Palisades Research Systems

Daily Stock Market Forecast

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Longer term projections

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Method:

How and why the program works:

Over the long term, the market is influenced by two major factors--the  expectation of future earnings and the expectation of future interest rates. This is a flexible relationship with large normal variations. These two elements have much less of an effect when you look at the market one day at a time.  We prefer to work in the short term where investor psychology is the primary influence.

Palisades Research uses a statistical approach to market trading. The technique is unique and proprietary. It relies on two basic elements, "money flow" and "investor emotion".  

The analysis of money flow looks at the movement of cash into or out of the market. This can come from pension and wage activity or from shifts between market segments. This is a kind of "causative" or "push" force.

The emotional element examines how investors have reacted to short term market changes and to the changes in factors that influence the market (like the price of oil).  This is not a "push" force, it is more a "reaction to" stimulus.  Emotional response tends to remain consistent over time unless affected by drastic conditions like those found in 1929 and 1987.  Even then, change is slow to occur and once things become stable again the old patterns reappear.

A major effect on the market is whether or not the people that are investing the next day feel optimistic based upon the way the market closed and its recent behavior. 

Our program relies on a brute force approach, we use genetic algorithms to determine the the most significant market influences. 

The stock market moves up less often than people think. Over the last 19 years the S&P 500 has gone up less than 54% of the trading days and the NDX has gone up less than 55% of the trading days. The day of the week can impact the results the S&P has gone up just over 52% on Tuesdays. Focusing on what influences trading for each day individually has proven to be rewarding. 

Initially the total effort of this program went into forecasting the direction of the S&P500 index for the single following day. We now target the NDX. This program makes no attempt to estimate the amount of change beyond one day. It does not try to determine the probable direction for the next week, or any other time period other than for the next day. 

Our longer term forecasts use a different program with a different focus. 

We analyze past data to see how the markets have behaved under similar situations. We know that we can never fully do that because there is nothing we can do about what happens after the market is closed and during the next market day. The best we can do is find some of the elements that have made an impact on the markets in the past and apply them to current situations.  Certainly, things will happen to influence the market direction and all of them are beyond our control. We avoid trading unless we statistically have a strong enough signal to overcome minor adverse influences.  When the program gives a "Money Market" or "OUT" signal, it doesnít mean that the next day's movement will be insignificant; it only means that we donít have a clear indication of direction. So we move into the money market.

Over 50 years of data were used in the development of the fundamental algorithm that drives this program. Yet, it was written in a way that allows it to be responsive to changes that occur over shorter time frames so it can adapt to its environment.  This program will continue to evolve, since ceaseless effort is underway to improve the program and make it even better.

One of the tools we use is a technique borrowed from NASA.

It should not be assumed that recommendations made in the future will be as profitable or will equal the performance of our programs in the past. There is risk of loss associated with investing in securities.

Patience is one of the keys to this method. We stay in the money market currently about 20% -25% of the time, patiently waiting for those days with the highest probability of gain.  When we are out of the stock market we do not expose ourselves to market risk. 

 

With patience the mulberry leaf becomes a silk gown.

---Chinese Proverb