The amplitude is the measurement of change between two extreme values. To measure the size of change in Nifty (Sensex) over 2013 is an amplitude exercise. Could Nifty deliver a stellar performance this year? It is tough to measure outliers. To understand how high a rocket can go or how large a fire blast it makes in the sky is rocket science.
For us earthquakes and stock markets express a similar character, as they both are a part of the natural phenomenon. Moreover, sticking out your neck for an annual Sensex forecast is not tricky. A good one can get you 15 minutes of fame or vice versa infame. Why 15 minutes? Because market participants are short sighted and more interested in the January effect rather than the decade effect. And this myopic approach cannot be sorted out because humans suffer from hyperbolic discounting. We are more concerned about today than tomorrow.
So, even if we had clocks telling us about market timing, what’s happening tomorrow or a few months ahead would be more exciting than what is happening from 2011 till 2019. But, timing still does not solve the problem. Determining the quality (amplitude) of correction or growth would remain a problem. We have mentioned Benner cycle clock on prior occasions.
Benner was one of the many reasons we reinforced our positive forecast for 2011. One reason why Benner got it right was because his dataset was built around an annual average of high and low prices. Symmetry is another reason why his clock still works.
Geometry, symmetry and proportion can give insights into amplitude. Dow, Elliott and many other technicians have compared bull and bear market sizes (proportion), to forecast the large trend ahead. If you look at the Dow 30 geometry, the 1929 high was unwound in 1945 (after 15 years). While the 1987 high was unwound in 1994 (after six years). Now after moving sideways for 10 years (2000-2012) any new Dow 30 trend could be at least a third of the size.
I cannot assume the Dow trend to be negative (down) because the prices are testing the high of the trading range rather than the low. The same is true for Sensex 30, which has moved sideways for five years (2007-2012). Even if the new trend is half the size of the previous geometry, we are talking about 2.5 years of a bull move. This is a large proportion, like large time forecasts.
Very few academicians have talked about long time forecasts like Benner. Behavioural finance experts talked about decade effect and mean reversion in a three-year performance. Shiller said that worst fundamental performers of a decade were seen to become the best in a decade. So, on one side we have geometry in time and on the symmetry in behaviour; outlier reversion. If you think long forecasts are academic and not for you, you should dig into the hedge fund performance which has performed dismally compared to passive indexing, aka investing in longer time durations.
Passive indexing is a simplified approach to invest. Orpheus indices are also passive and don’t assume forecasting acumen but long-term reversion. Most of our indices have outperformed their respective universes for 2012 and we are looking forward to do it again.
And if you want to simulate our performance, buy the worst and stay invested till they move to the other end of the performance spectrum.
What is the worst in India? Run a query of the worst performers from metals, oil and gas, real estate and you will have the list of potential positive performers. As anticipated last year, the Nifty has not only moved up positively but also pushed closer to our 6,000 targets. And regarding the amplitude for 2013, we retain our Nifty 8,000 target for 2013.
The author is CMT, and Founder Orpheus CAPITALS, a global alternative research firm
