Thursday, September 17, 2009

"Pub Power" Signals a Buy for Equities

I love catchy / data-mined equity buy signals with decent explanations. My personal favorite had been the recently renamed Demi-Ashton buy signal (previously known as the boring Middle-Young or MY ratio... yawn). BUT, may I present the latest and greatest... the "Pub Power" signal.

What is the "Pub Power" signal you ask? It is the relative strength of 'food establishment and drinking places' sales vs. grocery sales (as expressed in year over year terms). The relevance? Well, the data seems to suggest that "Pub Power" = Strength in the Dow, one year forward.

But, any good / catchy buy signal needs an interesting explanation, so here goes (and feel free to pile on in the comments section). The relative strength (i.e. demand) of restaurants relative to cooking at home shows the following characteristics:

  • Consumer confidence
  • Exuberance
  • Spending power
  • Wealth
Or something like that... On the other hand, when times are tough, individuals are more likely to eat at home, causing year over year sales at pubs to decline relative to grocery stores.

Here's another look at that data through August 2008 data (thus including the August 2009 Dow).

That's a 16 year average return of a 9% annual Dow return since 1993 (as far back as I could get the retail sales data) when the Pub Power > 0 and -1.7% annual Dow return since 1993 when Pub Power < 0.

Source: Census