Streetwise

Lauren Rudd

Sunday, February 6, 2011

The Predictors of Wall Street

The rampant discourse over the Nation’s economic future took a back seat to some more important forecasts this past week as fractious factions faced off over who was the superior groundhog on Groundhog Day.

Selected members of Marmota monax are yanked out of their comfortable dens to view their shadows, the purpose of being to predict the weather six weeks into the future. Staten Island Chuck found himself up against the powerful PR machine of Punxsutawney Phil who made is 125th annual forecast. Not to be outdone, General Beauregard Lee of Georgia, who holds honorary doctorates from the University of Georgia and Georgia State in "Weather Prognostication," took on Sir Walter Wally of North Carolina.

Wanting to take advantage of groundhog controversy, and armed with the fact that Florida is the only state within the continental United States not blessed with snow this winter, Florida’s tourism promoters devised an ad campaign indicating that Punxsutawney Phil had exited stage right in search of warmer digs. Phil's handlers were not amused, muttering something about, “trademark violation.”

Given the expertise most groundhogs have with the English language, not to mention meteorology, there is probably some doubt as to scientific strength of this forecasting approach. Unfortunately, many of Wall Street’s prognosticators are in the same league as your local groundhog.

Consider, for example, those who believe the Super Bowl can forecast the stock market. Supposedly accurate 34 out of 43 times, the Super Bowl predictor states that at least two of three major market indices will rise when an original NFL team wins. However, if a team from the old AFL wins, at least two indices from among the Dow Jones industrial average, the S&P 500 index and the NYSE composite index are headed downward.

You can relax, your portfolio is safe. The Green Bay Packers meet the Pittsburgh Steelers in Super Bowl XLV on Feb. 6. This year it will not matter which team wins because both have roots in the old NFL.  The Steelers moved to the American Football Conference in 1970 therefore a market rally is in the offing.

Furthermore, this year's predictor comes as the Dow has recently closed above the psychologically important 12,000 level, a number it has not surpassed since June 2008. Though stocks have surged in the last six months, they continue to be dogged by questions over their efficacy given the current state of the housing market, inflation, consumer spending and a stubbornly high unemployment rate. Not to mention the latest world crisis that is driven, some say, by rising commodity prices in general and food prices in particular.

Yet, last year's predictor was on target again after the New Orleans Saints, an NFC team, won Super Bowl XLIV. Nonetheless, skeptics scoff that the Super Bowl Predictor is as valid as the old theory that markets rise and fall with women's hemlines. I would have to agree, despite a bit of yearning for the late Madam Marie and her crystal ball.

Yes, I am aware that there is a modicum of statistical data that correlates various aberrations in the financial markets with certain calendar or non-financial events. A good example is the so-called January effect, a calendar-related anomaly where stock prices supposedly increase during the month of January.

Despite the adherence by some to a medley of unorthodox ideologies, the Street’s diviners are a rather tame bunch when compared with the lively group tasked with bringing order to financial markets, as evidenced by the recently released Financial Crisis Inquiry report. Gail Collins of the New York Times once affectionately referred to them as a pack of rabid otters.