Down goes the Dow

nearly retired wrote:

Noodling a bit again this morning with SP500 index data to add to my naive beliefs of whether the markets are over- or under-valued at the moment. If we look to idea that markets fluctuate about "the mean" or "revert to the mean," then one needs some basis for deciding where "the mean" lies.

Igy likes to refer to Shiller's work, and I think we've seen some other similar interpretations on here recently. These are based on second or third order metrics that may correlate with indices but are not the same as the indices.

I like to take a bare-bones look at the index itself, and if we hew to the idea that the past can tell us something about the future, we might look at very simple ideas or interpretations (like Sally repeating ad nauseum that the index goes up roughly 10% per year, on average, and the like).

I personally like to look at long term best fits to the data. This image shows the SP500 since 1950 with two candidate "best fit" curves that might serve as a proxy for "the mean" we would expect the index to revert to, or fluctuate about:

Link:ibb.co/mHYLmZN

We can normalize the index against those two best fit curves to show how high, or low, the index has been over time, as a direct ratio of those best fits, first for the power law fit and then for the exponential fit:

Link:ibb.co/d0fVgYR

Link:ibb.co/Ltfcx3Z

The simplistic notion of the index increasing ~ 10% per year is a simple power law, so if we believe that to best represent index behaviour, we might believe the current index value to be at about 1.5 times the best fit, with potential to swing back to 0.5 times (i.e., decline by 2/3 from current values. And, at any rate, looks far more likely to decline further in order to at least "revert to the mean."

If we believe the exponential best fit to be closer to the "truth," then the index is inly slightly overvalued, with roughly the same chance of increasing as decreasing in the medium to longer term.

This is a totally naive view of the market, informed only by past behaviour and crude best fits, with no consideration of causative factors. That said, for me, when I look at these two curves and combine them in my head, on the whole I believe the markets are overvalued and likely to decline in the medium term at least.

I realize not everybody (and possibly not anybody) will see value in what I've done here, and this is why I've called myself "the idiot" in the past.

carmine9 wrote:

nearly retired wrote:

Noodling a bit again this morning with SP500 index data to add to my naive beliefs of whether the markets are over- or under-valued at the moment. If we look to idea that markets fluctuate about "the mean" or "revert to the mean," then one needs some basis for deciding where "the mean" lies.

Igy likes to refer to Shiller's work, and I think we've seen some other similar interpretations on here recently. These are based on second or third order metrics that may correlate with indices but are not the same as the indices.

I like to take a bare-bones look at the index itself, and if we hew to the idea that the past can tell us something about the future, we might look at very simple ideas or interpretations (like Sally repeating ad nauseum that the index goes up roughly 10% per year, on average, and the like).

I personally like to look at long term best fits to the data. This image shows the SP500 since 1950 with two candidate "best fit" curves that might serve as a proxy for "the mean" we would expect the index to revert to, or fluctuate about:

Link:ibb.co/mHYLmZN

We can normalize the index against those two best fit curves to show how high, or low, the index has been over time, as a direct ratio of those best fits, first for the power law fit and then for the exponential fit:

Link:ibb.co/d0fVgYR

Link:ibb.co/Ltfcx3Z

The simplistic notion of the index increasing ~ 10% per year is a simple power law, so if we believe that to best represent index behaviour, we might believe the current index value to be at about 1.5 times the best fit, with potential to swing back to 0.5 times (i.e., decline by 2/3 from current values. And, at any rate, looks far more likely to decline further in order to at least "revert to the mean."

If we believe the exponential best fit to be closer to the "truth," then the index is inly slightly overvalued, with roughly the same chance of increasing as decreasing in the medium to longer term.

This is a totally naive view of the market, informed only by past behaviour and crude best fits, with no consideration of causative factors. That said, for me, when I look at these two curves and combine them in my head, on the whole I believe the markets are overvalued and likely to decline in the medium term at least.

I realize not everybody (and possibly not anybody) will see value in what I've done here, and this is why I've called myself "the idiot" in the past.

It's all just gambling.

And my intution based on who knows what says we are in for a ride down.

My bets vs. the market have more than made up for the losses they suffered yeasterday, so far. Far more. Hope the trend continues

nearly retired wrote:

Noodling a bit again this morning with SP500 index data to add to my naive beliefs of whether the markets are over- or under-valued at the moment. If we look to idea that markets fluctuate about "the mean" or "revert to the mean," then one needs some basis for deciding where "the mean" lies.

Igy likes to refer to Shiller's work, and I think we've seen some other similar interpretations on here recently. These are based on second or third order metrics that may correlate with indices but are not the same as the indices.

I like to take a bare-bones look at the index itself, and if we hew to the idea that the past can tell us something about the future, we might look at very simple ideas or interpretations (like Sally repeating ad nauseum that the index goes up roughly 10% per year, on average, and the like).

I personally like to look at long term best fits to the data. This image shows the SP500 since 1950 with two candidate "best fit" curves that might serve as a proxy for "the mean" we would expect the index to revert to, or fluctuate about:

Link:ibb.co/mHYLmZN

We can normalize the index against those two best fit curves to show how high, or low, the index has been over time, as a direct ratio of those best fits, first for the power law fit and then for the exponential fit:

Link:ibb.co/d0fVgYR

Link:ibb.co/Ltfcx3Z

The simplistic notion of the index increasing ~ 10% per year is a simple power law, so if we believe that to best represent index behaviour, we might believe the current index value to be at about 1.5 times the best fit, with potential to swing back to 0.5 times (i.e., decline by 2/3 from current values. And, at any rate, looks far more likely to decline further in order to at least "revert to the mean."

If we believe the exponential best fit to be closer to the "truth," then the index is inly slightly overvalued, with roughly the same chance of increasing as decreasing in the medium to longer term.

This is a totally naive view of the market, informed only by past behaviour and crude best fits, with no consideration of causative factors. That said, for me, when I look at these two curves and combine them in my head, on the whole I believe the markets are overvalued and likely to decline in the medium term at least.

I realize not everybody (and possibly not anybody) will see value in what I've done here, and this is why I've called myself "the idiot" in the past.