Why Investors Ought to Cheer a 5-Day Losing Streak

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

How is a spate of good economic data bad for the stock market? Because "investor-traders" (as opposed to genuine, long-term investors) become concerned that an improving economy will spur the Fed to begin curtailing its bond-buying program ("quantitative easing") earlier than anticipated.

That appears to be the working hypothesis to explain Thursday's fifth consecutive day of losses for U.S. stocks despite an upward revision in the third-quarter GDP growth rate and lower-than-expected initial jobless claims for the week ended November 30. The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average both lost 0.4%.


That explanation found some support in today's Yahoo! Finance main page poll, which asked investors: "The latest reading on GDP suggests a strengthening economy, does this make you more bullish on stocks?" More than a fifth of respondents (21%) chose "No, the stronger the economy, the sooner the Fed will taper." Nearly a third (31%) answered that they had faith neither in stocks nor in the economy!

While the former result suggests that stocks are vulnerable to a correction -- the rally has been partially driven by traders' overreliance on Fed accommodation -- the latter result shows why any talk of a stock market bubble at this juncture is almost certainly misguided. Assuming the poll respondents are even a half-decent proxy for the population of interested investors, we can't be in the middle of a bubble with nearly a third of retail investors saying they don't have faith in stocks.

Streaks everywhere you look
This week's series of consecutive daily losses threatens to end another streak. With one trading day left in the week, the S&P 500's eight-week winning streak -- the longest such streak in almost a decade -- looks likely to end. However, I think it's less worrisome for it to to end than it would be for it to continue. Stocks' upward march this year has simply been too regular, with too little (downside) volatility along the way.

That lack of volatility has been reflected in the depressed values of the CBOE Volatility Index , which reflects investor expectations for stock market volatility looking out 30 days. However, with stocks on a losing stretch, the VIX has put together eight consecutive days of gains of its own -- its longest streak in 19 months.

Does the rise in the VIX signal a correction is imminent? No, but as institutional investors adjust their portfolios for the year-end, there may be a growing realization that volatility will not be suppressed indefinitely, particularly since the Fed ultimately wishes to have less influence on the stock market, not more.

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The article Why Investors Ought to Cheer a 5-Day Losing Streak originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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