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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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2/1/2005
The January Effect, by Victor Niederhoffer, Alex Castaldo and Steve Wisdom
Around January each year, a bunch of amiable idiots start transmitting data
on the January barometer. If it looks like January is down, then all the
chronic bears of the world and more pessimist followers of the
"Abelprechtensteins" can be counted on rubbing their hands with glee to predict
an imminent Dow of 5000. But of course when January is up, the whole year is
likely to be
up. And when January is down, the chances are reduced. And of course you can
play with various starting points, indexes, changes in regime with lame ducks
et al to make the numbers of rises and declines, look alluring, especially when
you're dealing with a 8% a year drift and 0.6 chance of any month being up.
In any case, Doc Castaldo and Boss Wiz here respectively computed the
theoretical correlations assuming randomness and compared it to actuality with
the guaranteed to happen result of a bullseye at 29%. All other exercises will
result in similar bullseyes consistent with multiple comparisons. When will these
orgies of superstition go out of style? Never of course, because otherwise the
public couldn't always be counted on to be on the wrong foot.