Understanding price trends and the call for a short term pull back in the Nasdaq

With year-end rapidly approaching, we’re starting to get a lot of calls from strategists and market prognosticators for what Equities will look like in 2014.  The majority seem to be saying that the market will be up at the end of 2014, but with slower, single digit growth in the major U.S. Indices and many are anticipating a short term pull back.  These predictions are typically made based on a combination of macro level indicators, price trends, market fundamentals and the rich experience of strategists and economists.

EidoSearch also looks at price trends and market conditions to project market returns, but we apply cutting edge information processing techniques (pattern recognition) to objectively identify when we’ve seen these market conditions throughout history and to quantify what happens next.

“This financial crisis that we’ve been going through in the last five years has been one that seems to reveal the failure to understand price movements.” – Robert Shiller, December 2013.

Our tool provides investors with a way to statistically validate the impact of price trends and incorporate it into their investment methodology.  So, with that bit of background, we were interested in investigating the current consensus for a short term market pull back, and applied our predictive analytics tool to the Nasdaq Composite Index.

Using the EidoSearch engine, we took the last one year price trend in the Nasdaq Composite and searched for the most similar instances of this one year pattern in the history of the Nasdaq.  We found 29 similar price trends over the past 35 years, and in 80% of those instances the Nasdaq was down in the next one month and the average performance of all 29 instances was -3.49%.

See the charts below.

Last one year price chart of Nasdaq Composite.

Chart of the 29 highly correlated historical instances of this one year price pattern for the Nasdaq, and the

average relative return of the Nasdaq over the next one month historically of -3.49%. 

Spread of the 29 similar instances of the current one year chart of the Nasdaq, beginning in 1978.

Watch for our Latest Market Call next Monday, where we will have our own top “projections” for 2014, applying our predictive analytics to the forecasting process.