Confessions of a Day Trader, Part 3: The Myopic Market

This morning I crunched more than twenty thousand days of stock market history into excel to see whether the market was totally random, or whether, as I suspected, there were some occassional patterns to be found.  Whether you think the market is totally random or you’re a day trader trying to make a buck off the psychology of the masses, you may find my results surprising.

In our experiment, we took the entire history of the dow jones industrial average (every open market day since 1928) and counted all the days that the market was up after an up day, as well as all the days the market was up after a down day.  If there were a marked difference in the percentages of each, we would have evidence that the market is not entirely random (or, for that matter, efficient).

What we discovered was that the market is up after an up day 28% of the time, and up after a down day 24% of the time.  The difference is significant enough that we can conclude that the market is not totally random, but not significant enough to conclude that the market has the ‘hot hand’ we described in earlier posts.

The results suggest that if you were to throw money in the market at the end of an up day, you would be slightly more likely to gain money than lose money.  So, is this a practical investment strategy?  Alas, no.  On the days we lose money, we’ll lose more money than we gain on the days we win, so the difference balances out.  (sigh)

This week, we’ll look at individual stocks to see whether they exhibit a pattern we can monetize.  Failing that, we’ll take a whack at fundamentals analysis.