Six of the last seven times this happened, stocks rose

After three winning quarters for the market, what will the fourth bring?

If history repeats, stocks could be in for a sweet end to the year. In the last seven years in which the S&P 500 rose in each of the first three quarters, only in one of them — 2007 — did the index drop in the fourth.

Actually, when one looks at the entire performance history of the S&P 500 going back to 1928 (which is available despite the fact that the index was technically created in 1957) one finds that out of the 19 years in which the market rose in the first, second and third quarters, a negative fourth quarter only followed five times. In these 19 years, the S&P's median performance was a 4.1 percent gain, according to a CNBC analysis of FactSet data.

That 74 percent "win rate" and impressive median gain for fourth quarters following three consecutive winning quarters compares to a 62 percent win rate for the S&P over all of its 355 quarters, and average quarterly performance of a 2.5 percent gain. However, it is also the case that the fourth quarter just happens to be better for investors in general; the market rose in 73 percent of fourth quarters, and actually turned out a better median performance of a 4.5 percent gain.

The recent rises seen in fourth quarters can thus be ascribed to market seasonality — or, perhaps more credibly, to mere randomness.

But for the bullish strategist Tom Lee of Fundstrat, who has pointed to similar figures in the past, something more is at work. Lee argues that in years when stocks are doing well, active managers will invest heavily in an attempt to avoid lagging the market too badly — creating an additional bullish force in the market. The fact that 2016 has been a good year so far is therefore a reason to bet that stocks will rise, he concludes.

90% chance stocks see a year-end rally: Tom Lee

So will the fourth quarter, which begins on Monday, continue the bullish trend?

Unfortunately, marshaling stats all day can obscure but can never alter the fact this question is patently unanswerable.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect