1: We’ve been here before
The inaugural issue of Modern Trader profiled six companies that are redefining financial media and helping investors separate the signal from the noise. EidoSearch does its part by refocusing investment ideas on one simple question: Where have we seen this before?
By examining the past, we can calculate a realistic set of probabilities on which we can base our decisions. That starts by examining hundreds of millions of historical patterns to determine what the most likely outcomes will be based on past market behavior and to provide an empirical range of probabilities.
EidoSearch analyzed historical patterns of the S&P 500, Dow Jones and Russell 2000 and the short- and long-term look-back patterns and forward projection horizons. Here’s what we found.
The long-term price trend in U.S. markets reveals that there is little precedent over the past 40 years where the market has continued up and provided meaningful returns in the next six months. Although rebounds begin on a longer time frame, one year out is also historically bad for investors.
EidoSearch identified five similar patterns during the past 40 years in the S&P 500. What we determined was that there were no instances where the S&P 500 gained more than 5%, and three of these trends led to historical downturns: 1987 (Black Monday), 2000 (Internet Bubble) and 2008 (Financial Crisis).
As noted, the market has trended like this over a five-year period several times, and it has either run out of steam or led to a spectacular downturn.
We examined the same historical patterns out one year as well. We found that the average return following similar price trends in the past were −7.6%.