Vance Harwood | Nov 19, 2013 04:54AM ET
Years ago I was watching the action around an Atlantic City roulette table when I noticed a man taking careful notes. When I asked what he was doing he said he was looking for long consecutive strings of red or black. If the run got long enough he was going to bet that the ball on the next spin would land on the opposite color because it was “due.”
When I asked him how the ball knew what colors it had previous landed on he frowned and shifted a few steps away.
The borrow free on Amazon prime ), I decided to see if the data supported my intuition. I took the S&P 500 index data from 1993 to 2013 and analyzed market moves after 3, 4, 5, and 6 up days in a row. Rather than just plotting a binary up or down results I plotted the frequency of the percentage results using 0.1% bins.
Instead of supporting my intuition the data shows that the stock market is very much like roulette, with no directional bias after three consecutive up days. The average return (mean) is -.016%— indicating very close to even odds.
I repeated the analysis for bull runs of 4, 5, and 6 consecutive days.
The 5 Up Days statistics are distorted by a giant 8.9% drop on 1-Dec-2008 so I show the 5 up data with and without that drop
Clearly my notion that the market moves in 3 day cycles was bogus, and the data suggests that any sort of directional analysis based on market history is just another example of the Gambler’s Fallacy.
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