Celina Jade
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Celina Jade in Markets at a glance,

The ‘momentum’ rally in U.S. stocks might have a twist ending

The only animals found on Wall Street are bull and bear, but there should also be a tortoise, as in Aesop’s fable “The Tortoise and the Hare.”

The Dow Jones Industrial Average DJIA, -0.48%  hasn’t had a rally of more than 1% in more than six weeks but, like a tortoise, has been creeping relentlessly higher. In fact, the S&P 500 SPX, -0.47%  has enjoyed its longest rally ever without a 3% pullback. (The rally started Nov. 3, 2016.)

Historically, momentum rallies like the current one are extremely rare, but, as the study below shows, they tend to follow a similar script. The S&P 500 is on its way to a 12th straight month of gains, which would tie the record.

The setup

On Oct. 20, the Relative Strength Index (RSI), a popular technical indicator that measures momentum, struck an all-time high of 88.10.

Readings above 85 are extremely rare. There have been only nine other times where RSI moved above 85. Seven of them occurred before 2016, and two since December 2016. Below are all dates:

RSI readings above 85
June 20, 1944
July 6, 1955
June 9, 1960
March 18, 1964
May 14, 1965
April 19, 1971
Nov. 25, 1996
Dec. 13, 2016
March 1, 2017

Most instances have a common denominator.

The study

Chart No. 1 plots the performance of every 85-plus reading from 1944 through 1966. Each graph shows the percentage gain or loss for the 12 months (250 trading days) after RSI moved above 85.


Chart No. 2 does the same thing for the Dec. 13, 2016, and March 1, 2017, instances (where we don’t yet have 250 trading days of history).


Chart No. 3 shows how the Dow fared, on average, for the 12 month after an RSI reading above 85.