Short-term Outlook (1-5 Days):  25% Bearish  From Apr 13, 1194 SPX

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Equity Indicators - Updates and Extremes

Number Of Up Days In The Past Two Months

A major hallmark of the rally off the February low has been the sheer number of examples of historic momentum we've seen.  Perhaps none are more impressive than the simple number of positive days.

Over the past two months (42 trading days), the S&P 500 recently enjoyed a remarkable 31 closes higher than the previous day's.  That's not a common feat - in fact, we've seen it only once before in the past 15 years.

To see just how rare it is, and what it may portend, let's go all the way back to 1928 and look for any other time the S&P enjoyed at least 31 winning days out of the past 42 sessions.

What we'll look at is how long it took, and what kind of rally it mustered, before the index formed at least a two-month peak and suffered at least a 5% correction:

It's probably not a big surprise that this kind of momentum often indicated that the rally had a long time yet to go.  There was only one precedent, in 1968, when the S&P topped out soon after the momentum reached the current level.

In every other case, the index took at least another two months before it formed a top.  And in all other cases but one, it rallied more than 10% to get there.  The exception was in 1965 when it took an amazing 95 days to rally a measly 4% at the most before rolling over.

This does not mean that the S&P didn't suffer short-term scares along the way - it certainly did.  But the declines were either too short, and the index climbed to another high quickly after, or they were too modest (less than -5%) to count in the study.  Even some of the sentiment-based studies we looked at recently confirmed this kind of market behavior.

Let's flip the data around and look for the opposite condition, times when the S&P managed only 11 up days out of the past 42:

The downward momentum once again was not a signal that the S&P was about to reverse immediately, but the time to get to a turning point was significantly shorter than for the first table.

Every one of the instances formed a bottom within two months, though the drawdowns to get there were hefty, especially in '32.

This data confirms something we already know and have discussed many times on the site - upside momentum is very difficult to kill, and while it can precede choppy conditions for extended periods, it rarely results in imminent, substantial intermediate-term corrections.

On the flip side, when investors panic they tend to do so en masse, and we get very swift, painful declines.  The positive side of that is that the damage gets done fairly quickly, and when we see such persistent downside momentum, it usually pays to at least start looking for reversal signals to trade the rebound.

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