Hi Guys,
The “History does not repeat itself, but it Rhymes” quote is questionably attributed to Mark Twain. The marketplace has a storied history and loosely adheres to a history rhyming pattern. Loads of researchers have explored its historical rhymes with modest success to extract useable investment rules.
Yale Hirsch is one of the most time-honored and prolific of that research group. His and his son’s “Stock Traders Almanac” is a classic for active traders. So is his book titled “Don’t Sell Stocks on Monday”. That’s good advice, since statistically the stock market yields ground on Monday, gathers a little momentum throughout the week, and is highest on Friday’s close.
The Hirsch team operates a website. The site is subscription-based, but anyone can freely access its dated pdfs that contain a boatload of market advice and statistical summaries. For example, here is a direct Link to their December, 2014 issue:
https://stocktradersalmanac.com/NL_Archive/2014/2014_12.pdfTypically, the Hirsch work ethic is guided by detailed statistical pattern finding. To quote one of Hirsch’s succinct recommendations: “ Buy on Monday, Sell on Friday”. That’s not bad advice for mutual fund holders who plan to adjust their portfolio positions. Although I’m definitely not a trader, I do follow Hirsch’s sell on Friday rule when I infrequently trade.
Another useful observation is that the stock market only rhymes in the long run, not for day-to-day short run fluctuations which are truly random. The time scale is a determining factor for market rhythms.
Sometimes investors, especially rookie investors, confuse the Gamblers Fallacy with the Regression-to-the-Mean maxims. At a quick glance they appear to be in conflict with each other. They are not if time scale is introduced into their interpretation.
To illustrate, recall that the Gamblers Fallacy is to make a wager on Black if Red has been a predominant recent roulette outcome. That’s false since the roulette wheel doesn’t know what the previous spins registered. Each new spin is completely independent of earlier outcomes.
On a daily basis the stock market is positive about 51% to 52% of the time. It’s almost a fair coin toss. Researchers have examined records countless times to discover if any short term temporal correlations can be identified. No such correlations exist. What wealth the market produced or destroyed today gives nearly zero signal what it will do tomorrow. Some speculators do see an illusionary correlation; that’s the Gamblers Fallacy doing harm.
In the longer run, like over many months and years, regression-to-the-mean seems to operate with an uncertain grip on marketplace returns. Long term outcomes are reasonably predictable. Outliers revert to an average. Last years market wizards fall from grace. Momentum is an illusive happening that loses power suddenly.
The Periodic Tables for investment categories and for Sectors constantly demonstrate rapidly changing favorites. Over the longer periods, a regression-to-the-mean is a fairly reliable characteristic of the investment markets.
I appreciate that this is not new stuff for seasoned MFOers. We recognize that the markets only rhyme in the long run; that the short term markets are mostly dominated by purely random happenings that are subject to crowd behavior irrationality. Knowledge of market history is a necessary ingredient for investing success.
Your comments are encouraged and welcomed.
Best Regards.
Comments
Varying with time.
Non stationary.
Hard to predict.
Harder to exploit.
Mean.