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.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.
Today, at 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for October 31st, 2014 | John Ransom
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for October 29th, 2014 | John Ransom