The key to success in the stock market is simple: buy low and sell high. The hard part is knowing when the market will be low and when it will be high. To address this challenge, armchair analysts have come up with a host of unique metrics that have nothing to do with alpha beta, the Sharpe ratio or any of the other more traditional analytical measures.
According these unusual metrics, short-term stock market performance can be predicted by everything from the volume of butter production in Bangladesh to the length of women's hemlines. Do any of these indicators hold even a grain of truth? We'll explore some of the more fanciful indicators here.
Butter production in Bangladesh
What does Bangladesh, India, have to do with the U.S. stock market? Plenty, according to some pundits. Using their calculations, taking the change in butter production in Bangladesh and multiplying it by two will give you the exact percentage by which the S&P 500 Index will change in the year ahead. Based on that, a 5 per cent increase in butter production leads to a 10% hike in the S&P. The same statistics are believed to hold true on the downside.
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Fact or Fiction?
Like some of the other indicators, this one has a high enough degree of accuracy to satisfy its believers. Unfortunately, like most of the others, it also has no basis in economic fact.
Super bowl winners
Regardless of your hometown team, proponents of the Super Bowl indicator argue that you should always root for a National Football League team to win the Super Bowl. Should an American Football League team win the match, the markets are in for tough times. The twist here is that you need to root for an old-school NFL team, not an AFL team that became part of the NFL during the 1970s merger.
Fact or Fiction?
Yes, an NFL win has about an 80 per cent correlation to stock market success, according to a February, 2008, Wall Street Journal article ('Patriots Lost - Markets Win?'), but what about that 20 per cent failure rate? Would you bet your life savings on those odds?
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Presidential approval ratings
When the majority of a country dislikes the man in the White House, the stock market is supposed to soar. According to the numbers, a presidential approval rating between 35 per cent and 50 per cent is good news for the Dow Jones Industrial Average.
Fact or Fiction?
Based on this logic, voters seeking to line their pockets should vote for the candidate they hate the most. Hate for your leader is love for your portfolio? There's simply no logic to this one.
Sports illustrated swimsuit issue cover
Millions of men anxiously await the coveted Sports Illustrated swimsuit issue. But perhaps some of them just want to know the nationality of the cover model. According to this indicator, when an American model graces the cover, the stock market is poised for a double-digit rise.
Fact or Fiction?
The lonely boy who spent his time dreaming up this one was looking to generate hype, which he managed to do. While the markets have shown some gains when beautiful Americans capture the cover, top-notch money managers (like Warren Buffett) didn't make their reputations and fortunes by ogling magazine covers.
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Triple crown winners
According to the Triple Crown indicator, when a horse takes the Triple Crown, the Dow takes a tumble. If you believe this indicator, betting against the horses is arguably the best bet for your investments.
Fact or Fiction?
The number of horses that have won the Triple Crown is statistically insignificant. Eleven winners over the course of 125 years hardly makes for a benchmark for a sound investment strategy. What do you do with your money during the years the Triple Crown isn't won? Maybe betting on the ponies is a better idea.
Women's hemlines
Some market watchers take their cues from watching women's legs. According to the skirt length theory, when skirts get shorter, it's time to buy; when skirts get longer, it's time to sell. The logic behind this indicator dictates that positive markets lead to a happy nation and an atmosphere of fun. Fun times send hemlines rising, making micro minis great for the markets, while conservative floor-length dresses are bad news.
Fact or Fiction?
When times are good, fashions do indeed tend to show skin. The bad news is that fashions don't change until times are good, making this a lagging indicator. If you are buying and selling based on skirt length, you might be better off selling when skirts are high and buying when they are low.
The problem with numbers
The hemlines indicator is the most legitimate, but it's not perfect. At best, it's a lagging indicator, making it worthless to investors, although perhaps interesting to economists. Other lagging indicators, such as consumer spending, do serve as legitimate indicators of economic health. Unfortunately, success, like recession, is only fully visible after the fact.
As for the others, many of the results can be attributed to data mining in its worst form, which basically describes the practice of searching for numbers that provide the result you are seeking. Statistical data, such as the number of times a hunky leading man appears in movies without wearing a shirt or the number of unsuccessful stock market prognosticators staring out their windows at skirt lengths instead of making money for their clients can be correlated to all sorts of events, from stock market declines to lunar eclipses. If you dig hard enough, you can uncover a statistical correlation that says whatever you want it to say.
Predicting the future
Clearly, everybody wants to pick a winner and avoid a loser, and nearly everybody has a theory about how to do it. From short skirts to fast horses and pretty models, the amateur indexes run the gamut, but at the end of the day, if predicting the direction of the markets were that easy, we'd all be rich! Instead of spending your time watching silly indicators or dreaming up tracking schemes of your own, you'd be far better off with dollar-cost averaging, buying when you can afford to buy and holding until you need the money.
