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CLS: Are Streaks Meant to Be Broken?

02/28/2017

The common adage is streaks are meant to be broken. At least most people not associated with University of Connecticut women’s basketball team seem to think so. Despite Tulane’s best efforts last week, the UConn women have won an incredible 101 consecutive basketball games. This stretch includes two national championships and is a reminder to us all that streaks can go on for a long time.

Recent market performance has created a number of interesting streaks that make some investors believe they are too good to be true.The first streak was actually broken last Thursday. The S&P 500 had increased the previous seven trading days. While this streak seems short, at least by UConn standards, it is the longest winning streak since 2013. It could have easily been 10 days instead. The S&P 500 only declined 0.08% on Thursday, and then rallied on Friday to reach a record high.

Record highs are a second trend that can get investors worried. Underlying the concern about record highs is the idea that investing in stocks is akin to gambling. But, stock investing and gambling are very different. First, the odds favor the investor and generally don’t favor the gambler. Stocks go up more than they go down, and the historical odds of losing money go down the more we invest. The longer we play roulette wheels, slot machines, and lottery tickets the more likely we are to lose.

Second, stock investors aren’t investing in the outcome of a little ball or a computerized machine; they are investing in companies with valuable economic assets and tangible cash flows. Stocks reaching new highs is an indication that the value of the underlying businesses will continue to grow. While not true for every stock or every period, markets hitting new highs is a natural part of the process.

The current streak I find most interesting is the number of consecutive trading days since the S&P 500 declined by more than 1%. The current streak of 87 is the second longest since 1996, and only six days away from the 93-day streak in the second half of 2006.

2261-CLS-2/22/2017

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