Skirts up, taxi chat, buy, sell: here's the running inside out
There are several rather colourful sharemarket indicators, most of which emanate from the US.
They include the hemline index: skirts up, market up. Who wins the Super Bowl: if a National Football Conference team (NFC) wins then the market goes up that year; if an American Football Conference (AFC) team wins, it goes down. This indicator has an 83 per cent correlation apparently.
Then there are restaurant prices in New York. The higher they are the more dangerous the market. Then there are CNBC ratings. When CNBC ratings exceed soap operas the market is about to peak.
Then there's an indicator you can try at home. It's the "Cocktail Party Chatter Index". It works the same for the sharemarket as it does for the housing market. If your guests arrive and leave and never mention either, buy both. If they walk in going, "How's your portfolio going? Lovely house, what did this set you back?", sell.
Most of these indicators can be dismissed, of course, under the "sun spot" principle. In other words they rely on the principle that when X happens Y happens so X must cause Y. It is one of my bugbears, along with people saying "Bless you" or whistling inanely while they do a menial task, people in the stockmarket with too much time on their hands purporting to add value by making stockmarket predictions out of past statistical coincidence.
Of course, the beauty of these indicators, and why they endure, is that they are simple. Humans, faced with uncertainty and questions, constantly grasp at the simple solution. We really want to believe that small effortless steps like getting our credit cards out will have a deep and lasting impact. I myself have a Fitness First membership. Haven't been in over a year.
Here are some more ordinary indicators that have developed to guide us in the stockmarket. Some useful, some humbug. Your choice.
■January effect: The statistically correct phenomenon that share prices go up in January (and December). September, by the way, is the worst average month.
■Sell in May and go away and come back on St Leger day: I reckon the only reason this stockmarket idiom survived was because nothing rhymes with April. Despite that, the sell in May maxim is, unbelievably, statistically correct, but it relates not to the market performance in May but the market performance in the six months between May to October compared with the better six months from November to April. St Leger day is a group 1 horse race in the UK every September that marked the end of the British social season and time for the aristocracy to return to more financial matters.
■Mean reversion: The idea that stocks that go up a lot will then fall, that stock prices revert to the mean or average. This is statistically wrong in the stockmarket. In fact, rising prices correlate more highly with future price rises than future price falls. In other words, you should buy what's going up and sell what's going down because what goes up doesn't come down, it goes up.
■P/E and yields: PEs and yields only tell you what analysts are currently forecasting, but the real money is made in the stocks the analysts have got most wrong. PEs and yields don't help you with that. Buy cheap stocks and you will be buying all the stocks people don't like. They are cheap for a reason, usually because the earnings forecasts are too high.
■Volatility: Low volatility is an indicator of good future returns, high volatility is an indicator of poor future returns. Statistically a sharp rise in volatility can be associated with a sharp drop in prices and a fall in volatility correlates with subsequent rises in prices.
■Insider buying: Aggregate buying of directors of their own companies is seen as a lead indicator of equity markets. The "insiders" know before we do. Makes sense. In fact, talking to an experienced resources director the other day this was one of his abiding trading principles for resources stocks. Sell when they do.
■Taxi drivers: If they so much as mention the stockmarket, sell!
■Newsletters: Another contrarian indicator. The more bullish they are the more negative the outlook. I'm a bear at the moment, which is about as bullish as it gets.
All that aside, there is still one fail-safe indicator, proven to be 100 per cent effective in 100 per cent of cases. Hindsight. Harry is never wrong.