Every now and again, an odd correlation or pattern gains traction in the markets.
Data gets assembled, analyzed, reviewed, reanalyzed, disseminated and then sensationalized. For some, it becomes a basis of traders’ decision-making process.
Other times, it becomes part of Wall Street lore.
The problem: such patterns and metrics can produce bogus statistics.
Cherry-picked data and backward-looking analysis gets form-fitted, square shapes thrust into round holes. Typically, this data offers no insight into what has occurred and/or provides no true indicator of future market activity.
Confirmation bias and selective perception are common problems. Both can lead an investor to lose objectivity, to choose an approach that justifies an existing portfolio mix as opposed to the process of objective data evaluation.
Unfortunately, these dubious indicators can cost investors’ money. Whether they are spread across financial media networks or become a joke gone-too-far at a cocktail party, these market myths should be tossed into a waste barrel with other urban legends.
Let’s take a look at some very dubious market indicators.
Financial magazine cover indicator
The Magazine Cover Indicator is a questionable contrarian indicator used by some technical analysts. It works like this: Whatever the cover story suggests on major business magazines, the thesis should be ignored. Instead, traders should bet on markets to head in the opposite direction. This is frequently tied to headlines in BusinessWeek, Forbes and Fortune.
For example, the rule states that if a cover issue suggests that oil prices are heading for a slump, traders should take the opposite position. Go long! Buy… buy…buy.
Of course, no direct evidence exists that this is an effective, let alone sane, trading approach, as a number cases suggest its fallibility. The best example of this comes from January 2008 when Business Week’s cover story issued a dire warning called: “Meltdown: For housing the worst is yet to come” and a July 2008 story called “The home price abyss: Why the threat of a free fall is growing.”
Housing prices collapsed over 2008 and 2009, and some national markets still remain below their 2007 price peaks. Anyone who would have purchased houses because of a magazine cover would have likely lost their shirt…and possibly those same houses. the basis for this contrarian indicator is based on the belief that the media is often the last to know would not have worked here.
Sports illustrated swimsuit cover indicator
Want to know if the S&P 500 will outperform historical returns, you could speculate on the Super Bowl, or you could move onto this next unrelated gem.
This goes that the nationality of the woman chosen for the annual cover on the Sports Illustrated swim shoot edition will determine how the markets perform. If the woman is an American, expect outperformance. If not…well, you get the idea.
The high heels index
Like the Hemline Index, but in reverse. This Index postulates that consumers turn to flamboyant fashions during economic downturns in order to mentally escape from their own poor economic reality. The argument goes that low flapper shoes of the 1920s were replaced by high heels during the Depression. In addition, the stiletto craze in fashion appeared during the end of the dot-com boom.
Pumps were also in during the 2008 financial crisis, but remained down during the economic downturn of 2011. Deviation is apparent across different economic booms and busts over time.
Car salesman closing time indicator
There’s no data for this one, but it’s made the rounds since the financial recession hit. The idea goes that the faster a car salesman offers a discount on automobiles, the weaker the economy is performing. This could be based on sharp discounts in 2008 when U.S. automakers were facings serious crises.
However, some should consider that a salesman’s decision could be the results of non-related issues. For example, the dealership’s sales price may be above the MSRP, and the salesman uses that as a negotiating tactic. Or, perhaps the location is trying to clear inventory.
Men's underwear indicator
A man’s underwear has an interesting relationship to the economy in that it’s supposed to help predict the onset of a market downturn. Simply put, men’s underwear is a necessity in good times for the market. But when the market is going downward, demand falls, and so do the shorts. Underwear demand for men and women is deemed a strong indicator of discretionary spending in a broader economy, according to the index.
Fun fact: This indicator is noted for being followed by former Federal Reserve Chairman Alan Greenspan during the 1970s, but over time it’s been less effective as a forward looking indicator. That’s because the MUI typically measures the amount of market share that the underwear has as part of the total apparel market, which means sales could be rising. Second, underwear has evolved into more of a luxury item in recent decades, as designers entered the space. Underwear sales may provide an indicator of the health of a broader economy, but it’s not a reliable predictor.
The hemline index
George Taylor proposed the Hemline Index in 1926, and men have been looking at women’s legs ever since for a sign of how the markets will perform. Taylor’s theory suggests that women’s dresses rises as stock prices do. According to this backward-looking theory, miniskirts correlated to good economies like one seen in the 1960s and 1990s. Meanwhile, when bad economies occur—like in 1929- dress hemlines fall.
Non-peer-reviewed research in 2010 confirmed the correlation, suggesting that the economic cycle leads the hemline by about three years.
Michael Sincere, author of “All About Market Indicators,” has written that women’s hemlines have little to do with the market or economy, and dismissed it as insignificant. However, he did note that there is a possible relationship between the price of the clothing—and amount of money people spend on clothes – and the performance of an economy. He’s calling it—and researching – the Fashion Indicator.
The hindenburg omen indicator
Here’s the big one, the one named after one of the world’s most famous aviation disasters. The Hindenburg Omen is supposed to be a premiere predictor of a market crash. Combining several technical factors, this omen attempts to measure the NYSE’s health and the broader global market.
The simple argument is that under normal market conditions, a large number of stocks hit new highs or lows each year, but never at the same time. When a larger number of stocks are hitting records at both ends of the spectrum, this is supposed to suggest trouble in the market. That figure is when both numbers are higher than 2.2%.
However, according to past research, this measurement has a weak track-record in an-already too small data set. Back in August 2010, it signaled a market crash, but the Dow rose by 24% in the next nine months. Then, it arrived in June 2013, and the market climbed 48% over the next 18 months.
The super bowl indicator
Many spurious sports correlations exist, but none is more part of urban lore than the Super Bowl Indicator. A man named Leonard Koppett posited in the 1970s that the outcome of the Super Bowl could predict whether or not the markets would finish up or down during the year. It became popular not only as part of the post-game discussion for the financial media, but also because the timing of the game set up speculation perfectly: In mid-January (when the indicator was conceived).
The indicator suggests that if an “original” team from the National Football Conference wins the Super Bowl, the markets will have a positive return for the year. If a team from the American Football Conference wins, then the markets will have a down year.
According to market and NFL data, it has been right 39 times over the first 48 years of the Super Bowl. And with the New England Patriots winning Super Bowl 49 in January, history would suggest that the
Dow will finish down on the year.
However, no real connection exists between a league’s team winning the Super Bowl and U.S. stock market performance; this is a coincidence, and one that should be sacked.
As New York Times columnist Floyd Norris once wrote, “Anyone foolish enough to bet on a game based on the stock market, or credulous enough to believe a football game can forecast the stock market, probably should hire a money manager or a psychiatrist, or both.”
Fun but not real analysis
Dozens more of these so-called economic indicators exist. They are often fun exercises employed by financial analysists and business media during slow markets or an attempt to take advantage of widespread attention around a major event like with the Superbowl Index.
So go ahead and have fun with them— maybe you can come up with one of your own — but remember the maxim from statistics that “correlation does not imply causation.”