The Truth Behind This Market's "Groundhog Day"

The market appears to be experiencing its own version of Groundhog Day this month, the 1993 comedy that had Bill Murray caught in a loop in which he repeats the same day over and over again. Indeed, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) has now risen every day in March, for a 10-day winning streak -- the longest one since Nov. 1996! In the process, it has managed to set eight consecutive record highs.

Fun with streaks, highs and lows
Curiously, even if you assume no upward drift in stock prices, a 10-day winning streak should actually occur more frequently than every 16 years. Indeed, assuming an equal probability of the index rising or falling on any given day, a 10-day winning streak is equivalent to flipping a fair coin 10 times, and obtaining 10 heads, which has a probability equal to one-half raised to the tenth power, or 0.1%.

That might sound like very long odds, but, assuming 252 trading days in the year, a streak of that length would occur roughly every four years, on average. Bottom line: The current streak is perhaps not as unusual as it appears. For more on the possible significance of streaks in this market, see my column, Is a Secular Bull Market Under Way?, which I wrote back in January when the S&P 500 (SNPINDEX: ^GSPC  ) recorded an eight-day winning streak of its own.

Speaking of the S&P 500, despite gaining 0.56% today, it failed, once more, to break its Oct. 2007 all-time (nominal) high of 1,565.15, all the while closing within 1% of this level for the fifth day consecutively. The good news is that the index is inching closer -- it's now little more than 0.1% from the prize. Keep the confetti and party favors close at hand.

More than streaks and record highs, I'm more concerned about the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, which fell another 4.5% today, to close at 11.30. This is the lowest level achieved since April 2005, and corresponds to the bottom 3.5% of values since the index's inception in Jan. 1990. Try as I may, I simply cannot reconcile those numbers -- which suggest a high degree of investor complacency -- with the current environment.  (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming thirty days.)

If you're ready to invest with conviction, based on fundamentals, cashflows and competitive advantage, the Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the brand-new free report, "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2314297, ~/Articles/ArticleHandler.aspx, 11/28/2014 4:01:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement