Mar

13

On top of K2It is interesting to speculate about what happens when the market is up 10 days in a row and then again at the open, since this has never happened before so one can't do it. This is a quandary for frequentists and perhaps mysteries of the Bacons, Dave and our readers could shed light, as I can't.

Alston Mabry writes:

I'm looking at SPY closes, only one peak higher than this, back in Sep 1995, 12 up days in a row. lt's like standing on K2 and being able to see Everest from there. But maybe I'm just tossing coins…

Bruno Ombreux comments:

I found a funny rule in Statistical Rules of Thumb, by Gerald van Belle, called the Rule of Threes: "Given no observed events in n trials, a 95% upper bound on the rate of occurrence is 3/n." There is one very simple demonstration based on the Poisson distribution.

Victor Niederhoffer comments:

The van Belle rule would say that in 1000 repetitions, it would be 19 to 1, that a decline would occur less than 300 occasions (i.e. a probability of 3/10), a truly precise but completely misleading answer in this case, especially when the underlying base estimate is 0.5. Sort of the way people talk about Microsoft's answer to a help question. However, in this case I predict a decline of 0.25, just to make the people waiting for a reversal crazy and even poorer.


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