Market Measures

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Random Walk After Market Movements?

Market Measures

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Our previous Market Measures segment from May 1st, 2013 examined the Random Walk theory, and the theory held up well. There was no predictability in the direction of daily moves over the long-term. Are market movements also random after notable daily increases or decreases in the market?

If the market increased or decreased 1% in a single trading day, we calculated the returns of the next day in the market. We did this to test whether or not there was a higher likelihood of an increase or decrease after these "notable" moves.

In both cases, the market tended to still be random, with the upside and downside moves sharing a near 50/50 split. In fact, there was a slight benefit to being a contrarian after increases and decreases. When the market increased 1% in a day, there was a 2% less likelihood of another daily increase. When the market decreased 1% in a day, there was also a 2% less likelihood of another daily decrease.

The results also showed that after 1% daily increases and decreases, there was a higher likelihood for larger market moves (greater than 2% and 3% in either direction) to occur.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for their takeaways and the detailed study results testing the Random Walk theory after 1% daily market moves.

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