Investor Behavior and EidoSearch’s Top 3 Projections for 2014
By EidoSearch
Every week since October 4th, we have posted a Market Call to our website (www.eidosearch.com) projecting where an index, future, currency or stock was headed. How often did we get it right? 6 out of 6 times, and we have 5 other calls that are well positioned to be proven accurate. Please click on the link below for a table of results:
EidoSearch – Projection tracker 12-16-13
EidoSearch applies cutting edge pattern recognition technology to quantify the way investors are likely to respond today by studying their behavior during similar market and trading environments in the past. We’ve used that technology, and our objective capture of investor behavior, to make our Top 3 Projections for 2014, below. But quickly, why should this technology work in the first place?
Investor behavior plays a significant role in determining the prices of publicly traded assets. At well documented times throughout history, it has even been a primary factor. This has strong academic backing, including Yale University Economist and 2013 Nobel Prize Winner in Economic Sciences, Robert Shiller, who earlier this month stated that behavior, more than anything, moves the market.
“The whole idea that the stock market reflects fundamentals is, I think, wrong. It really reflects psychology. The aggregate stock market reflects psychology more than fundamentals.”
Yet few investors have a meaningful factor or proxy for investor behavior. One issue is that there hasn’t been an effective means to objectively capture and utilize the impact of investor behavior until now with the application of pattern recognition technology. The other is that people might need more empirical evidence, even though they often see the divorce of fundamentals or macro indicators from the performance of their holdings.
Our table above is clearly a small sample, but the point is that price patterns, reflecting investor psychology, have real impact and incorporating this into the investment mosaic can significantly enhance portfolio monitoring, idea generation and trade timing for investors.
So, with everyone now on the edge of their seats, I give you the EidoSearch Top 3 Global Market Projections for 2014!
#1 Across the Pond – full year projection
Looking at global markets, Italy stands out as a top market opportunity based on current price trends. There are certainly plenty of reasons to be cautious, including debt over 120% of GDP and continued lack of economic growth. However, we are solely focused on how investors are expected to react in 2014 based on the last 12 months trading behavior in the FTSE Italia AllShare Index.
We looked for this unique one year pattern in all global indices to find the most similar instances historically, and to see how investors traded in the next one year. We found 50 highly correlated instances, and in 41 out of the 50, the index was up in the next year and the average of all 50 is a return 16.05% in the next year. Also interesting is that only 1 of the 50 historical instances of this pattern was down more than 10% in the next year.
One year price pattern in FTSE Italia AllShare (ITLMS)
Chart of the 50 highest correlated historical instances of this one year price pattern looking at all Global
Indices, and the average return in the next one year historically of 16.05%.
#2 North of the Border – mid-year projection
Next we looked for a medium term projection, again across global markets. The last 6 month price pattern (from the low on June 24th) for the S&P/TSX 60 (Large Cap Canadian stocks) was very compelling.
Searching for this approximately 6 month price pattern across all global indices, we found 47 similar historical instances. In 39 of the 47, the TSP60 was up in the next 6 months and the average return of all instances was 12.49%
Last 6 month price chart for the S&P/TSX 60 (TSP60)
Chart of the 47 highest correlated historical instances of this appr. 6 month price pattern looking at all Global
Indices, and their average return in the next 6 months historically of 16.05%.
#3 Here at Home – full year projection
Finally, we wanted to incorporate a little home cooking and highlight a projection for the U.S. Markets. We looked for a group of stocks that are set to underperform in 2014 based on their price patterns this past year. We found two Communication Services companies that are projected to significantly underperform the S&P next year.
Verizon (VZ): We found 51 similar historical instances of this one year pattern in stocks categorized under Communication Services, and the average relative return of all instances in the next one year was -14.41%
Cablevision (CVC): There were 51 similar historical instances of this unique one year pattern as well in the same category, Communication Services, and the average relative return of all instances in the next one year was -9.17%
One year price chart for Verizon (VZ)
One year price chart for Cablevision (CVC)
Happy Holidays!