What Follows Record Setting Dow Quarters?

With futures deep in the red, let’s take a contrary look at how markets do after big quarters. The quarter ending 9/30 saw the Dow putting in its best Q since ‘98, up a solid ~15%. 

With everyone waiting for a pullback, and yesterday and today viewed as the probable start, perhaps its time to review some history. What has happened historically after markets have put in record setting quarters — 15%plus?

For the most part, momentum has trumped mean reversion historically. Jim Bianco crunched the numbers, and he found that “stocks returned an average of 1.33% over the month following one of these record quarters, 3.46% over the following quarter, and 9.95% over the following year.”

It is worth noting that these average returns following quarters of 15%+ performance are nothing out of the ordinary. The average monthly return over all periods in the DJIA since 1900 is 0.58%, the average quarterly return is 1.66%, and the average yearly return is 6.90%. If anything, the average returns following huge quarterly gains actually outpace the average returns during all periods.

Perhaps another way to look at it is these record setting rallies, especially following a a big selloffs, are themselves a form of mean reversion.

Here’s the tabel of past 15% quarters:


courtesy of Bianco Research

Originally published at The Big Picture and reproduced here with the author’s permission  

55 Responses to "What Follows Record Setting Dow Quarters?"

  1. Guest   October 3, 2009 at 2:45 am

    What about Q2 2009, which was surely also a quarter when DJ outpaced a 15% criterion?Put enough of these together back to back and ypu’re probably looking at hyperinflation, given the near-zero cost of financing the increase.