V.6:4 (157-159): Consensus indicators by Arthur A. Merrill

Consensus indicators by Arthur A. Merrill

There are scores of indicators and, at the same moment, some present an optimistic picture of the future while others are predicting trouble. Which indicator should be watched most carefully? When two indicators disagree, which one is the most likely to be right?

How can you gauge the past performance of indicators? Can it be put into numerical form to simplify comparison? Can indicators be combined into a consensus or model?

Market analysts usually consult the same battery of indicators but their conclusions are often quite different. I exchange my weekly report with the reports of 50 analysts. If I sorted the reports between optimistic and pessimistic, the two piles would be almost equal. I believe that personal prejudice is a large part of the reason for the diversity—optimistic analysts give the most weight to optimistic indicators; pessimistic analysts believe the pessimistic indicators.

Also, it's always a temptation to remember recent successes and give undeserved weight based on recent performance. A good example is October's "Black and Blue" Monday. It's easy to put on a pedestal the indicators that were bearish before the historic stock market crash. This is dangerous. One success isn't enough; it's called "anecdotal evidence."

Probably the most popular method of checking consistent accuracy is the graphical-eyeball approach. An indicator is charted and compared to the chart of a market indicator. Some analysts chart the indicator on tracing paper and superimpose it on a market index. The tracing paper can be moved forward to check the indicator's ability to predict the future of the market. Another popular method is to mark the indicator signals with arrows on a chart of a market average. This quickly shows success or failure.