Posts filed under “Analysts”
Every now and again, a way of looking at markets suddenly gains traction. Data gets assembled, analyzed, reviewed. Eventually, it becomes the basis of traders’ decision-making process. It even can become part of Wall Street lore.
The problem that arises all too often is that this approach is statistically bogus. The data gets cherry picked; backward-looking analysis gets form-fitted to what just happened and has no meaning for what is most likely to happen in the future. Confirmation bias and selective perception can lead an investor to lose objectivity, choosing an approach that justifies an existing portfolio mix, as opposed to objectively evaluating the data.
Consider as an example the ominous-sounding Hindenburg Omen, a technical analysis that purports to signal the likelihood of a market crash. That’s exactly what it’s been doing — unsuccessfully — since 2010. This sort of recession porn allows people to confirm their existing prejudices. After five years of money-losing forecasts, theHindenburg Omen’s following among traders is fading.
But many other dubious or disproven metrics are still out there. Consider the Murdoch Indicator, or the Super Bowl Indicator, or theMascot Indicator or even the Ticker Tape Parade Indicator. A decade ago, I termed this phenomenon YAII – for Yet Another Idiotic Indicator.
The most recent such metric? New York Stock Exchange margin debt. (Margin debt is when an investor borrows against the stocks he owns to buy more shares.) Margin debt has reached an all-time high and, as we have been told repeatedly, this is a fatal sign for markets.
There are two problems with this: The first, and lazier criticism, is to point out that analysts have been discussing the danger of this for at least the past four years (see chart below from two years ago). Margin debt was cited as a precursor to doom in 2011 and 2013 and last yearand again a few days ago.
The more substantive analysis is to note that this is a correlationwithout much predictive value. It is a coincidental, not a leading indicator. Check the historical data and you will find it gives little warning of an imminent market crash.
Let’s delve into the details:
Continues here: A Market Indicator That Predicts Nothing
Those of you who over the many years have followed some of the thoughts and observations I jot down each morning may have noticed several themes. Prominent among them is that forecasting is folly; cognitive errors create investing mistakes; consider context when analyzing data; recency bias overemphasizes the latest data; mixing politics with investing is…Read More
click for larger graphic The Standard & Poor’s 500 Index is market-capitalization weighted, meaning that companies with higher stock-market valuations have a bigger influence on the index. There has been a cottage industry of criticism about this structure. Recently, it has led to a new world of fundamental indexing and so-called smart…Read More
Apple’s first-quarter earnings were blow-out numbers. Far beyond what anyone forecast, the figures show Apple arguably had the single-greatest quarterly performance in U.S. corporate history. A quick overview: Apple’s net profit of $18 billion is an astonishing gain of 38 percent over the already-huge $13.1 billion in the same quarter last year. (So much for…Read More
Paul Macrae Montgomery, best known as the originator of the Time Magazine Cover Indicator, and for popularizing the Hemline Indicator of the stock market, died this weekend. He was 72. I was fortunate to have had several conversations with Mongomery over the years. He was humble and soft spoken but he took delight in…Read More
Until, not so long ago, Morgan Stanley’s Adam Parker was one of the most bearish analysts on the street. He had consistently violated one of the first rules of the market: Never mix politics with investing. Following last year’s 30% S&P 500 rally, he has had a change of heart. He now has a 3000…Read More
In our discussion of Mr. Market, we made passing reference yesterday to CAPE, Yale professor Robert Shiller’s 10-year cyclically adjusted price-earnings measure. This led to quite a conversation via a series of e-mails and Twitter posts from an assortment of analysts and asset managers. I received research from or by Cliff Asness, Michael Kitces, Mebane…Read More