WALL STREET GIBBERISH, 2007 FIRST QUARTER NEWSLETTER

The Dow Jones Industrial Average had a streak of eight days when it rose. It attracted too much attention with some going so far as to compare it to Joe DiMaggio’s 56-game hitting streak in 1941, which is certainly gibberish. On April 12, the day after the Dow’s streak ended, the Wall Street Journal had an article on the front page of its Money & Investing section about the streak comparing it to the longest ones. It turns out that eight is not at all close to being the longest. That was fourteen in 1897, the Dow’s first year. Since the index was so different then, I think a more meaningful record would be the thirteen days in early 1987. There have also been gaining streaks of 12 days in 1970 and eleven days in 1921, 1929, 1944, 1955, and 1992. The article did not provide data about the nine and ten day ones, and I suspect these have not been rare.

The real gibberish is the implication that some number of consecutive days rising is a meaningful investment measure. Unless one can make a bet each day on the Dow’s direction, what is important is the amount of the gains or losses over a period of time. Would you rather own an investment for four days that goes up 0.25% each day or one that goes up 1% the first day, falls by 0.5% the second day, gains 2% the third day, and drops 0.5% the fourth day? I think all of you would prefer the one that goes up on only half the days.

When the talking heads were going on about the streak, I was struck by how little the Dow and other indices had advanced during it. The Dow gained a total of 2.2% during those eight days, and almost a third of that was wiped out on the following down day. Last year, there were 251 overlapping eight market day periods, and 27 of them, more than 10%, had greater gains than we saw during the “streak.” As the Bard of Avon did not say: much ado about not very much.

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