What if I think the Market is totally Random

GlobalFinancier · Oct 15, 2006

Quote from easyguru:

Markets are not random. For many years studies after studies have shown two anomalies which make profits

1 PEAD- Post Earning Announcement drift
2 Momentum effect

Hundreds of studies have shown this behavior continues in the market years after year.

http://quantlogic.blogspot.com/2006/03/pocket-phd-post-earning-announcment.html

Each quarter when companies report their earnings, there are usually a handful of companies whose earnings are either surprisingly good, or shockingly bad. You can immediately recognize these companies by the post earnings announcement jump or plunge in their respective stock prices. So far so good. But now fast forward, say, three quarters. If you take a look at all the stocks that had negative earnings surprises, you find that on average these stocks continued to go down. Similarly, the stocks that had positive earnings surprises continued to go up, on average. In other words, the stocks with earnings surprises exhibit post earnings announcement drift, or PEAD for short. Now this is weird. Every finance professor will tell you that this isn't suppose to happen. If the stock market is efficient, what should happen is a one-time jump in the stock price when earnings are announced.

This PEAD effect was first identified in a paper published in 1968, almost 40 years ago. Generally, when research on market inefficiencies is published, people start trading against the inefficiency and the anomaly goes away. But not with PEAD. Subsequent papers have overwhelmingly found the same result. PEAD is considered one of the most robust stock market anomalies around. And, so far, nobody really knows why....

-------------------------------------------------
There is substantial evidence that indicates that stocks that perform
the best (worst) over a three to 12 month period tend to continue to perform well (poorly) over the
subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the evidence of price and earnings momentum and the potential explanations for the momentum effect.
http://papers.ssrn.com/sol3/papers .cfm?abstract_id=299107

Why people don't trade them, because most people are lost in technical analysis jungle. Secondly many people trade on too short a timeframe to capture returns from such strategies. Some of the most profitable systems are based on these two key anomalies.
More...

Mentioned in the market wizards series, though I forget which book.

ElectricSavant · Oct 15, 2006

What if I think the Market is totally Random

Then you will need to explain how trends occur

easyguru · Oct 15, 2006

Quote from GlobalFinancier:

Mentioned in the market wizards series, though I forget which book.
More...

The third book - Michael Masters interview.

ElectricSavant · Oct 15, 2006

It's like saying there is no god, but everyday nature itself speaks of god.

Quote from ElectricSavant:

What if I think the Market is totally Random

Then you will need to explain how trends occur
More...

dan05 · Oct 15, 2006

Hi Steve,

I fully agree with your comment. I{ve been following for some time now, a Chaos Based indicator at this journal.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=70418

To support the statement that there is order in Chaos, check this predictions. The black line is the prediction, the red line is the market. Prediction where computed when the black and red line splits.

http://www.tradingpro.com/PastperformanceDJIA.html

Take care.

Dan

Quote from Steve Tvardek:

There IS an order within chaos...
More...

Log in or Sign up

What if I think the Market is totally Random

GlobalFinancier

ElectricSavant

easyguru

ElectricSavant

dan05