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What Happens When a Long Uptrend Ends?

The Nasdaq 100 ETF is in the midst of its longest uptrend in history: 138 consecutive trading days above its 50-day moving average.

Image of longest uptrend of Nasdaq 100 ETF

On CBNC today (click here to view) I discussed a number of factors that are signaling a potential end to this historic run (click here for my recent post on gray skies). If the streak is indeed coming to an end, what does that mean for the market? Is it a signal of a top, a bottom, or nothing at all?

To answer that question, let’s take a look back in history at the end of prior uptrends in the Nasdaq 100 ETF (QQQ).

2010 – 2011

Streak ends with an 8% correction. New highs soon follow.

Image of moving average of Nasdaq 100 ETF

1999 – 2000

Streak ends with a 36% correction, marking the start of the 2000-2002 Bear Market.

Moving average of Nasdaq 100 ETF from November 1989 to March 2000

2003

Streak ends with a 7% correction. New high soon follow.

Moving average of Nasdaq 100 ETF from March 2003 to August 2003

2014

Streak ends with an 8% correction. New highs soon follow.

Moving average of Nasdaq 100 ETF from May 2014 to September 2014

2006

Streak ends with a minor 4% pullback. New highs soon follow.

Moving average of Nasdaq 100 ETF from August 2006 to December 2006

2004-2005

Streak ends with a 14% correction. New highs are not hit until November 2005, 11 months after the prior high.

Moving average of Nasdaq 100 ETF from September 2004 to January 2005

2007

Streak ends with a 10% correction. New highs soon follow, culminating in the bull market peak in October 2007.

Moving average of Nasdaq 100 ETF from April 2007 to July 2007

What Happens When a Long Uptrend Ends?

Most of the time, there’s a pullback/correction which is followed shortly thereafter by new highs. We saw this in 2011, 2003, 2014, 2006, and 2007. Why does this tendency to run right back to new highs occur? One theory: the many participants who missed out on the uptrend finally get their chance to buy the dip, and once it starts moving higher again they jump on board. This is what seems to happen most of the time.

But most of the time is not always. In 2005, a deeper correction of 14% ensued which took some time (11 months) to reach new highs again. The most bearish example was after the 1999-2000 uptrend which saw an initial 36% correction that marked the start of a devastating bear market.

Which will occur this time around? I don’t know. Nobody does. The only thing I would say is that such a break will likely coincide with higher volatility in markets. We illustrated the relationship between moving averages and volatility in a research paper last year, showing that volatility tends to increase when indices are trading below commonly referenced moving averages such as the 50-day and 200-day.

Over the past two months, the Volatility Index (VIX) has seen 9 out of its 19 lowest closes in history. Given the mean-reverting nature of volatility, we should expect to see higher levels in the back half of the year. A break below the 50-day moving average would only strengthen that case.

Ranks of lowest daily closes of Volatility Index from 1990 to 2017

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Related Posts:

From Silver Linings to Gray Skies

Is This as Good as It Gets?

Leverage for the Long Run

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie-Bilello

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors. He previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University. He has done a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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