Why Roubini Is a Better Indicator Than Peter Schiff

 |  Includes: SPY, VXX
by: Insider Monkey

The great stock market crash created a lot of losers. But it also created a few winners. Clearly, Nouriel Roubini has been at the top of the winners list. His popularity skyrocketed and for the most part, remained. Now, it may seem as though he’s on TV only when volatility spikes and the markets are crashing. The truth is, our Granger causality tests show differently- that with a very high degree of statistical significance, the Roubini Sentiment Indicator leads the VIX and the stock market by up to two weeks. Unbelievable…

When we published our results, Roubini immediately shared our article with his followers via twitter. We don’t blame him. Still, the results didn’t really make a whole lot of sense. Everybody knows that permabears like Roubini and David Rosenberg have been wrong about the stock market for the past 18 months. Back before they realized the economy had come out of the recession, they were predicting a loooong U shaped recession. Then they changed their tune to a ‘double dip recession.’

To his credit, Roubini never said “Hey, I predicted a double dip, and the economy slowed down, so I was right.” It was more like he was predicting defaults/depression for European countries like Poland, Hungary, Austria, Estonia, Latvia, Lithuania, and finally the PIIGS (Portugal, Italy, Ireland, Greece, Spain). If We asked Roubini to guess which number we picked between 1 and 10, and gave him 9 trys, he probably would have gotten it right.

Then, why would Roubini’s popularity be a leading indicator for the VIX and the stock market? Roubini’s popularity is only a short term indicator. The Roubini Sentiment Indicator is a proxy for the media’s and investors’ pessimism. Whenever the media feels pessimistic about the market, they do pieces which cite permabears, including Roubini. This affects investors’ psychology and starts a chain reaction that leads to lower stock market returns in the following week or two. As long as Roubini’s credibility is above a threshold, his popularity will continue to be a successful stock market indicator.

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Many of our readers told us that Roubini’s prime time has passed and the Roubini Sentiment Indicator is not a reliable indicator anymore. Yes, he may have been more popular during the Great Recession. But when we focused in on only the past 12 months, our results show that the correlation coefficient between the Roubini Sentiment Indicator and the S&P 500 Index had been -0.51 during that whole time. The correlation coefficient was 0.68 during the past 4 years. So, the Roubini Sentiment Indicator’s predictive power has weakened but is still at a significant level.

Another alternative we have is the Peter Schiff Sentiment Indicator. Schiff came to the spotlight a little after Roubini. Schiff trailed him for a while, but recently his popularity declined at a slower rate than did Nouriel Roubini’s. So we also calculated the Peter Schiff Sentiment Indicator’s correlation coefficient with the market. It was -0.42 during the past 12 months. Peter Schiff also appears to be a good proxy for the media’s and investor’s sentiment, but not as good as is Roubini’s. It seems Roubini is a better indicator than is Peter Schiff.

Disclosure: Author long SPY