We think we may finally have a decent handle on how to compensate for the echo effect in our forecasting of the S&P 500's future.
To briefly recap the story to date, our index value forecasting method incorporates historic stock prices from a year earlier as part of the base reference points from which we project the future value of stock prices. The "echo effect" is something that results from our use of that historic data, particularly when stock prices had experienced a "noise event". A noise event is when stock prices deviate from the level that their fundamental underlying driver, the change in the growth rate of their trailing year dividends per share expected at a discrete point of time in the future, would otherwise suggest they should be set according to our model of how stock prices work.
Those deviations from various noise events are clear when you compare what our model had forecast against the actual trajectory that stock prices took in 2013.
We had previously come up with a filtering technique that initially showed promise, but which turned out to not be able to handle the situation where the stock market had undergone a volatile series of disruptive noise events, which was the case from mid-June through mid-October 2013. So we pulled the plug on it last month.
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