The sports industry is about statistics and so is the stock market. Because there are so many variables—mostly uncontrollable—in both games, we like to think that we can wrap everything up in nice little boxes. Have enough of those boxes and look inside as many as possible and we might be able to predict results.
Unfortunately it comes back to British Prime Minister Benjamin Disraeli: “There are three kinds of lies: lies, damned lies and statistics.”
Take the University of the Philippines (UP) Men’s basketball team, for example.
“Fighting Maroon” hearts were singing with joy when the headlines read: “UP Maroons nail first UAAP Finals berth in 32 years.” Obviously, a new day had dawned and a new trend was in the making.
They lost the last game they played by a score of 99 to 81. Not only was that a decisive victory but in the second quarter UP was down by a dismal 28 to 13. Terrible game. Maybe we need to open another one of those statistics boxes to find some rays of hope…or maybe not.
If we ignore the UAAP 1939-1940 season when the Maroons were playing as “University of the Philippines-Manila,” UP has the worst record of the eight UAAP schools. The trend is not broken. It only burped momentarily.
The point is that the numbers are truthful but the interpretation of the numbers is what creates the “three kinds of lies.”
Remember the famous Indian fable about the six blind men that come across different parts of an elephant? Each blind man creates his own version of reality from his individual perspective. None of them happened on the elephant’s genitals or the fable might have been even more interesting.
Ask a local stock market investor what the market has been doing in the last three months. The most accurate—if not correct—answer might be: “The main index went down for a while and then it went up and then down and has been going up for a while.”
On September 14th, the Philippine Stock Exchange Composite Index closed at 7,413. By November 13th the PSEi had fallen to 6,843 or a relatively large 7.7 percent. As of December 12th the PSEi had gained 8.9 percent from the November low.
However, the reason that the analysis of “down, up, down, up” is accurate but not correct is this: The net change between September 14th and December 12th—nearly 60 trading days—is 0.50 percent. The correct answer to “what the market has been doing these last three months” is—“Nothing.”
Volatility is defined as “big swings in either direction” and there is a large school of thought that thinks this means something. There is an index called the “VIX” (CBOE Volatility Index) that, in turn, has led to the “Fear Index.” The idea is that the larger the volatility, the greater risk of a huge move higher or lower and the “fear” is that high volatility may lead to a crash. And while some see volatility as the number one market forecaster, in real life trading it means almost nothing. Black Swan author Nassim Taleb titled one of his papers “We Don’t Quite Know What We are Talking About When We Talk about Volatility.”
The fact that UP made the UAAP finals doesn’t change anything, at least for now. The fact that the PSEi went from 7,400 to 6,800 to 7,400 also means little. The local stock market has basically been going sideways since May 2018 as it did in 2015 and 2016. Trade the volatility but invest in the big picture.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.