V. 9:11 (477-477): Letters To S&C

LETTERS TO S&C

THE UPS AND DOWNS OF IT

Editor,

I have some questions regarding "Historical movement of the stock market" (STOCKS & COMMODITIES, November 1991). Mr. Moody states that the data cover the quarterly periods from 1940 through June 1991. This would be 206 quarters. My questions are:

1. Figures 1 and 2 cover 82 quarters, not 206. Why was 60% of the quarterly data not reported? Also, all frequency charts I have previously seen show the market up 60% of the time, but these two charts are 50/50.

2. Figures 3 and 4 together appear to cover 196 of the 206 quarters. Were the missing 10 quarters effectively unchanged? In these two figures the frequency does follow the 60% up and 40% down expected distribution.

3. How does Mr. Moody calculate down moves? (A 20% down move requires a 25% recovery to be back to even.)

DOUGLAS B. BEATH

Jupiter, FL

Mr. Moody replies:

Regarding #1: Figures 1 and 2 do cover all 206 quarters. The caption on Figure 1 ,for instance, reads "Up moves by size and frequency." I believe you may be misreading this to mean quarterly price change. In the article, an "up move" is defined as "consecutive positive quarterly (average) total returns." Thus, an up move can easily consist of two or more consecutive positive quarters. As a result, there are fewer up moves than quarters. In addition, these charts show frequency of up moves and down moves, not frequency of up quarters. An up move by definition is always followed by a down move, which is why the frequency of up and down moves is 50/50.