It’s an pressing query, because the Citigroup Financial Shock Index (CESI) has been destructive for 2 months now, following an unbroken constructive stretch for greater than a yr. The CESI measures the extent to which the newest financial information deviates from the Wall Avenue consensus. The previous two months of constantly destructive CESI readings due to this fact imply that the financial information, on steadiness, has been worse than anticipated.
Is it excellent news or dangerous for inventory traders that latest U.S. financial information releases have been considerably worse than anticipated?
The most recent studying from the Citigroup Financial Shock Index (CESI) is minus 29.2. Simply 10 days in the past it was much more destructive, at minus 61.7. Its common during the last 18 years is 4.6.
There is no such thing as a consensus among the many advisers I monitor about what these newest readings imply. Some consider it’s excellent news, on the contrarian concept that the worse-than-expected information constitutes a “wall of worry” that the U.S. bull market can climb. Others argue which you could’t sugar-coat worse-than-expected financial information.
To assist resolve their disagreement, I analyzed day by day CESI knowledge again to 2003. Particularly, I measured its correlation with the S&P 500’s
return over the next month-, quarter-, six months, and one yr. I got here up with nothing that met conventional requirements of statistical significance.
A abstract of what I discovered is plotted within the chart under. Discover that the S&P 500’s common return is nearly the identical no matter whether or not the CESI is constructive or destructive, trending upward or downward.
These findings should not a criticism of the CESI itself. Citigroup created the index as a useful gizmo for overseas trade merchants. Citigroup has said that the CESI “is an ideal instance of distinctive proprietary design which has nearly no bearing on those that talk about it… It was not meant for use for inventory costs.”
There’s a broader lesson right here for us to study as properly: We have to topic our intuitions to empirical actuality checks. That’s particularly vital when our hunches appear so clearly true — as is the case relating to whether or not the financial information is coming in higher or worse than anticipated. Inventory market historical past is stuffed with expectations that have been assured to occur however which didn’t.
It may be tedious plowing by way of large databases to see if a sample actually exists. However it’s definitely worth the effort. Although being statistically rigorous doesn’t assure that you’ll beat the market, you most assuredly will lose to the market should you’re statistically sloppy and inconsistent.
Mark Hulbert is an everyday contributor to MarketWatch. His Hulbert Rankings tracks funding newsletters that pay a flat payment to be audited. He might be reached at firstname.lastname@example.org