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Minyan Mailbag - Framing



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column, written in response to Prof. Reamer's morning piece, with that very intent.


Can we see Cisco (CSCO) going higher while the broad market has very bearish action?....Doubt it.

Minyan David


CSCO is down 39.5% from its January 2004 peaks to present. For its part, the NDX is down 4.9% in that same time frame, this after putting in a new annual peak in 2004 (which obviously CSCO did not). The statistical correlation between CSCO and the NDX from January 2004 to present is -0.15. In other words, no correlation whatsoever. Perhaps that correlation will change, and become tight and positive with both the NDX and CSCO falling hard over the next several months. But you could have asked with equal incredulity in January 2004 how CSCO could decline 39.5% WITHOUT the NDX declining meaningfully.

Of course, that's precisely what happened from 2004 to present: CSCO declined hard while the NDX did not.

The logical equivalent of what you are proposing is this:

"CSCO can go down without the NDX going down but the NDX can't go down without CSCO also going down."

Behavioral economists call the thought process behind conclusions like this "framing", and it is defined roughly as: analyses and conclusions that are dependent on how the issue and its parameters are worded, described or perceived rather than on a rational assessment of the facts given. To frame an issue is to narrow and/or bias its definition towards one given conclusion irrespective of the data given.

So can Cisco go up while the NDX goes down? Of course. Just as much as CSCO can go down while the NDX goes up.


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