When strong momentum first returns to the stock market, the stock market usually goes higher in the medium and long term.
The Russell 2000 has just broken its “8 weeks up in a row” streak by falling this past week. However, the Russell is still up 4 months in a row, a sign of market strength.
When the Russell goes up 4 months in a row for the first time in half a year (i.e. return of strong momentum), the stock market usually:
- Breaks this streak in the short term (i.e. short term bearish for the Russell 2000), but…
- Goes higher in the medium and long term.
Here’s what happens next to the Russell 2000.
Here’s what happens next to the S&P 500.
Click here to download the data.
As you can see, the stock market tends to go higher in the next 6-12 months after the Russell goes up 4 months in a row. But more importantly:
None of these historical cases happen during a bear market rally. Bear markets don’t see this kind of market strength (i.e. the Russell is up 4 months in a row). It’s also rare for the market to see this kind of strength in the runup to a “significant correction”.
This kind of market strength is characteristic of bull markets. That’s why the stock market has a strong tendency to go higher in the next 6-12 months: it’s still in a bull market.