Will the market go up or down tomorrow?

John Osbon - August 21, 2012

The answer is yes. It will go up or down, and tomorrow night we can tell you which.

As of August 17, the Dow had risen 8 of the last 11 days. Both the Dow and S&P 500 were up 6 weeks in a row, and the NASDAQ 5 weeks in a row.  What do these trends mean for the future direction of stocks?

Patient index investors have been rewarded this year. The Dow is up 8.7 percent for the year and the S&P is up 12.7 percent. Both are near their year-to-date highs.

These are encouraging data to be sure, but as the disclaimer goes: Past performance is no guarantee of future results. Six up weeks in a row tells us nothing about what will happen in the seventh week, and even less about what will happen on any given day.

The Morningstar exhibit below is a classic one I like to share every few years.

Probability of down days, months, quarters and years

As the title describes, even rising markets have many down days. While the market (as represented by the S&P 500) increased in value by about 400 percent between 1989 and 2008, the index was down on 46 percent of the days in that period. Monthly and quarterly results are somewhat better, falling 37 and 30 percent of the time, respectively. The market was down in 5 of the 20 years, or 25 percent.

Up and down and all around

Rising markets do not move in straight lines. The path up typically includes many significant dips, and certainly many down days.

This daily data — 46 steps backward for every 54 forward, on average — points to the difficulty of trying to time the market. We feel it is not practical or cost-effective to try to jump in and out of the S&P or any other investment hoping to catch upswings and miss downturns. Instead we advocate buying and holding for the long term a diversified portfolio of low expense index ETFs that represent a wide spectrum of asset classes.

 

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This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible).  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance. 

 

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