Jul

6

 The action in the S&P 500 since the unemployment report brings to mind Ben Franklin's quip, "When all is said and done, a lot more is said than done." Conversely, a few months ago, there was very little back and forth, just a slow, steady upward grind.

I calculated a measure of market efficiency by dividing the absolute value of the daily price change by the "minimum path" that has been discussed here before. The equation for minimum path if today's net change was negative is: (absolute value of (today's high - yesterday's close)) + (today's high - today's low) + (today's close - today's low)

If today's net change was not negative, minimum path is: (absolute value of (yesterday's close - today's low)) + (today's high - today's low) + (today's high - today's close)

For example, today's efficiency was 16%. The absolute value of the net change was 9.9 points, and the minimum path was 60.5 points.

From 2004 to 2007, 10% of all trading days had an efficiency of 69% or more. At the other extreme, 10% of trading days had an efficiency of less than 5%. Results on the day following a very efficient or very inefficient day appear consistent with randomness.


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