To do so, I make one important simplification, for now: I assume the market closes up for the week if it closes higher on more days than it closes lower. (Regarding unchanged closes, just consider down to include these). In other words, I assume the market closes up for the week if it closes higher three or more of the five trading days in a week. Of course, this is not necessarily true as, for instance, one big up-day can make up for four down-days, but for now I will stick with this simplification -- I do not want to assume a particular distribution for the underlying distribution of returns. I leave the more complex stuff for later.

Thus, our problem reduces to the following: Out of the five trading days in a week what is the probability that the market closes higher three, four, or five days of the week. If p denotes the probability of the market finishing higher on a day, (1-p) is the probability that the market finishes lower. You can think of each day as the toss of a coin -- and all five days as a sequence of five coin tosses. The totality of probabilities is then given by the various terms in the expansion of the binomial formula when n is 5:

\[

\left(p+\left(1-p\right)\right)^{5}=\sum_{i=0}^{5}\binom{5}{i}p^{i}\left(1-p\right)^{5-i}

\]

Our answer is simply the sum of last three terms of this expression. Thus, in reverse order,

\[

p^{5}+5p^{4}(1-p)+10p^{3}(1-p)^{2}

\]

The trick now is to establish that this expression is greater than p. If so, we have shown what we had intended, that weekly market gains happen more often than daily market gains. In the following plot, the blue curve represents the function, the probability of an up-

*week*, the green line, p, the probability of an up-

*day*:

As you can see, the blue curve exceeds the green line -- it is above the green line -- when p is between 0.5 and 1.0.

The following graph makes this clearer. It is a straightforward modification of the above, simply taking the

*difference*between the probability of an up-week and the probability of an up-day and plotting this against the probability of an up-day:As before, when the daily up-probability is between 0.5 and 1.0, the difference between weekly and daily up-probabilities is positive, meaning the probability of an up-week exceeds the probability of an up-day. In the real world, p needs to typically average above 0.5, long term, or else the market is doing nothing or destroying wealth. (I guess theoretically this could happen, but it has not and generally should not happen in more established markets.) Thus, as p is typically more than 0.5, we have proved our assertion: weekly market gains happen more often than daily market gains. (As an aside, in the graph, when p is between 0.5 and 1.0, the maximum difference is achieved when p is 0.76.)

Let us see how our expression meshes with the historical data noted earlier. From an earlier post, we saw that the probability that the stock market closes higher on any given day is (only) 53.7%. Thus, p = 0.54 (rounded to 2 significant digits). Using this value of p in our expression, we get that the market finishing higher during the week is 0.57, or 57%, in agreement, essentially, with our result from a previous post that the S&P 500 encounters an up-week 56.5 percent of the time.*

Kind of spooky cool, though probably a fair bit lucky.

* [Updated:] I reran the calculations based on a set of daily returns that essentially matches the years (1950 through 2015, roughly) under consideration for the weekly returns. In this case, p is 0.53, and I get that the market finishing higher during the week is 0.56, or 56%, again close enough to the result from the previous post about weekly returns.

Kind of spooky cool, though probably a fair bit lucky.

* [Updated:] I reran the calculations based on a set of daily returns that essentially matches the years (1950 through 2015, roughly) under consideration for the weekly returns. In this case, p is 0.53, and I get that the market finishing higher during the week is 0.56, or 56%, again close enough to the result from the previous post about weekly returns.

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