Beware of the Current Price Trend for Adobe

“Do you validate?” – Chris Farley, Tommy Boy

 Adobe Systems (ADBE) is up 9% so far this year, which is solid since it was up about 56% last year and has jumped a full 128% since the start of 2012.  They are well positioned in key growth markets including eLearning, the Cloud, Digital Advertising and Web Analytics.  Per the chart below, out of 23 current analyst recommendations, 16 are a Buy and 7 are a Hold with no Sell ratings.  All systems go!

This may very well be the case in the long term, but in the short term there is a significant factor signaling that there could be a negative move in the price over the next one month.  For many investors, this could create an opportunity for a short position or the ability to trade around the position.  For longer term investors, this could be a trigger to reconsider the weight of their current position or in many cases just to be educated on a potential factor in the forward price return.  What is this factor you ask?  The current price trend.

Price trends are often ignored because people don’t understand them objectively, don’t believe they have a significant effect on returns or the impact in the market has just never been well validated.  EidoSearch has been on a mission to change all of the above.  Just about everyone will admit that the price of a security is often divorced from fundamentals.  When this is the case, where do you turn for a gauge on where the stock might be headed and when it might realign with the fundamentals?  Via our patented search technology (predictive analytics), we’ve not only validated that price trends have impact but also the situations where they become even more significant.

On the validation front, we have recently started using Quantopian to provide portfolio statistics on our research simulations and to verify our results.  Based on a study investing in the price trends reflecting the most consistent historical investor behavior to similar price trends (the outliers), our weekly projections generated a cumulative return of 669% over 7 plus years (stats in chart below).  Although this was a market neutral strategy (equal weighting of longs and shorts), the S&P during this time is up only 50.6%.

Technologies like ours that quantify data in this fashion generating predictive analytics, can no longer be ignored.  Nobody has a crystal ball, but price trends have been validated as a factor in the movement of stocks and other security prices (futures, currencies, indices, etc.), and at times with certain securities or in the aggregate market (2008) there are times where investor behavior is a significant driver in prices.  Our goal is to make it easy for all investors to incorporate this into their investment mosaic, and to help them profit from our analytics.

So on to Adobe then.  Adobe just happens to be one of these outlier projections, but how did we pick them out amongst the thousands of price trends emerging on a daily basis?

Our powerful technology looked at all of the S&P 500 companies price trends based on Friday’s close, and we focused on the stocks with the most negative price projections.  These projections are based simply on how investors have reacted to these similar environments historically, but we’re literally looking through millions of patterns with great statistical accuracy.  Adobe was the greatest outlier to the negative side, with a projected one month return of -10.8% based on their current 3 month price pattern.

Is there a better gauge for how investors are likely to react once again to this price pattern?  Even the most fundamentally oriented Portfolio Managers check price charts often to take a snapshot of where a stock has been, how it’s valued and to understand where it might be headed.  We’re now doing that analysis very objectively for the investor, and delivering analytics that complement the primary factors used by each investor.  Adobe is one worth highlighting per the below charts.

Current 3 month price trend for Adobe (ADBE)

Projection showing the typical outcome historically of -10.8% based on the average return of the 40 most similar instances.  The upper and lower orange bounds (deviation from the mean) show much greater downside than upside.  This is a great gauge for the investor to understand not just the typical outcome but the RANGE of likely outcomes based on historical precedent.

This chart displays the 1 month forward returns of each of the 40 most similar instances of this price pattern in technology stocks historically.  There are a couple instances that jump up from here, but mainly consistent strong trade off to the downside historically.

Replicating the Market Call in EidoSearch (Clients Only)

• Go to Watchlist Tab and to your custom watchlist of stocks or securities
• In the table view, select the time horizon (ranging from 1 day to 1 year) that you are most interested in.  Sort by average return projection, from most positive to negative or vice versa, to capture the “outliers” and the strongest positive and negative projections
• Click on any of the tickers in the table or heatmap to launch the projection chart and underlying analytics