Total Recall and Ralph Lauren

“The only source of knowledge is experience” – Albert Einstein

When meeting with institutional money managers and traders, I am always impressed with their ability to recall market events and specific dates from the past.  “That was the LTCM crisis”, or “that’s when the CEO for XYZ Corp was indicted”.  Good investors not only have great recall for the purpose of impressing me, but they apply this vast experience to current market situations to better understand the possible outcomes today.  This is a key, and invaluable factor in the decision making process.

While an investors recall ability is more than impressive, it’s impossible to have “Total Recall” (save Arnold Schwarzenegger).  Which is why a common question being asked regularly is, “when have we seen these conditions in the past, and what happened next?”  Investors are trying to identify the similar historical instances so they can frame what was happening at that time, and then utilize their rich experience and understanding of these historical outcomes to determine their relevance in respect to their current investment decision.

What if investors could use the power of pattern search technology to instantaneously identify the most similar historical instances of a current trend, and marry that with the wealth of experience and knowledge of the investor?  What if we could have a solid historical backdrop to every trade and investment decision in seconds?

EidoSearch can take a current price trend for any market and/or security and search through 100 million patterns in seconds, with tremendous statistical accuracy, to arm the investor with the most similar instances of that trend historically and project the most likely forward outcomes.  The power of total objective recall at the fingertips of the investor, and the ability to easily apply their knowledge and interpret the relevance of the past to better understand the potential outcomes.  Let’s put it to a test.

Ralph Lauren (RL), the iconic American brand, started the year at $175 but traded down strongly over the next month on growth concerns, hitting a low of $148 on February 5^th.  They reported solid third quarter earnings on the same day, and in concert with an overall market rebound, the stock is up about 7% over the past week and a half and closed Friday at $158.39.  We’ve likely seen this type of price reaction to information thousands of times, but knowing the MOST similar historical instances is what we’re after.  So, we looked for the current 3 month price trend in RL across all Consumer Cyclical stocks to find the best historical matches, and to uncover the most likely outcome over the next month.  Since we can’t enhance the use of the information with investment experience (we are software guys), we will focus solely on the statistics below:

Current 3 month price chart for Ralph Lauren (RL)

Chart below of the 52 most similar historical instances of this current 3 month price trend in RL, and how the stocks

performed in the next 1 month.  It’s easier to inspect in EidoSearch, but a few of the instances are as follows:

• Harley-Davidson:                    Nov-Dec 2008 down -33.7% (great recession)
• Williams-Sonoma:                   Nov-Dec 2000 down -28.15% (internet bubble)
• Aeropostale:                            Sep-Oct 2011 down -6.77% (?)

The chart below shows the typical, or average outcome in the next 1 month historically.  Not only is the stock

down -9.4% on average, but the standard deviation of the negative occurrences is quite wide (orange line

below the red line in the chart below).  When considering the range of potential outcomes, historically there

is not much upside (top orange line) but considerable downside.  Also, important to note is that the average

relative return historically, to the S&P 500, is -6.05%.

The statistics alone, and investors consistent reaction historically to this price trend, point to a short term drop in the price.  We

encourage the investors to take a closer look.