Unexpectedly Intriguing!
08 October 2015

On 21 September 2015, we wrote:

From a volatility standpoint, given the amount of vertical space between the likely trajectory of stock prices for investors focusing on either of these two future quarters, we can now reasonably expect that there will be quite a bit of volatility in the near term, which is due to the quantum-like characteristics of how stock prices behave.

That volatility will be highly dependent upon new information entering the market, as stock prices move rapidly from one expectation level to another as investors shifting their forward-looking focus from 2015-Q4 to the more distant future and less positive future of 2016-Q1 and back again in response to news events.

Keep in mind that this is not something new. We have already tracked one such Levy flight this year, and the Fed has created an environment where we may well see others in upcoming weeks until investors might have sufficient reason to stabilize their focus on one particular point of time in the future.

That is assuming that there will be no changes in the fundamental driver of stock prices: rational expectations of the amount of dividends that will be paid out in future quarters, which have been remarkably steady through most of the year to date. If and when that might change, the likely trajectory for stock prices will change dramatically, as we've previously observed back in late 2008 and 2009, and more recently in December 2012 and 2013.

And as for what to expect this week, in the aftermath of these events, and not considering any new information that what we have at the close of trading on 18 September 2015, here you go:

Alternative Futures - S&P 500 - 2015Q3 - Rebaselined Model - Snapshot on 2015-09-18

[Update 9 October 2015: Changed "hand" to "have" in paragraph preceding chart. Damn you autocorrect!]

Here is what the updated version of that chart looks like now that we're past the end of the third quarter of 2015:

Alternative Futures - S&P 500 - 2015Q3 - Rebaselined Model - Snapshot on 2015-10-01

And here is what the succeeding chart for the fourth quarter of 2015 now looks like, as of the close of trading on 7 October 2015:

Alternative Futures - S&P 500 - 2015Q4 - Rebaselined Model - Snapshot on 2015-10-07

The large and pronounced changes we have been observing in the level of stock prices is the result of what we'll call our quantum random walk hypothesis, which largely resolves and reconciles the fundamental and apparently incompatible differences in the theories advanced by such economists as Eugene Fama and Robert Shiller for how stock prices behave, for which they were jointly awarded the Nobel prize in economics (or whatever it's really called) in 2013.

And since today is the official beginning of the previous quarter's earnings reporting season, where we have the very real potential to see a major shakeup in the future expectations for the S&P 500's dividends per share, we might soon see how changes in the fundamental driver of stock prices that defines the "quantum levels" of future stock prices affects their likely projected trajectories.

Welcome back to the cutting edge!

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