Yesterday morning, we learned of Rupert Murdoch’s bid for Time Warner for as much as $85 dollar a share, or more than $75 billion. Soon after, the annotated chart below showing the Standard & Poor’s 500 Index began circulating on trading desks and websites, suggesting Murdoch’s offer signaled a market top.
It is such a misleading piece of statistical tripe that it cried out for a rebuttal. It is a prime example of confirmation bias writ large, another in a long line of weak analyses, wishful thinking and intellectual laziness that pollutes the Web.
There are numerous ways to debunk this bilge water, but for brevity’s sake, I will limit my wrath to a few quick lines of attack: Cherry picking, bad correlations, small data set, and randomness.
If Twenty-First Century Fox chief Murdoch only made three acquisitions, and they all occurred at or near market tops, the chart would be much more interesting. Of course, Nassim Taleb would then wag his finger at you, warning that you are being fooled by randomness.
Your pattern recognition sub-routine is again deceiving you. Continues here