This summer has brought about a plethora of different chit chat about where the market will be at the end of the year and beyond. Everything imaginable has been “predicted” by top analysts, from doomsday double dip warnings to easy street 5% GDP growth estimates. Amidst conflicting economic reports pouring in on a daily basis, the stock market can’t seem to make up its mind on a trend direction. With prices sitting right around their yearly opens, it’s anyone’s guess as to where we end up at the end of the year.
Rather than construct fancy models or use “math” to predict if the market will be green or red when all is said and done, we turn to The Underground Trader to give us the rundown on some critical indicators used by only the most savvy of professionals. Before investors can make intuitive predictions, we believe it is crucial to review the following:
(From The Underground Trader:)
THE SUPER BOWL PREDICTOR. I am sure everyone reading this is very familiar with the lore of Super Bowl winners predicting the annual market outcome. Until I just rechecked it, it had honestly not dawned on me that this year was a foregone conclusion before the game was even played. Both the Indianapolis Colts and New Orleans Saints had their roots in the original NFL, giving us a 77%chance that the markets will end the year higher than they began. Unfortunately, this is counterbalanced by the old Wall Street adage of "As January goes, so goes the year," with the S&P posting a 3.7% January decline.
THE MID-TERM ELECTION INDICATOR. This one has both bullish and bearish news. In mid-term election years, the average correction off the highs of the year is -19.3%. Since we have only seen a correction so far of about 14%, there is the belief that there is more pain to come. There are several pieces of good news, however. In the three quarters following mid-terms, the average market gain is +18.1%. Even better, in the five cases of first-term Democratic presidencies, the market has been up averagely +21% in the third year of the first term. Even S&P has acknowledged the mid-term election year trends, citing that the 4th quarter of a mid-term election year is generally up +6.3%, with the best-timed entries around November 1st.
THE MOVIE-GOING INDEX, THE HEMLINE INDICATOR, THE WOMEN'S HAIRCUT PREDICTOR AND THE LIPSTICK EFFECT. Although all four of these are largely lagging indicators, they are worth examining. 2010 movie revenues are projected to be up 4% but tickets sold down, giving a mixed signal. Higher revenues and tickets sold are bearish, the theory being movies are very popular 'cheap entertainment' in a down economy. The 'Hemline Indicator' is classic theory, but this signal is very bearish, with universal agreement that the Fall 2010 trend will be toward longer lengths, with perhaps Katy Perry, Britney Spears, and Paris Hilton running countertrend. However, 2010 hairstyles are definitely leaning toward longer, which is bullish. Estee Lauder reported a 5.2% increase for cosmetic sales for the fiscal year ending 6/10, which is bearish, as lipstick sales theoretically rise in down economies, as women spend on 'small luxuries'.
THE "HOT" WAITER/WAITRESS INDEX. This is one of my favorites, with the idea being that in major film/TV/advertising/convention markets such as NY, LA, Chicago, and Dallas, an increase in good-looking waiters and waitresses is a bearish indicator. These unemployed models, actors and greeters, the theory goes, often seek part-time restaurant service work when times are bad in the economy. I cannot locate any rigorous scientific proof to confirm or deny this trend for 2010; you will have to conduct your own field surveys.
THE GOLF INDUSTRY INDICATOR. It is a fact that the golf business thrives in good times and falls off with poor economic cycles. The golf industry is said to be historically one of the last to enter recession and one of the first out. The 2008-2009 period was of the darkest ever for golf, with virtually every measure falling off dramatically: rounds played, new courses being opened, number of active golfers, equipment sales, resort visits, etc. "GolfTown USA" Myrtle Beach, S.C. now has 20% fewer courses than 10 years ago. It is estimated there are 4-6 million fewer active golfers than in 2001. Callaway Golf recently reported sales and earnings which were slightly up versus a very poor 2009, but declined to give guidance for the rest of the year "due to the extreme macroeconomic picture". Sea Island Co., operator of famous luxury resorts in Georgia, filed for bankruptcy protection on August 11, 2010. The fabled Pinehurst golf resort of North Carolina, home of U.S. Open course Pinehurst #2, reportedly has been offering 50% off one night stay discounts to play the course (where greens fees had soared to over $400!). And I think we are all aware of the troubled golf course/real estate developments all over the country, but especially in California, Nevada, Arizona and Florida. All in all, I think the golf indicator still has to be leaning heavily towards the bearish camp.
THE HARVARD MBA INDICATOR. This theory states that there will be higher rates of financial services hiring at market tops and vice versa. Data for 2010 grads is not yet available but surprisingly 2009 Harvard MBA's entered financial services at roughly the same historical rate as the past several years. While it is indeed heartwarming (not) to see that the flow of excellent leaders to financial services companies will go uninterrupted, this is a bearish signal.
THE MEN'S UNDERWEAR INDEX. In "The Age of Turbulence", former Fed chair Alan Greenspan made famous his 'underwear index', noting that men's underwear is one of the first purchases put off in a recession. Now the mental image of Mr. Greenspan sitting in a bathtub contemplating men's underwear is a little disturbing, but there have been reports that after a very weak 2009, men's underwear sales have recovered in 2010. Hanesbrands recently reported "the second consecutive quarter of double-digit sales growth in men's underwear". We will have to put this firmly into the bull camp.
SUMMARY. As you can see above, there is a very mixed picture of these very key indicators for economic recovery and stock market performance. In fact, I think my headache is coming back even stronger after researching this post. Truth be told, Berkeley's Center for Innovative Financial Technology ran an exhaustive correlation analysis of endless data points and found that the strongest predictors of U.S. stock market performance are the number of buried treasures found in England and Wales and butter production in Bangladesh. My money is on the data concerning the mid-term election cycle. With most of the major investment houses predicting year-end gains for the S&P, this historical data might play out well, although a short period of interim pain could be a definite possibility.
Please don't waste our time with this kind of useless garbage.