Does Stock Market Momentum Really Matter? History Says So

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On Nov. 20, the S&P 500 Index (SPX) was down 4.4% for the month, and it looked as though its six-month winning streak was about to end. Instead, it rallied over the final 10 days of November to eke out a win and extend the streak to seven months heading into December. With the index up over 20% during the streak, should we worry that the market is overextended? This week, I’m digging into the historical data to find out.

Looking Closely at 7-Month Win Streaks

Since 1950, there have been 15 previous seven-month win streaks. The table below summarizes the SPX returns after seven straight months of gains. The second table shows typical returns for comparison. Based on these numbers, stocks tended to outperform over the next two to six months, with the next month performing like a typical month. Momentum tends to continue after a seven-month win streak rather than indicating frothiness.

I also looked at how the market typically performs once a long winning streak finally breaks. The data shows the first negative month hasn’t been the start of a major unwind. In fact, it’s historically been a reliable buying opportunity. In the 15 prior seven-month winning streaks, buying the SPX after the first down month yielded an average six-month return of about 10%, with positive returns in 14 of 15 cases (93%). After several months of gains, that first losing month can cause fear that we’re due for a deep pullback. But the numbers say otherwise. It has usually been a chance to get into the market, not out.

Finally, here’s the full list of seven-month winning streaks for the SPX. In this table, you can see the last time happened in August 2021, in which the SPX fell almost 5% the following month. The longest streak was 11 months, which happened twice -- both instances in the 1950s.