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Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market by Eric T. Singer

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How MPT Has Been Used by Financial Advisers

How was the work of Markowitz and Malkiel distilled into practice for financial advisers? If all short-term returns of stocks are random, then it follows from MPT and EMH that investors will be net losers, after transaction costs are considered, from trying to time the market tactically. For advisers, this has been translated into “buy and hold,” which is followed by “you don't want to be out of the market on any of the 10 biggest days of the year because you would then sharply underperform the market.” To reinforce this observation, over the years, in response to most observed market correlations, financial advisers often have asserted that “correlation does not mean causation” as a sort of mantra to dispense with the need to examine any correlation in particular. This is important because when you are dealing with small sets of data, it is relatively easy to find overlays that match that may not have much, if any, discernible connection to the market theory being asserted. Small data sets are 20 or 30 or even 40 single data points. A good example is the Super Bowl indicator mentioned in Chapter 1, which has an 80 percent correlation with the S&P 500. Sounds like a lot, but it is not. Over the past 45 years since the Super Bowl started, there have been 34 years when the S&P 500 was up, a 75 percent chance of having an up year. Over that same time frame, a team from the NFC won 24 times, and the market was up 87 percent of those years. ...

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