Correlation does not always mean....correlation.

Just a quick post.
I read a lot of stuff, mostly financial, and I'm always interested in others' views. However, I read everything with a critical mindset, especially when there's a paid service being touted. Nevertheless, sometimes 'free' content can highlight some interesting facts about the 'expert' analysis.
I just read this post and noticed something that I decided to share, merely because it is so obvious, it made me smile.
There's a chart within the post which shows the KBW Bank Index plotted against the gold price over the last couple of years. The writer makes the point that the two have been negatively correlated for a long while, and has placed some arrows on the two charts to illustrate this point, with green up arrows on the bank index, and red down arrows on the gold chart. Very easy to follow for the simple souls that might be seeking 'expert' views. (Disclaimer: I am colour blind, but the arrows do look red/green to me).
Trouble is, the arrows don't align at all! Ok, well to be fair, one pair of arrows does align, but two pairs don't align at all, in fact they show that the two charts are positively correlated on those two occasions. Weird eh? Here's the chart with my vertical lines added:
What's most interesting about this little slip up is that the writer often criticises sloppy analysis elsewhere, but isn't immune to it himself. No one is perfect of course (perhaps his ruler slipped), but some are more sanctimonious than others.
Good luck.

3 comments:

Gary from biiwii.com said...

Good catch. But I'd say that the arrows are the anomaly within the 'anti' trend between the two. The chart's point stands.

As for the sanctimoniousness, I agree. I can get intolerant sometimes. I'd like to think that it is more that I appreciate sound analysis, but whatever... you got me on that.

As for the original post, its point was that the Banks and Gold can go together (unlike for much of the last few years) under certain conditions.

Gary said...

We're all human Gary, and so prone to errors. Sound analysis, well, that's often a subjective call, and evident (or not) with the benefit of hindsight.

As for banks versus gold, we shall see.

Gary said...

An apposite post from Bron:

http://research.perthmint.com.au/2015/05/22/gold-price-forecasting-the-hard-core-academic-way/