Unexpectedly Intriguing!
10 February 2014

Depending upon how we account for the echo effect from the Fiscal Cliff Deal Rally of a year ago on our growth rate calculations, investors have either split their forward-looking focus between two future quarters or are largely focused on 2014-Q2 in setting stock prices today. Mind the notes in the margin of the chart below, and we'll discuss this seemingly confusing state of affairs in the Analyst Notes section below....

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 7 February 2014

Analyst Notes

We're not joking when we indicate that we're do cutting edge analysis here at Political Calculations! Today's a good example, as we're working out, almost live, the methods we're developing to analyze the behavior of stock prices.

Having predicted and successfully accounted for the existence of the echo effect, where the noise generated by the "echo" of anomalies in the historic data we use as our base reference points in calculating the year over year growth rates of stock prices could otherwise obscure our ability to determine the future quarter to which investors have fixed their forward looking attention in making their investment decisions today, we now have a new dilemma: when do we really need to account for that factor?

It would make sense to account for it whenever we know that there is something anomalous in the historic data, which was the case with the one-year anniversary of the Great Dividend Raid Rally in late 2013, where if we didn't account for the effect, it would have instead appeared that stock prices would have entered a new, negative noise event, rather than have been largely focused upon the future defined by the expectations for future earnings in 2014-Q1.

But there isn't a similar historical shock in the historical data that corresponds to the Fiscal Cliff Deal Rally, whose anniversary period will continue into mid-April 2014. So are we getting any better insight into which future investors have focused by continuing to take the echo effect into account?

It's not so much a factor where anticipating stock prices is concerned. With the echo effect, it appears that stock prices are following a trajectory in-between the various alternate futures investors can select in setting their forward-looking focus.

The Alternate Futures for the S&P 500 in February 2014 with the Echo Effect Accounted For

As long as the "split" between the focus upon future quarters is relatively stable, we could pretty easily anticipate how stock prices will behave. The math we do gets easier though if we can dispense with accounting for the echo effect.

The Alternate Futures for the S&P 500 in February 2014 without the Echo Effect Accounted For

Without accounting for the echo effect, we could argue that investors have maintained their focus on 2014-Q2 in setting stock prices since shifting it from 2014-Q4 after 22 January 2014, with stock prices behaving consistently with that observation since.

Right now, we're leaning in favor of dispensing with accounting for the echo effect, except for when we know there's a major anomaly in the historic data that would skew how it appears stock prices are behaving by considerably more than the typical level of noise we observe in the data. Ultimately, we'll let the data decide what the best practice going forward might be.

For now, that means that we'll continue tracking both scenarios until we've developed a better understanding of the dynamics involved.

Thank goodness that what we do is only complex, which believe it or not, makes it simpler to understand. If what we do was complex and difficult, we probably wouldn't be at this point.

Labels: ,

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Indices, Futures, and Bonds

Closing values for previous trading day.

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button


The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links

Useful Election Data
Charities We Support
Shopping Guides
Recommended Reading
Recently Shopped

Seeking Alpha Certified

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.