Unexpectedly Intriguing!
June 27, 2016
Market Chaos! Run!

If you want to know where stock prices are going to go next, you need to know three things:

  1. What stock prices are today.
  2. What the expectations are for the amount of dividends that will be paid out in future quarters today.
  3. How far into the future investors are focusing when they make their investment decisions today.

If you know those three things, you have a decent shot at being able to predict the future trajectory of stock prices, assuming that no unusual amounts of speculative noise are at work in the stock market.

The first two are not hard to figure out. You can easily look up stock prices and also the values of the dividend futures contracts that will give you an indication of what dividends that investors reasonably expect will be paid out in future quarters. You can even uses contemporary news reports to identify how far forward in time investors are focusing their attention.

But the holy grail of being able to tell exactly where stock prices are going to go in advance of their getting there is being able to tell in advance when investors are going to suddenly shift their forward-looking focus from one point of time in the future to another. The occurrence of those kinds of events are quintessentially random in nature, and when they happen, they are often associated with sudden and very large movements in stock prices. Instead of just pacing along a garden variety random walk, they suddenly erupt into a full Lévy flight, or as we've come to understand them, a quantum random walk.

When they happen, they are a sight to behold. Last Friday's Brexit event provided an excellent case study for such an event, where investors appear to have shifted their attention from the distant time horizon of somewhere between 2017-Q1 and 2017-Q2 to the much nearer term future of 2016-Q4, with U.S. stock prices following along accordingly.

Alternative Futures - S&P 500 - 2016Q2 - Standard Model - Animation: 7 April 2016 through 24 June 2016

In the animated image above, we're showing the trajectory of the S&P 500 in the period from 7 April 2016 through 24 June 2016, with respect to the alternate levels it might be based upon the historic value of stock prices and the expectations for dividends in future quarters. [If you're reading this article on a site that republishes our RSS news feed and the animation doesn't play, you may want to click through to our site to see the original animation. For it to play, you will need to use a modern web browser with JavaScript enabled].

Every time you see the lines move in this animation, you're seeing the effect of the changing expectations for the future. When you see a sudden shift in the value of stock prices, you're seeing the effects of investors changing their time horizon in making their current day investment decisions in response to the random onset of market moving news events.

The Brexit event isn't the only dramatic example of this factor that directly drives the volatility of stock prices at work that we can present. It was also clearly apparent 10 months earlier, during China's August 2015 stock market meltdown - here's our animation of that event.

Alternative Futures - S&P 500 - 2015Q3 - Rebaselined Model - Animation: 28 July 2015 through 28 August 2015

Not uncoincidentally, the Brexit event represents the most the U.S. stock market has declined in a single day since the China event 10 months earlier. And in truth, the reason it wasn't bigger is because there is less of a difference in the expectations for future dividends between the respective future quarters that investors shifted their attention from and the future quarters they shifted their focus toward.

Update 27 June 2016, 6:00 PM EDT: And now, investors are looking more intently at the defacto current quarter of 2016-Q3....

Alternative Futures - S&P 500 - 2015Q3 - Standard Model - Snapshot 2016-06-27

Having already mentioned market moving news events, here are the headlines that caught our attention in Week 4 of June 2016 - the week when the Brexit vote caused investors to reel in their forward-looking attention to a less distant point of time in the future.

Monday, 20 June 2016
Tuesday, 21 June 2016
Wednesday, 22 June 2016
Thursday, 23 June 2016
Friday, 24 June 2016

Events like last Friday's are why we make a point of keeping track of certain contemporary news stories.

Previously on Political Calculations

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