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« Hedge Fund Managers and Data | Main | Sneaky Street Conspiracy? »

December 21, 2005

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oldprof

Thanks for your comment, Barry.

Your original post, after listing the streaks, said: "Under the circumstances, that implies pretty good odds that 2006 is less than likely to be an up year, just based uon historical averages."

We all understand that years may not be completely independent, although the direction of the dependence (trend persistence) seems counter to your point.

Try this. Tell us what you think the odds were of a four-year streak BEFORE IT STARTED, in Dec 2003. What do you think the odds are now that three years have been booked?

Whether you are right on the market forecast remains to be seen, but I don't think it has anything to do with streak analysis.

Barry Ritholtz

The key difference is that coin tosses are a 50/50 affair -- regardless of the streak, they remain a random event.

Markets, are the other hand, are not "True." They exhibit specific tendencies that reflect non random characterstics, such as persistence, sensitivity to initial conditions, and especially, cylicality.

In particular, the 4 year cycle that markets exhibit is fairly established, with highs in the 4th year of a President's term, and lows in a the 2nd year. (See this for more details:

http://bigpicture.typepad.com/comments/2005/09/presidential_cy.html )

The lack of 4 year streaks, excepting two atypical eras, is consistent with this phenomena -- and its why random chance (i.e., flipping a coin) yields a very different behavior than do markets . . .

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