When I saw this piece from Barry, and this piece from Jason Goepfert on the eight-week Nasdaq streak, and read some of the questions, I said, “Hey, maybe I can help.”  After struggling with what defines a week (close of business for the week, Friday, or Thursday if the market was closed on Friday, or Monday in the second week of September 2001), I ran the numbers, and here is what I found:

Up Streaks

Nasdaq Composite Upstreaks

I used data from the Nasdaq Composite Index from inception in February 1971 through last Friday.  (Dividends not included in performance.)  Streaks longer than seven weeks are rare, but they tend to be associated with good performance in the next twelve weeks.  Again, the momentum effect is showing its face.  Interesting that intermediate length streaks of five and six weeks have done poorly over the next 12 weeks, whereas shorter streaks are just noise.  The frequency of streaks seems to follow an exponential decay pattern that is essentially coin-flip random, decaying at a rate of around 50%.

Down Streaks

Nasdaq Composite Downstreaks

Hey, if I have the data, shouldn’t I do the other side even if it is not immediately relevant?  The market was in a bull phase from 1971 until the present, so it doesn’t surprise me that after streaks downward that the market tends to rally, and after streaks upward the market meanders?  But long down streaks tend to bounce back hard (few observations, be careful), while the results after middling streaks are weak, and short downward streaks are stronger.  Again, there is exponential decay of streaks, near coin flip levels here as well.  Not surprising.

What does this tell about the current eight-week streak upwards?  With weak confidence it tells us that there is more room to move up.  Perhaps the Nasdaq Composite could be over 1900 by the end of July.  Given the lack of confidence in the rally, that is a genuine possibility.

Whether you run out and buy a bunch of QQQQs is your own business, but momentum tends to persist.  I don’t plan on buying the QQQQ.

Two pieces worth reading today from Eleanor Laise at the Wall Street Journal, which go along with what I have been writing in my Unstable Value Funds series:

• 401(k)s Hit by Withdrawal Freezes
• When Safe Places No Longer Feel So Safe

I just want to make the short, simple point that an investor can only get two of the following three items (at best):

• Principal Protection
• Liquidity
• Above-Market Returns

Perhaps I am a bit of a pessimist, but as a wide number of products came into existence attempting to offer all three back in the 90s, I would ask questions like, “But what happens if you have losses on assets and redemption requests at book at the same time?”  An answer would come back on the order of, “You worry too much.  We’re making money.”

True, as parties are willing to take more and more risk, you can get all three for a time.  But over a full market cycle, it can’t be done.  And, by a full market cycle, I mean a period of time long enough to include a major debt deflation, like the 30s and now.

So, be aware of withdrawal provisions on your investments, both the formal ones listed in the prospectus or its equivalent, and the informal ones where ability to withdraw is suspended as a matter of fairness to all clients, and/or protecting a business at a financial firm (though risking lawsuits in the process).

Also, try to understand what underlies the shares in any pooled investment vehicle that you own.  If the underlying does not have a liquid secondary market, the shares of the pool won’t be liquid under all conditions.  If the value of the assets vary considerably over time, stability of principal won’t be possible under all conditions.

So, be aware.  Though there are laws and courts, you are your own first and best defender when it comes to any investments.

Coming out of a recession, and even more so if it is debt deflation, the key question to ask is whether most of the financing problems are solved.  It is not yet true in residential real estate, and is far from true with commercial real estate, and the banks that finance real estate.

The current rally is driven by hopes of government policy, and short-covering.  Debt levels are still way too high, and the economy needs them lower for strong sustainable growth.

So, resist the rally and sell into it, but don’t leave the game entirely.  Who can tell how long this run will last?