The Market "Double" No Investor Can Ignore

Following the strongest week for U.S. stocks since January, stock indexes added to their gains on Monday, with the S&P 500 (SNPINDEX: ^GSPC  ) and the price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) both up 0.1%. The Russell 2000 Index of small-capitalization stocks rose 0.7%. All three indexes established new record (nominal) highs.

With all three indexes establishing new (nominal) record highs, it's not surprising that the CBOE Volatility Index (VIX) (VOLATILITYINDICES: ^VIX  ) , Wall Street's "fear index", fell another 0.4% to close at 13.79, its lowest closing level since May 21 -- the day before which the market first got wind that the Federal Reserve was thinking about slowing its bond purchases this year. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

The year of the "double"
For the S&P 500, today's gains brings the index's winning streak to eight days -- the longest such streak since January. Streaks of this length are relatively rare: Since January 1950, the S&P 500 has produced a streak of eight winning days or longer roughly every 15 months, on average. Two streaks of eight or more "up" days in the same calendar year are, naturally, rarer still. Before this year, the phenomenon has occurred only six times since 1970:

Year

Streaks*

2003

2 x 8-day streaks

1989

2 x 10-day streaks

1980

2 x 8-day streaks

1972

8-day streak & 12-day streak

1971

9-day streak & 14-day streak

1970

9-day streak & 12-day streak

*The streak must begin and end in the reference year. Source: Author's calculations based on data from Yahoo! Finance.

Interestingly, these "doubles" occurred more frequently during the secular bear market of 1966-1982 (at least four occurrences: 1980, 1972, 1971 and 1970) than they did during the secular bull market of 1982-2000 (just one occurrence, 1989.)

I'm convinced this year's "double" is linked to what I call the "liquidity" rally -- the advance in stock prices that owes much to the Fed's extraordinarily accommodative monetary policy and the market's perception of this policy. I don't think it's a coincidence that the second streak has occurred just as the Fed has taken great pains to reassure the market that its monetary policy will likely remain accommodative for the next couple of years.

Let me be clear: The "double" could be empty of any meaning -- a pure product of randomness -- but I think it's a reasonable hypothesis that it is the symptom of a market that is not yet well-functioning. Add to that the fact that valuations are high by historical standards, and investors have every reason to remain cautious and highly value-conscious right now.

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