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Mark Hulbert
March 30, 2011, 6:18 p.m. EDT
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Gold market optimism at worrisome levels
First Take "º
Obama's déjà vu energy plan
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Talk about an over-achieving stock market.
Through Wednesday's close, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 12,351, +71.60, +0.58%) had gained 6.7% since New Years. That's nearly four times the average gain of just 1.8% for all calendar quarters since the late 1890s, when this benchmark was created "” and better than the returns achieved in 71% of those individual quarters.
/quotes/comstock/10w!i:dji/delayed DJIA 12,351, +71.60, +0.58%
Indeed, the Dow's gain over the last three months is equivalent to an annual jump of nearly 30%.
Not bad.
And, coming as it did at the end of an already record-setting bull market run, it's even more impressive.
Can the stock market sustain this pace?
It certainly would be nice if a quarter as strong as the one now coming to a close would increase the odds of market strength in the second quarter "” if the market's momentum could be sustained, in other words.
$( function() { embedPlayerByVideoId('{D041D34E-885C-4DE2-AABC-F6D4E9549A25}', 'video_D041D34E-885C-4DE2-AABC-F6D4E9549A25', '162', '287'); }); Small-cap tocks hit 3-1/2 year highJoe Bel Bruno explains why stocks rallied again on Wednesday, pushing the Russell 2000 Index to its highest level since October 2007.
Unfortunately, the historical data don't provide any statistical support for this otherwise tantalizing notion. At least that's what I found upon feeding into my PC's statistical software the Dow's quarterly returns back to its creation in 1896. The software was unable "” at the 95% confidence level that statisticians typically use to determine if a pattern is genuine "” to detect any momentum from one quarter to the next.
Those who otherwise might worry that regression to the mean is about to kick in may find some solace in this result, since it suggests that particularly strong quarters aren't automatically followed by mediocre quarters "” or worse.
On the other hand, the findings of my statistical analysis also throw cold water on those who naively are extrapolating the first quarter's strong returns into the second.
Though some investors may be frustrated that we can draw few inferences about the second quarter because of what has happened in the first, it actually is something to celebrate. It means that the stock market is admirably efficient, with its level at any given time reflecting all available information at that point.
If instead the stock market's return over the subsequent quarter were related to how it did in the previous one, then the market would suffer from "unnecessary and unhealthy turmoil," according to Lawrence Tint, a chairman of Quantal International, a firm that conducts risk modeling for institutional investors. In an interview, he said, "We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns, and do not include history in the calculation."
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.
Add Comment › · Recommend · Post: Alert Email Print More Mark Hulbert March 29, 2011 Gold market optimism at worrisome levels March 23, 2011 How corporate insiders reacted to Japan March 22, 2011 Market now higher than before earthquake March 21, 2011 How bull market stacks up against history March 18, 2011 Old market timing theory, modern insight Explore related topics Dow Jones Industrial Average Comments Screener About Mark HulbertMark 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.
First Take Obama's déjà vu energy planFollowing in the footsteps of his predecessors, President Obama tries once again to raise alarm over the nation's glaring vulnerability to foreign oil.
5:14 p.m. March 30, 2011
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