Monday, October 20, 2014

Book Summary: How Markets Really Work

How many times have you gone long at a high in anticipation of further strength or short at a low for further weakness and often find yourself stuck in a turnaround? The book “How Markets Really Work” by Larry Connors, has shown some interesting results backed by statistical data over a 15 years period.

 His results tell us that there is a better opportunity on the long side when the market has declined multiple days in a row instead of buying when the market has risen multiple days in a row.

This is likely because a market usually makes a new high after good news has occurred and the buying has already taken place. On the opposite side, new lows are accompanied by bad news. The sellers have taken prices lower and from there buyers are likely to step in, in anticipation of better news in the near future.
Further study shows, when comparing 2 day up in a row to 2 days down in a row, the difference in the return was significant . After the S&P 500 has dropped 2 days in a row, it has risen in average .48% after one week. When it had rallied 2 days in a row, it rose only .07% over the next week. When S&P 500 dropped 3 days in a row, the market has risen on average .84% over the next week. When it has risen 3 days in a row, the average gains were just .04% over the next following on week period.

This contradicts the idea of short term market strength follows through with more strength. In fact, the result shows that short term weakness is followed by short term strength and short term strength is followed by under-performance. 

So is it better to buy when the market has been strong and has made multiple days of highs? And, is it better to sell after the market has shown weakness and has made multiple days of lows?

The answer is “no” according to Larry Connors.

Buying market weakness provides for superior returns than buying strength and selling into strength has been better than selling into weakness.

1 comment:

monika aggarwal said...

Sudarshan sir
Can u help me where we can get this book

Manish Aggarwal