Unexpectedly Intriguing!
20 November 2013

In Part 1, we explored the challenges associated with filtering out the noise of the past in calculating the change in growth rates of stock prices. We left off by identifying a period of time in the stock market, some 10 months ago, that might work as a good base reference point from which we can quantify the amount of echo effect present in our regular year-over-year growth rate data.

Let's get straight to the results. Our first chart shows the change in the annualized growth rate for stock prices using that 10-month base reference period against our usual change in the year-over-year dividend growth rates:

Change in Growth Rates of Expected Future Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, 10-month base

That red bracket gives an indication of the amount of the echo effect that is currently present in our regular model of stock prices. Speaking of which, the chart below shows what that looks like going into today:

Change in Growth Rates of Expected Future Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, through 2013-11-19

Now, the reason we're going through this exercise is to work out how much do we need to take the echo effect into account in using our dividend futures-based model to project what today's stock prices in the absence of current-day noise. Is our model self-correcting, where we can simply use the year-over-year growth rate data, as we would seem to be able to do so far in using last year's stock prices along with the expectations for dividends to be paid in 2014-Q1? Or do we need to make some adjustments to account for the effect of long past noise in the market?

We don't know the answer yet. We're excited to find out as this all plays out!

Finally, before any of our readers at Seeking Alpha get all upset at whatever again, keep in mind that we're the only market analysts who do theoretical development and analysis in public view. We don't work with a safety net and there's a real potential that our previous thinking may turn out to be wrong.

For all our other readers, that we very rarely ever are is probably lost upon that group.

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