Gavekal Capital: A Not So Random Walk in 2013

Thursday, October 24, 2013

A Not So Random Walk in 2013

Everyone that's read Burton Malkiel's A Random Walk Down Wall Street learns the idea that the movement of stocks is random--they can rise or fall on any given day.  Like a hitter in baseball or a shooter in basketball, players can go on "runs" that temporarily give the appearance of non-randomness.  Similarly, stocks can do the same, and for a period of time violate the random walk.  This is currently the case, and has in fact, been the case all year.

We measure the number of days a stock has been up and down over the previous 88 trading days (4 months).  A perfectly random walk would have a stock up 50% of the says and down 50% of the days.  We can also perform the exercise on stock indices.  Currently, using the S&P 500 index, stocks have been up 66% of the trailing 88 days.  Moreover, the percent of days up has been above 50% all year long, which is a first since the Lehman induced financial crisis of 2008.

This looks less like a random walk than a manufactured sprint, engineered by massive amounts of quantitative easing.  In sports, the payback from a "run" is a "slump".