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Since the dawn of trading stocks, investors have attempted to predict the direction of the markets, making calls based on everything from solid research to gut instincts. In this vein, market indicators have been developed, acting as tools to help investors predict future market movements.
Although countless indicators of varied usefulness exist, there is a special breed that finds itself off the beaten path, for obvious reasons. Some are humorous, others scientifically studied, but all have one thing in common: they attempt to predict future market performance. Not to mention that they can be rather entertaining.
With that said, keep in mind that using these indicators is at your own risk, although the high degree of reliability (not to be confused with validity) of some may surprise you...
By Paul Toscano
Posted 18 Feb 2009
This theory suggests that the direction of the economy can be predicted based upon the average length of hems in that year’s new fashion lines. If skirts are short, markets are on the rise. Conversely, if skirts are long, markets are heading down.
The rationale is that longer skirts are worn when general consumer confidence is low, demonstrating fear and lacked spending. When skirts are short, consumer optimism and confidence is high, indicating a bullish market.
Though not a generally accepted indicator, major shows such as NYC’s fashion week do offer a unique perspective into the global psyche; where designers from around the world, working independently, come together to unveil that year’s designs. These designs are at least in part influenced by the culture and economy surrounding the designers.
In early 2008, from London to New York to Milan, reports suggesting the drop in hemline length were abundant… and so were the references to the stock market. Looking back to reports from 2007 and 2008, the headlines are eerily prophetic: Reuters Sept 07: Low Hemlines Spell Bad News for the Market?
This simple, one-for-one indicator suggests that a white Christmas in Boston means a rise for stocks the following year. The most common example is in 1995, when more than 11 inches of snow fell on Boston. In 1996, the S&P was up more than 20 percent, and the Dow increased more than 26 percent, so what’s the correlation?
In reality, there is no statistical correlation between Boston’s Christmas snowfall and positive performance in major market averages, which is why it is also called the “BS Indicator,” named by some NY Yankees fans on Wall St.
In the past 30 years, Boston has seen 9 White Christmases, according to the Farmer’s Almanac. In the years following, the S&P 500 was up 5 times (+14.99 on average), and down 4 times (-7.83 on average). It seems the Boston Snow Indicator may be more of a coin toss and less of a solid indicator.
The Super Bowl indicator is based on the belief that a championship for an AFC team predicts a decline in the stock market for the coming year, and a win for the NFC means the stock market will be up. The NFC is comprised predominantly of original NFL teams, from before the 1970 merger with the AFL. (Original NFL teams that switched to the AFC when the AFL and NFL merged include the Steelers, the Colts and the Browns.)
The indicator has been pretty consistent over the years when it comes to the original NFL/AFL teams. Of the 22 NFL wins, with Dow and S&P 500 have been up 12.3 percent and 12.2 percent on average, while over the 14 AFC wins, the Dow and S&P have been down 4.8 percent and 3.6 percent, respectively. These numbers don’t take into account expansion teams that have been created since the merger.
Luckily for this year both Super Bowl contenders - the Arizona Cardinals and the Pittsburgh Steelers - were both original NFL teams. Although there may be no logical connection between Super Bowl winner and the stock market, the results have certainly been consistent. For more stats on this indicator, check out this post on our By The Numbers Blog.
Of note, for each of the five prior Steelers Super Bowl wins, the Dow has had double digit gains.
The newest indicator on this list is rooted in pop culture — it's got a good beat, and you can dance to it.
Phillip Maymin, assistant professor at the Polytechnic Institute of New York University, released a study in late 2008 that analyzes the connection between volatility in the market and trends in popular music.
Maymin analyzed the “beat variance” in songs from the Billboard Top 100 chart using sophisticated computer software, looking at songs from 1958 through 2007. He found that songs with high beat variance — individual tracks that shift tempo throughout the song — are preferred in times when market volatility is low. When volatility is high, people tend to prefer songs that have a more consistent beat.
Mayman suggests that high beat variance is more intellectually draining, and thus less popular during times of high volatility. His paper also analyzes trading volatility based on his findings, and the potential profitability of the indicator.
Can this trend be trusted? Maymann himself suggests that mood is the key driving force of this indicator, which has been known to affect markets. It certainly is the most scientifically approached indicator on this list…
The original scientific paper can be downloaded here.
This bearish indicator is based on the idea that when individuals feel uncertain about the future, they turn to less-expensive luxuries, most notably vanity items such as lipstick. The trend suggests that lipstick sales increase during a recession or times of economic uncertainty. The use of lipstick has also been suggested to be a “mood enhancer,” which would understandably function to lift spirits during depressing times.
According to the New York Times, this term was coined by Leonard Lauder, the chairman of Estee Lauder, who noticed a surge in lipstick sales in the downturn following the September 11 attacks. How has this indicator held up in 2008? The New York Times reported in November that sales of cosmetics had risen more than 40 percent in the last months of 2008 with other sources reporting cosmetics sales up across the board.
This is a long-term indicator founded in quite a bit of logic. It looks at the percentages of Harvard Business school graduates entering into various market-sensitive jobs, such as investment banking, private equity and securities trading. The indicator signals investors to exit the market if more than 30 percent of graduates take these jobs, while investors should go long if less than 10 percent of graduates move into these fields.
The indicator is meant to demonstrate long-term trends based on the attractiveness of Wall Street jobs. The idea is that the more Harvard grads entering the financial job market, the more likely the market is nearing a top, or building a bubble that is about to burst. Conversely, when markets are lagging, fewer want to enter Wall Street and it may indicate a buying opportunity.
The indicator was created by Roy Soifer, a Harvard business graduate. In 1987 and 2000, Soifer’s index gave sell signals, and the S&P moved +2.04 percent and -9.78 percent respectively. However, the 1987 call seems rather prophetic, given the stock market crash that Fall.
First recognized in the 1980s by Don Keim, a graduate student from the University of Chicago, was the January effect. He observed the phenomenon dating back to 1925, where small cap stocks outperform the broader market and mid- to large cap stocks in the month of January.
The trend arises from a historical sell-off trend that occurs in December, as private investors (who tend to disproportionately hold small cap stocks) sell their securities, creating tax losses in order to offset capital gains. The January effect results as these individual investors will reinvest following a drop in prices after the relatively artificial surge in sell orders.
However, the January effect has been less pronounced in recent years, with the increased popularity of tax-sheltered retirement funds, which remove the incentive to sell for a tax loss at the end of the year.
There is also the idea that according to the direction that the market takes in January, the rest of the year will follow. “As goes January, so goes the year.” For more information on this, check out a recent post on our By The Numbers Blog.
When times are tough, headaches abound… and aspirin sales go up! The idea is that, as a lagging indicator, stock prices and aspirin sales are inversely related. So, when the sales of asprin go up, the market goes down. This is generally considered more of a humorous theory than a concrete strategy.
How did this lagging indicator perform in 2008? Wyeth reported that sales of pain/headache reliever Advil were up 2 percent (to $673 million) compared to a year earlier, noting a sales increase of 8 percent (to $171 million) in the fourth quarter. So, at least for 2008 there seems to be a correlation, but then again, the aspirin count indicator has never been formally studied.
The Sports Illustrated Swimsuit issue is a hot topic in the world of economic indicators.
First, there is an indicator based upon the nationality of the cover model. It suggests that when the cover model is from the United States, the S&P will show a return for the year above it’s historical rate. With a non-American cover model, the S&P 500 will underperform for the year.
From 1979 to 2008, the average return of the S&P 500 was 8.87 percent. When the cover model was American, the average annual return of the S&P 500 was 13.9 percent. With a non-American cover model, the average annual return for the S&P 500 was 7.2 percent.
Going against the theory, the best performing year for the S&P 500 was in 1995 (up 33.56 percent) when the cover model was Daniela Pestova, of the Czech Republic. The worst performing cover model was also a victim of the financial meltdown, American-born Marissa Miller saw the S&P plummet 38.49 percent during her cover year. This year’s cover: Bar Rafaeli, an Israeli citizen.
There also appears to be a trend in the hair color of the cover model. For more, check out this post from our By The Numbers Blog.
The Pallet/Cardboard Box indicators are straightforward and rather logical. Basically, the higher the demand for corrugated boxes and shipping pallets — necessities when shipping products to customers — the higher the demand for the products being shipped.
Today, virtually everything purchased on a large scale at some point was in a box or shipped on a pallet. Known followers of the cardboard box indicator include Alan Greenspan, who was known to look at cardboard box numbers, among other things, for insight into shifts in the economy.
In today's down economy, numerous businesses in the corrugated box industry are posting losses. Among them was European firm Smurfit Kappa Group PLC, the continent’s largest producer of the cardboard boxes. Smurfit’s revenues fell by $269.9 million in 2008 from 2007, with operating profits falling 50 percent, according to company documents.
It seems the cardboard box indicator can give some pretty reliable insight into the ebbs and flows of the markets. In a similar approach, many look at the transports to prognosticate that increased shipping implies a growing economy.
Developed by The Economist, the Big Mac is dubbed “the world’s most accurate financial indicator based on a fast-food item.”
The indicator is based on the theory of purchasing-power parity, which is the notion that one dollar should buy the same amount of product in every country. The Economist suggests that in the long run, the exchange rate between two countries should reach equilibrium, and the ability to buy the same items in each country should remain in-sync.
The Economist selected the Big Mac for its ubiquity — it is sold in about 120 countries. The index, however, only lists Big Mac PPP levels in 34 currency zones, according to their most recent report. The comparison of actual exchange rates with the Big Mac’s purchasing power parity ostensibly sheds light on whether a currency is under- or over-valued. The Economist provides a thorough history of its index on its Web site.
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