The chances 2 people in a room have the same birthday (sort of) explains why stocks will probably rally

Stocks are probably going to rally.

Or at least one strategist thinks it’s most likely that stocks are going to rally from here.

In an email on Thursday morning Peter Tchir, a strategist at Brean Capital, used the example of the “birthday problem” to explain why it’s likely stocks are going higher from here.

Here’s Tchir (emphasis ours):

There is about a 50% chance that at least 2 people will have the same birthday in a room full of 25 people.

To me, at least, that number seemed high. My initial reaction is always, well there are 365 days in the year, so the number seems like it should be around 10% not the 50% it actually is.

The problem is that we are used to thinking in terms of the chances of something happening, not the chances of something NOT happening.


What does this have to do with the markets and me being bullish here?

I think the market is now pricing in a lot of bad things happening, possibly all at once. Positioning is extended to oversold. Bearish sentiment abounds.

As the market prices in more and more bad things happening, it starts missing the odds that NOT all of the bad things will happen.

Yes, each bad thing (oil, weak QE in Europe, a Fed that is intent on hiking, China slowdown, mixed signals on retail) has a reasonably high probability of occurring. But the probability of them all occurring is low and that is now what the market is pricing in.

So right at this moment, your intuition (and mine) is screaming “BEAR!!!” but I think the odds are stacked in favour of a bull market rally.

So that’s at least one way of thinking about it.

On Thursday morning futures were higher as the euro fell in response to commentary from European Central Bank president Mario Draghi.

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