Take a break from p/e ratios and macroeconomic statistics. There are plenty of less scientific and more entertaining alternative indicators that purport to tell you where stocks or the economy are heading. Here are some of the stockmarket's most popular urban legends.
Alternative indicators: magazine covers
Once the mass media cottons onto a trend, the market has probably reached a top or bottom. Magazine covers seem particularly prone to leaping on a bandwagon just as it goes off a cliff. In 1999, just before the dotcom collapse, Amazon's Jeff Bezos was named Time's Man of the Year. BusinessWeek has also had its fair share of howlers, including a cover entitled The Boom' in February 2000 and a notorious feature on The Death of Equities' in 1979 not long before the secular bull run of the 1980s and 1990s finally began. In early 1999, The Economist reckoned that oil, then at $10, could head to $5. Black gold promptly turned north and is now heading for $80 a barrel. Similarly, a recent cover proclaiming that Goldman Sachs was on top of the world appeared to usher in a period of turmoil at the investment bank.
Alternative indicators: the lipstick indicator
Coined by Leonard Lauder of the cosmetics group Este Lauder, this is based on the notion that lipstick sales rise when the economy is struggling because consumers forego big-ticket items and opt for small, affordable luxuries instead. So rising lipstick sales reflect a downturn. This indicator has been a relatively reliable signal over the years; Este Lauder's lipstick sales doubled after September 11th, for instance. US lipstick sales are tipped to rise by 38% by 2008, suggesting we are heading for trouble.
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Alternative indicators: the hemline indicator
Another indicator that seems to be rooted in pop psychology, this posits that when hemlines are high, good times lie ahead; as they fall, markets follow them down. Short skirts supposedly reflect exhibitionism and thus confidence, while long ones connote subconscious vulnerability. In the UK, hemlines are short at present, although the good times may soon be over: at recent catwalk shows in the US, autumn skirts were worn below the knee or longer.
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Alternative indicators: the US Superbowl indicator
This widely monitored sporting indicator refers to the annual end-of-season championship game of American football. In late January or early February, the winners of the NFC league and the AFC division face off. A win for the NFC team heralds an up year for stocks, while an AFC victory foretells the opposite. The Superbowl has been played since 1967 and the indicator has been right on 32 of 39 occasions an 82% success rate; over the past few years, however, it has been less impressive, proving wrong for four years on the trot between 1998 and 2001. Last year's victory by the AFC's New England was indeed followed by decline the Dow finished the year 0.8% down and this year the winner was also from the AFC.
Alternative indicators: the US electoral cycle
Market watchers across the Atlantic have noticed that stocks often move in a four-year pattern that seems to be related to the electoral cycle. History shows that stocks dip in the beginning of a four-year term as political realities and unpopular initiatives eclipse lofty promises. The final two years are better for stocks as the government typically stimulates the economy to fuel the feel-good factor. According to the Stock Traders Almanac, the average fall in the Dow Jones index from its peak in an election year to a mid-term trough has been 22%. But since 1914, the Dow has gained an average of 50% from the trough to the pre-election year high. Meanwhile, Standard & Poor's, crunching data from 1945, note that the second and third quarters of the second year of an administration produce the worst returns in a four-year term, averaging 2% and 2.2% respectively.
