the Dow was down 12 days in a row. This would be classified as five of the 43 instances but only one group. Let's focus on the 25 groups so we don't get too repetitive.

Of the 25 different groups, the Dow rallied by at least 6.2% in 21 of the cases. However, four times it did not. Let's focus on those right away:

  • 1912: The Dow saw a 3.8% bounce over the next 29 days.
  • 1931: (April) The Dow went up 2% over the next eight days.
  • 1966: The Dow went up 1.1% in about six weeks.
  • 1977: The Dow went up 3.2% in about 2.5 weeks.
The above instances are the "worst case" scenarios. All experienced at least a 1.1% rally and all rallies lasted at least eight days. After the tepid rally attempts, stocks then proceeded to decline rather substantially.

There were three other times where the Dow rallied more than 6.2% but not quite 10%. These rallies lasted from two to four months.

Those proficient at math may deduce the other 18 of the 25 groups saw a double-digit rally in the Dow. Many of these rallies were quite dramatic and near major inflection points. For example, the signal in August 1982 kicked off the great secular bull market in stocks. While the September 21, 2001, signal did not herald a new bull market, it was the day of the exact low before a 35% bear market rally which lasted five and a half months.

So this indicator in isolation is suggesting a 16% probability of a very weak bounce, a 12% probability of a respectable 6-9% bounce for two to four months and a 72% chance of a double-digit move. This indicator isn't particularly helpful in determining the strength or duration of the bounce. However, the indicator does suggest that there will be a better exit point in the intermediate future where you will be able to get out of your stocks if you are becoming increasingly concerned about a possible recession.

While hardcore quants would like to go over all 25 times, that would be a bit much for a mainstream article on the Dow. Having said that, it still could be helpful to go over the last 10 times the Dow was down eight days in a row to give you an idea of the various types of scenarios. It should serve as a decent sample size. The Dow's listed performance was from the close of the eighth down day in a row to the intraday high of the subsequent rally.

  • October 10, 2008: Dow went up 17.4% in 4 days.
  • September 21, 2001: Dow went up 35% in about 3.5 months.
  • May 9, 1989: Dow went up 27.5% in 14.3 months.
  • August 12, 1982: Dow went up 253% over the next 5 years.
  • July 6, 1981: Dow went up 1.6% over the next 11 days.
  • February 21, 1978: Dow went up 37.5% over the next 3.2 years.
  • March 28, 1977: Dow went up 3.2% in about 2.5 weeks.
  • October 1, 1974: Dow went up 69% in less than 2 years.
  • August 19, 1974: Dow went up 42% in a little over 2 years.
  • October 22, 1971: Dow went up 25% in about 1.3 years.
Eight of the last 10 times the Dow was down eight days in a row it went up at least 17.4%. Two times it did not. Unfortunately, it is not immediately apparent which of the two scenarios will unfold.

A typical bear response would be: "Never in the history of civilization has a country been in such deep trouble as the United States is now!" But if you look at the aforementioned dates you will discover that when the Dow is down eight days in a row, the news is bad. Recessions and bear markets occur quite often. Actually the current situation is mild compared to many of the other instances, as earnings are near an all-time high.

In summary, this indicator suggests that at some point in the near future stocks will go higher from here. It is also interesting to note that in most of the cases stocks went considerably higher from here. Unfortunately, on occasion they did not. So if you are long-term bullish, perhaps your beliefs will prove to be justified despite the current dark outlook. And if you are long-term bearish, you will still probably be better off by waiting for a bounce before shorting.

No positions in stocks mentioned.
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