From: John Conover <john@email.johncon.com>

Subject: Re: Deming's comment "in God we trust-all others bring data."

Date: Fri, 20 Sep 1996 21:29:22 -0700

On tonight's "Nightly Business Review," on PBS, an equity market analyst, not to mention any names, made the comment that "7 out of the last 10 election years had financial bull markets," In the spirit of Deming's comment, "in God we trust-all others bring data," I decided to see if election years really were responsible for bull markets, as implied by the analyst, (in the context that the FED runs low discount rates, intentionally, so the financial markets will be optimistic.) So, I ran a fractal analysis on the NYSE's Composite, DJIA, and S&P500 time series, and low and behold, the Shannon probability, (and also the Hurst exponent,) was 0.68-meaning that the equity market indices are very definitely fractal, which, in a nut shell, means that the statistics of the indices, over time, are what is called "self-affine and self-similar." What that means is that the statistics of the indices do not vary, irregardless of the time scale used, be it minutes, hours, days, months, years, decades, or whatever. Also, it means that given any interval of time-no matter how you define time-68% of that time will be a bull market, and 32% a bear market. Or in other words, taking the last 40 years for example, or so, and randomly picking years, about 70% of the years picked will have bull markets, the remainder bear markets-and it does not make any difference if I pick every 4th year, every other year, every third year, or just years at random. That statistic will hold, and be invariant. So, are election years responsible for bull markets? Of course not. It is always easy to find statistical significance where there isn't any. John BTW, he should have known better-he is a certified financial advisor, and his boards test knowledge of entropic analysis-what, in the lay vernacular, are called fractals. FWIW, you can quote any thing you want-for example, 70% of the time we had a Democratic Congress, it was a bull market. Never mind that 70% of the time we had a Republican Congress, we also had a bull market. It could also be stated that 70% of the time that the tide is out, we have a bull market. Or, also, bull financial markets have a correlation with the price of eggs in China, for 70% of the time. All, of course, are blatantly incorrect. Where the guy made his mistake was assuming that the financial markets can be divided into a bear and bull markets, approximately evenly. Although it sounds reasonable, it just isn't so-instead of each market prevailing for half the time, bull markets actually prevail 68% of the time-skewing the distribution mean from 0 to the positive side. That is why the markets increase in value over time-if it had a zero mean, the DJIA, etc., would still have the same value as in the last century. Funny thing for a financial advisor that specializes in equity markets not to know. -- John Conover, john@email.johncon.com, http://www.johncon.com/

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