The Nasdaq’s winning streak reached 12 on Thursday. It’s all over the news. In Tuesday night’s Subscriber Letter, when the streak had hit 10, I posted the following commentary. I think you may find my take a bit different than others who have examined the streak.

I have seen much written about the Nasdaq’s current winning streak. As of Tuesday the Nasdaq has now closed higher for 10 days in a row. I ran a study to examine performance following such runs since the inception of the Nasdaq.

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These results appear to be quite bullish. Rather than just taking them at face, though, let’s give it some further thought and consideration. A closer examination of the results would show that the last occurrence was in 1997, which means it happened 26 times in 26 years and then not again for 12 years. Let’s consider what might cause this to happen and what this suggests about the above results. I’ve shown the Trend vs. Chop chart many times for the S&P 500, but never for the Nasdaq Composite. I decided to produce that for examination below. As a quick refresher, a downward moving line suggests the market is dominated by chop while an upward trending line suggests daily follow through is more prevalent.

For those who would like to read more on the Trend vs. Chop concept you may click here.

Despite the rise in the S&P 500 on Tuesday the banks (BKX) fell over 3%. Historically when the banks have fallen sharply while the S&P has risen, it has often been followed by weakness in the S&P. Below is a study that exemplifies this.

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Both the low winning percentages and the fact that losers were larger than winners suggest a downside edge over the next 1-5 days.

I was on vacation last week with limited access to the internet. While subscribers still got the nightly Subscriber Letter, I was unable to produce blogs. I’m back now and will have some edges to share this week. This is one study I found interesting from Sunday night’s Subscriber Letter.

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Pretty much everything I’m looking at short-term is suggesting a pullback. Longer-term that is not the case.

I did a study looking at situations where historical volatility has contracted rapidly like it has in the last 3 days. For the study I looked at the 3-day historical volatility and compared it to the 10-day historical volatility 3 days ago. In other words I divided Friday’s 3-day historical volatility by Tuesday’s 10-day historical volatility. A result below 1 would indicate the last 3 days have been less volatile than the previous 10. A number above 1 would indicate a recent uptick in volatility. For the SPX, Friday’s 3-day over Tuesday’s 10-day came in at a very low 0.23.

I then looked to see what the 3-day historical volatility has typically been 3 days later. What does a sharp contraction over the last 3 days indicate you might expect over the next 3 days? What I found is that when the 3-day over the offset 10-day dropped to 0.25 or lower the next 3 days were 5.5 times as volatile as the recent 3 days. This is based on 1,111 trading days since 1960 – or about 9% of all trading days. Going back to just 1999 gave similar results, as the 3-day historical volatility increased by 5.4 times.

This suggests we may see some increased movement over the next few days. A breakout of the recent 3-day range could be very sharp.

Thursday’s action was extreme in that the gap down was large and the SPY opened at its high and closed at its low. Often reactions this strong and persistent are overreactions. Overwhelming negativity such as this has led to quick, sharp, bounces in the past. Below is a study that exemplifies this:

The Stock Traders Almanac noted that the Dow Has been up 16 of the last 19 years on the 1st trading day in July. It’s been a while since I last looked at 1st day of the month tendencies.

From 1960 until the late 80’s there was no decided edge on the 1st trading day of the month. In the late 80’s this changed and the 1st day of the month became an outperformer. The most often cited theory as to why is that defined contribution retirement plans like 401k’s became more popular. This meant there was a lot of money going into funds right at the beginning of the month, and funds managers were putting it to work.

Below is a performance report showing all the 1st trading days of the month from 1/1/1987 through June, 2009.

The average performance on the 1st day of the month is over 0.2%, which is substantially stronger than the remaining days.

The 1st day of month strength has not been immune to bear markets, though. Below is an equity curve. As you can see, there were sizable dips in the strategy in 2002 and 2008/09.

Lastly I broke out the performance by month. You’ll note July has been the most reliable month over the last 22 years. It also ranks 3rd based on average profits. August has had the worst performance.

Friday night the Quantifinder identified the below study. I haven’t updated it in over a year so I thought it would be interesting to do so.

Results are much the same as they were a year ago. Low QQQQ volume in an uptrend has often signalled at least a short-term drying up of buying interest. Historically this has created negative expectations over the next several days and weeks.

Much of the net negative thrust has often been found in the 1st two days following the setup.

Originally published in the blog on 9/11/2008, the Quantifinder noted the below breadth-based study for Tuesday’s close. I re-ran it in last night’s Subscriber Letter and have updated it below. (Note: Up Volume % is tracked in the members chart area each night. It is equal to (Up volume / (Up volume + down volume).

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The fact that there was a pullback within three days every time is a fairly compelling stat. There have been 2 upmoves occur in the 6-day holding period since I published the first set of results last September. They both had pullbacks first though, allowing either opportunity for profit or at least a chance to move your stop to breakeven. Below I’ve listed all the trades along with their 6-day exit:

Note even the 2 most recent losers saw some sizable pullbacks. The 3/6/09 instance which came very close to the bottom was the worst of the bunch from a short perspective but still moved south by over 1.5% before launching higher.