Unexpectedly Intriguing!
26 November 2018

"Essentially, all models are wrong, but some are useful."

Those are the immortal words of statistician George E.P. Box, which underlie every bit of serious analysis that seeks to approximate real world processes and outcomes with math. Including our own.

What keeps models useful is to recognize when and how they're wrong. For example, many years ago, we recognized that the projections of our dividend futures-based model of how stock prices work could be skewed off target because it incorporates historic stock prices as the base reference points from which it projects future stock prices. If those historic stock prices were to include a period of abnormally high volatility, the accuracy of the model's projections would be negatively impacted - skewed off by the echo of that past volatility.

With past volatility events proving to be poor predictors of future stock prices, we experimented with different methods to compensate for the echo effect in our model, eventually settling on a very simple method of "connecting the dots" to bridge across periods where we recognized that the accuracy of our model's forecasts would be affected by the echo of past volatility. We show those adjustments as a red-zone on the forecasting charts we produce.

In our latest redzone forecast, which covers the period from 7 November 2018 through 7 December 2018, we assumed that investors would remain focused on the future expectations associated with 2019-Q1. In the Thanksgiving holiday-shortened third full week of November 2018, something changed for the S&P 500 (Index: SPX) to break that assumption, and what had been our stellar track record for previous redzone forecasts....

Alternative Futures - S&P 500 - 2018Q4 - Standard Model with Redzone forecast assuming investors focusing on 2019Q1 from 7 November 2018 through 7 December 2018 - Snapshot on 23 Nov 2018

Instead of falling within our redzone forecast, the trajectory of the S&P 500 has dropped below it, seeming to follow the unadjusted trajectory associated with investors focusing their forward-looking attention on 2019-Q1. That's almost certainly a coincidence, which we'll be able to confirm in the next several weeks.

Instead, we believe that investors have shifted a portion of their forward-looking attention toward a more distant point of time in the future, 2019-Q3, which appears to have been prompted very specifically by a change in the expectations for future revenues at Apple (Nasdaq: AAPL) that occurred on Monday, 19 November 2018, which resulted from the company cutting production orders to suppliers for its newest iPhone models. That news was sufficient to dim the prospects for the company's profits well into the future, and since Apple is still the single largest company within the S&P 500, the news was also sufficient to shift the trajectory of the whole index lower as investors adjusted their focus accordingly.

And that's how we can get useful insights from a model that's wrong! Meanwhile, here are the other headlines that stood out to us from the holiday-shortened week....

Monday, 19 November 2018
Tuesday, 20 November 2018
Wednesday, 21 November 2018
Thursday, 22 November 2018

Elsewhere, Barry Ritholtz listed positives and negatives for Thanksgiving Week of 2018, and also has introduced a catch-all tag for archiving all his weekly succinct summations for the major economy and market-related events he tracks each week.

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

Stock Charts and News

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.