Thanks for the New Years good wishes.
Say did you see that the NASD managed to get 4 standard deviations above it's 200 dma. a full 42% above it.
John Rouque pointed it out in a column on Dec 30th.
A major market index trading at more than four standard deviations above its 200-day moving average.
As you've probably guessed, the items above are so rare as to never occur. Well, almost never occur.
While I'm guessing we'll never see a hen's tooth, campaign finance reform, a needle in a haystack or a great pro-basketball game without the theatrics -- we are witnessing a major market index trading at four standard deviations above its 200-day moving average. What does that mean? Standard deviation is, according to the Dictionary of Finance and Investment Terms, the statistical measure of the degree to which an individual value tends to vary from the average.
In short, the greater the deviation from the norm, the rarer the event, and thus the greater the risk. According to Statistics for Business and Economics, the rule of thumb is that one standard deviation encompasses 68% of the historical possibilities in any given statistical study, while two standard deviations encompass 95% of these possibilities. The way I figure it, four standard deviations must include something like 99.99999999% of the possibilities. |
