The stock market is following a rare pattern that could signal double-digit gains next year

• The stock market is following a rare pattern that could signal big gains next year, NDR said.
• The S&P 500 rallied for five months straight this year, followed by three consecutive months of losses. 
• In previous instances when that's occurred, the index posted double-digit gains a year later.

A rare pattern of gains and losses in the S&P 500 is flashing a bullish signal that the benchmark index could be in for a double-digit rise in the year ahead, analysts from Ned Davis Research said in a note this week.

A five-month winning streak earlier this year was immediately followed by a three-month selloff from August through October. That's an unusual pattern in the history of the market, one that has only been observe four times since 1926. Importantly for investors, it's typically been followed by a period of strong gains in stocks over the next year, Ned Davis wrote on Wednesday. 

In all instances of the S&P 500 posting at least five straight winning months before a three-month losing streak, the S&P 500 has gained a median 12% over the following six months, according to NDR data. And over the following 12 months, the index gained a median 21%.

The stock market's current winning and losing streak most resemble the patterns seen in 1975 and 2016, strategists said. In those instances, stocks gained a respective 22.5% and 12.1% in the following six months. 

"Over the past 50 years, the S&P 500 was up every time from one to 12 months later," the strategists said. "From a bull/bear cycle standpoint, the early bull stages of 1975 and 2016 are the most akin to 2023, and their double-digit gains six months later are encouraging," they added.

The current selloff in stocks, though, is lasting an unusually long time. 

"At 39 market days, it is the longest in the study. The market has work to do to avoid being the first negative case."

Stocks are up to start November but have wobbled for the past three months as investors adjust to the outlook for interest rates remaining high for longer. That's sent bond yields soaring, with the yield on the 10-year US Treasury hitting a 16-year-high in October and helping to push the S&P 500 into correction territory last week.

Still, market commentators have made a bullish case for equities into 2024, as the economy remains robust and the Fed looks mostly done with its aggressive interest rate hikes to lower inflation. More dovish comments from Fed officials could cause stocks to rally into the end of the year, according to Fundstrat's Tom Lee, who previously predicted the S&P 500 could retest its all-time-high by the end of 2023.