Coin flip could have prevented the Dow from achieving its 14th consecutive gain

The Dow Jones Industrial Average experienced a negative close on Thursday, putting an end to a 13-day winning streak that resulted in a 5.3% gain for the blue-chip index. This missed opportunity prevented the Dow from tying its longest rally on record, which was a 14-session run in 1987.

However, it’s important to recognize that such streaks occur naturally due to basic probability. This is similar to the “Gambler’s Fallacy,” where individuals mistakenly believe that an unusual streak in a game of roulette predicts future outcomes. In reality, long streaks are to be expected on occasion.

We can even draw parallels between these streaks and the results of a coin flip.

By running a simulated coin flip thousands of times and tracking the number of consecutive “heads” results, we can equate these to daily gains in the stock market. It’s worth noting that these are completely independent events, unaffected by prior simulations.

Since its establishment in 1897, the Dow has experienced almost 33,000 trading days. Throughout this period, there has been one instance of a 14-day winning streak and two instances of 13-day winning streaks. The most recent 13-day rally occurred in January 1987.

In our simulation of flipping a fair coin 33,000 times, we obtained identical results to the actual Dow: a single 14-day rally. When the coin was slightly biased towards “heads” with a 0.523 chance for each flip, our simulation produced two 14-day rallies and three 13-day streaks.

In the world of stock market speculation, pundits often attempt to attribute explanations to every twist and turn. However, by considering the 50-50 assumption of our theoretical coin, we can demonstrate that long streaks are not as extraordinary as they might appear.

— CNBC’s Gabriel Cortes contributed to this report.