Tracking Global Price Trends: Nasdaq and the Nikkei

Updated Track Record of Market Calls:  (posted weekly at www.eidosearch.com since 10/4/2013)

• # of calls:  33
• Average Annualized Return:  40.4%
• Batting Average:  78.8%

“The aggregate stock market reflects psychology more than fundamentals.” – Yale University Economist, 2013 Nobel Prize Winner in Economic Sciences, Robert Shiller

A lot of our discussion with clients recently has been less about stock picking and more about trends in the U.S. and Global markets.  In the U.S., PE ratios are at historically high levels and momentum names have been beaten up as of late.  The conflict in Ukraine is the most significant geopolitical factor, and is creating ongoing unrest in global markets.  When have we seen similar market conditions, and what’s the impact been historically?

Regular readers of our Weekly Market Call will probably recognize that we’ve used the above quote from Robert Shiller before.  While we are not saying that understanding investor behavior is more important than understanding the fundamentals, it certainly supports our positioning with clients about the importance of incorporating price trend analysis in their investment mosaic.  Price trends are an amazing thing.  They capture sentiment of participants, the major market drivers and events taking place at the time, fundamentals, the views of long and short term investors, et al.

We decided to get back above the weeds this week and look at some of the emerging price trends in about 40 Global Indices to see when we’ve seen similar environments historically, and to see how investors reacted to those environments.  What Index has performed the best over the next few months historically?  The worst?

The Nasdaq 100 has the most positive price trend over the next 3 months, and the Nikkei 225 has the worst.  Charts below provide an overview and projections based on investors consistent behavior to similar price trends historically.

Current 6 month price trend in the Nasdaq 100 (NDX)

We found 13 statistically similar instances of the current 6 month price trend in the Nasdaq 100, in its history, going as far back as 1993.  The chart below shows the returns of each of those historical instances in the next 3 months.  The worst outcome is a -1.48% return in the Spring of 2010.

Current 6 month price trend for the Nikkei 225 (NI225)

We found 12 statistically similar instances of the current 6 month price trend in the Nikkei 225 Average, in its history, going as far back as 1996.  The chart below shows the average return for all 12 in the next 3 months forward of -4.0%.  The worst pull backs were -23% in the fall of 2008 and -19% in the fall of 1996.

Replicating the Market Call in EidoSearch (Clients Only)

• Go to Watch list tab, then click on the dropdown menu that says, “Watch list Views”, and click on “Watch list Manager”
• Create a new watch list for Indices with a couple of clicks, and set up the time horizons of interest
• Go back to Watch list Views and view a heatmap or table view of the strongest positive and negative projected price trends
• Click on the index in the heatmap or table to launch the projection chart, and to review the historical instances of the pattern