Oh, the elections, all that excitement! It's as if who we elect makes a difference in our bank account, or the national debt, or the trade balance.
Well, we are past all that. Now it's time to get back to business.
On Oct. 12, when I wrote my first forecast, the S&P 500 index stood at 1458.59. The forecast called for a short uptrend, then a downtrend to a level of about 1400 by Nov. 8 or 9. In the days following the forecast, the index rose to 1460.91 by Oct. 17. Today, Nov. 8, it stands at about 1,394.53, as predicted.
The forecast from Oct. 16, 2012:
Let's examine President Obama's track record. Deutsche Bank macro strategist Jim Reid's daily note looks at the best-performing asset classes since Obama was elected the first time on Nov. 4, 2008.
The table from Business Insider shows that the main beneficiaries from Obama's first term were investors in precious metals. The iShares Silver Trust (SLV) went up 100%, and the SPDR Gold Trust (GLD) rose by 50%. The debasement of the U.S. dollar that started at the height of the crisis during Bush's final years has continued at full speed.
We have yet to see the full effect of this devaluation, since commodity prices were also depressed due to the lack of demand in the stagnating economy, and the major currencies have lost even more value compared to the dollar (UUP). We have all become poorer without even noticing!
Our Updated Forecast
The stock market forecast sees a short-term rebound with low predictability (closely related to probability). There is a higher predictability of a further drop two weeks to a month ahead. Nevertheless, the long-term forecast for a year ahead is improving, meaning the S&P 500 will be mostly higher next year than what where it's at today.
One can speculate that the short-term rebound is due to the market overreacting to the election results. One can also say that the system detected market "nervousness" related to the "fiscal cliff," hence the medium-term dip.
But these are not certain answers. The real answers are found in the combination of many factors, each taken with its own weight, as explained below.
A Bigger Picture Update
World markets will follow the U.S. lead, except for some South American and Asian economies that will fall behind (not including Brazil and China). Europe will be up, except for Ireland. Greece is out of our view; it's a dead horse. I also see inflation picking up, commodities rising, and the U.S. dollar strengthening.
The Why and How of the Forecast
The algorithms that are at the base of the system make the answer to "why" complicated. Perhaps it is easier to explain "how."
We use math and constantly learning algorithms to make forecasts. Markets move in waves, and our algorithms are designed to detect and predict the waves. Many inputs from different sources go into each algorithmic forecast. The output for each stock is the signal, up or down, and the predictability.
So, how does the system decide if the market will go up or down, and when? The logic behind each rule says, for example, "If input A goes up, then output B will go down. But if inputs A and C go up, then B will go up," and so forth. Each statement is quantified, meaning not only "if," but also "by how much."
Finally, many of such statements "vote" in the "elections" to decide the winner, "up" or "down." But unlike in American democracy, "one vote, one person," this system is meritocratic. Each vote has a weight assigned that is proportional to the voter's past performance.
The forecast is rolling, meaning that the system receives new input every day and creates another forecast using new closing prices as the base point for future moves. Thus, a week or a month from now a different picture might emerge -- stay tuned.