Thursday, April 20, 2017
Fake Investment News
I just read an online investment article on a famous business website entitled “As Goldman Sachs (NYSE:GS) goes, so goes the market, history shows.”
This article made me hopping mad!
The article goes on to explain that since…. “Goldman’s stock is down 5 percent so far in April”……then the implication is that the market will be down as well.
The article explains that since Goldman entered the Dow Jones Industrial Average (DJIA) in 2013 it has been the most highly correlated stock to the DJIA, with a correlation coefficient of 0.78.
As you know, perfect correlation is 1.0 and perfect inverse correlation is -1.0.
The implication is, of course, that since Goldman is down, the market will be down because of a high 0.78 correlation.
This is fake news – let’s examine why
Below is a daily chart of the DJIA (green line) and Goldman Sachs (blue line) since GS entered the DJIA at the close September 20, 2013.
Here is why the article saying that if GS goes down the DJIA will go down:
Correlation is not static – the 0.78 correlation is the average over the entire 3.5 years, that’s meaningless information to an investor
The implication is that correlations are static – which is far from the truth
The black line below shows the 50-day moving average of the correlation between GS and the DJIA – currently that correlation is 0.41, not correlated very much
You can see that the black line swings around quite a bit – correlations are not static at all
GS soared when Trump was elected on the hope that bank stocks would have less regulation. The article does not mention that GS had risen fast and furiously since November 8, so a pullback could be expected
Visually comparing the blue line to the green line, anyone can easily see that oftentimes there is no correlation between the 2 lines, GS and the DJIA
Be careful what you read about investing, the majority of articles are fake news – a disservice to investors.
I was trained by PriceWaterhouseCoopers, CPAs to trust, but verify – that training has served me well.