Monday, September 20, 2010

How bloggers dissect a chart

Felix Salmon recently posted the following chart on his blog...

The chart, created by someone at the Bank of England, basically claimed that you could outperform using a simple monthly momentum strategy. I didn't buy it when I saw it. First of all, the valid comparison is a buy and hold strategy which isn't shown in the chart. I posted the comment regarding this, (as did many other commentators).
"Without seeing what a simple buy and hold line would look like, this graph is pretty meaningless. For most of the time period (before SPDRS) trading costs would kill you in the momentum strategy."

Felix then posted a new chart showing the buy and hold line.

Sure enough, it doesn't look like there is much there.

Then finally, the death knell to the whole thing..

It turns out that the original momentum chart used the average monthly prices. Something pointed out by another commenter. What this means is that, momentum "might" work a bit, providing you have the benefit of hindsight.

So the blogosphere puts to rest an embarrassing error by the Bank of England's "Executive Director of Financial Stability"