Taking The Fork in the S&P 500's Future

Political  Calculations
Posted: Aug 04, 2014 12:01 AM

Earlier this week, we wrote what was perhaps one of the most timely posts ever in the history of Political Calculations, as we discussed how we may have finally succeeded in compensating for the echo effect in our forecasting method for anticipating the future of the S&P 500:

Here's the result of our rebaselining the calculation to incorporate the historic stock data in our projections of today:
Rebaselined Alternative Future Trajectories for the S&P 500, 30 June 2014 through 30 September 2014, Snapshot on 25 July 2014

Suddenly, we find that stock prices would appear to be once again predictable, currently following the trajectories that are consistent with investors continuing to be focused on either 2014-Q3 or 2015-Q2 in setting current day stock prices - just as they were before we ran into the echo effect using our regular one-year ago base reference period!

But now, we appear to have reached a fork for that trajectory, where we'll soon determine which future investors are really focused upon.

That's become relevant again today because from all appearances, the S&P 500 followed Yogi Berra's advice about what to do when facing a fork in the road: it took it!

Or more accurately, after a few days of seeming to split their forward-looking focus between the futures defined by the expectations associated with 2014-Q3 and 2015-Q2, investors really focused upon 2015-Q2 in setting today's stock prices.

Rebaselined Alternative Future Trajectories for the S&P 500, 30 June 2014 through 30 September 2014, Snapshot on 31 July 2014

Meanwhile, the news reports of the day's trading activity would suggest that nobody else had any sort of handle on what was driving stock prices, so they were more or less randomly pointing in all directions:

Investors said an upbeat reading from the labor market sowed concerns about the Federal Reserve possibly raising rates quicker than many investors anticipate. Some pointed to disappointing earnings reports from U.S. companies Thursday, which disrupted what has been a strong season for corporate profits. Others pointed to Argentina's default on some bonds and fresh worries that the euro zone's central bank will need to provide more stimulus.

The Dow Jones Industrial Average fell 317.06 points, or 1.9%, to 16563.30. The S&P 500 shed 39.40 points, or 2%, to 1930.67 and the Nasdaq Composite Index dropped 93.13 points, or 2.1%, to 4369.77.

"There are so many things that are coming to a head simultaneously," said Joe Spinelli, head of Americas single stock trading at Deutsche Bank. "Clients are wanting to get into a position to ride out any storm that might pop up."

In reality, investors were adapting their investment portfolio holdings to match the fundamental expectations that coincide with the specific point of time in the future that they've focused upon in making their investment decisions today. And on 31 July 2014, that meant a sudden decline in stock prices, as the S&P 500 suddenly caught up to the future investors had focused upon.

The only real randomness in how stock prices behaved was in the timing for when that shift in focus occurred. How much they would change was not so random considering how stock prices really work as a quantum phenomenon.