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Mark Hulbert
Sept. 29, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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By Mark Hulbert, MarketWatch
CHAPEL HILL, NC (MarketWatch) "” What a September it's turning out to be! With only two trading sessions left, the Dow is up 8.4% for the month.
Assuming that the market remains this high at month end, it will go down in the record books as the best September in more than 70 years. You have to go back to 1939 to find a September with a bigger percentage increase: In September of that year, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,835, -22.86, -0.21%) produced a 13.5% return.
Given September's reputation as being by far the worst for the stock market, there are any of a number of important investment lessons to draw from the stock market's surprising strength this month.
The first: Averages are not guarantees, even when those averages are as statistically significant as September's has been. This might strike you as utterly obvious, but it's worth repeating nonetheless. That's because it's all too easy when focusing on averages to gloss over the large variance in the individual results.
For example, even though September has been an awful month on average for the stock market, the month has nevertheless produced a gain 42% of the time since the Dow was created in 1896 (in contrast to a 59% gain rate for all other months). Despite being on average a loser, in other words, the stock market in the past has still risen in more than 4 out of every 10 Septembers.
This leads to a corollary: In order to get your odds of winning as close as possible to 100%, you need to bet on a pattern many times.
Imagine being a card counter in blackjack. If you're a good one, the odds of your beating the casino eventually become tilted in your favor. But, no matter how good you are, you still have no guarantee of winning any given round. The only way to get any reasonable assurance of winning is to play many rounds.
How many? The rule of thumb I remember from Statistics 101 is 30.
What this means in the case of September: Assuming the future is like the past, you have good odds of being a winner only if you were to bet that the stock market will on average be a loser during the next 30 Septembers.
That's an awfully long time to wait if you're interested in instant gratification. But what we want, and what the odds are objectively, are two very different things.
This leads to yet another corollary as well: One data point, even an outlier as impressive as the stock market's gain this September, does not make a pattern. Nor can it reverse a long-standing trend.
Another important lesson has to do with how past success can sabotage a stock market pattern. If enough investors know about a pattern, they will try to get a jump-start on it and, in the process, cause the pattern to disappear.
This may be one of the reasons why August produced a loss for the stock market, despite historically being one of the better months. It's entirely possible that many traders sold stocks in August in order to sidestep September, thereby transferring September's loss into August.
The bottom line? Extrapolating the stock market's past into the future is tricky at best: Even when a previously very strong pattern hasn't been discounted away by shrewd investors, there is no guarantee that it will work the next time around. And when it doesn't work, there is no way in the moment to know if the pattern has permanently stopped working.
In the meantime, though, we can all celebrate the unexpectedly good news that the stock market has brought us this September.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
An increase in the value of the yuan would amount to a hidden tax on the American consumer.
56 min ago8:02 p.m. Sept. 29, 2010 | Comments: 8
- Zebra365 | 11:54 p.m. Sept. 28, 2010
"Mark Hulbert: Best September in more than 70 years http://on.mktw.net/aBhMIH" 11:20 p.m. EDT, Sept. 28, 2010 from MktwHulbert
"Mark Hulbert: Contrarian analysis is bullish on stocks http://on.mktw.net/9qeKPI" 11:22 p.m. EDT, Sept. 27, 2010 from MktwHulbert
"Mark Hulbert: End-of-recession announcement not "?kiss of death' http://on.mktw.net/9G0a2U" 11:36 p.m. EDT, Sept. 23, 2010 from MktwHulbert
"Mark Hulbert: Greek sovereign debt crisis, ten months later http://on.mktw.net/9jbtLk" 11:03 p.m. EDT, Sept. 21, 2010 from MktwHulbert
"Mark Hulbert: Adviser goes for broke"”and loses http://on.mktw.net/ceFSwH" 11:47 p.m. EDT, Sept. 20, 2010 from MktwHulbert
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