Twenty in a row. Now what?

The Dow Jones Industrial Average has been on a roll, making a gain of about 15 percent in last 6 months. Along the way it managed to gain ground on 20 consecutive Tuesdays. That’s an unprecedented streak of glory on a day of the week that rarely gets its due. But what does it mean?

What it means, of course, is nothing. As we’ve discussed before, the market is up on about 54 percent of days, so out of 20 Tuesdays we’d expect about 10 up days…unless there is something special about recent Tuesdays that is making the market thrive. But I think we can all agree that there’s nothing special about Tuesday except that it’s when many people start looking forward to the weekend.

For investors hoping to make money, this win streak is a pattern but not a predictor, just like flipping 20 heads in a row tells us nothing about what will happen on the 21st.  The streak is a fluke of random events, interesting for its quirkiness but nothing more. Below are longest streaks for each day over last 10 years.

Patterns that tell us nothing

Because past performance is not a predictor of future results, we ignore what happens on Tuesdays, who wins the SuperBowl, who wins the baseball All-Star Game, what Punxsutawney Phil sees when he looks out his window, the gender of the Rose Bowl Parade grand marshal and every other oddity that may somehow align with stock returns for a while.  If there’s no causal relationship, it’s just coincidence.

These are all silly examples (here’s another), but there is a big financial industry built on the premise that patterns are meaningful. It’s called technical analysis. Sometimes known as chart reading, technical analysis tracks market stats, especially price and volume. Certain patterns are thought to portend future price movements, and therefore serve as signals for investors to buy or sell.

We don’t believe that technical analysis is predictive at all. What we do believe is that over long periods, markets typically move up. What we believe is that investors who stay invested in low cost index funds for long periods – instead of trying to guess what is going to happen next Tuesday – will generally be rewarded. That’s a pattern that has held up well for generations, even with significant short-term disruptions due to recessions, bubbles, and other mayhem.