Reaching The End Of The Red Zone With The S&P 500

From time to time, we take on the specific challenge of forecasting where the S&P 500 will over an extended period of time.

That’s usually because of a limitation of our dividend futures-based forecasting model, where because we use historic stock prices as the base reference points from which we project future stock prices, we occasionally have to deal with the echoes of past volatility and their effect upon our model’s projections. Most often, we know well in advance, up to 12-13 months ahead of time, when what we call the echo effect will affect our model’s projections by skewing their accuracy for the duration of the echo event, where we’ve experimented with various methods over the years to cope with the issue.

A little over a month ago, we were caught by surprise when we realized that our model had picked up a short term echo that would throw our model’s projections of the S&P 500’s likely future trajectories off by somewhere around 100 points, which is a direct consequence of the breakdown in orderthat occurred in the market beginning after 29 December 2017. A new echo had formed, where we would have the opportunity once more to generate a new manual forecast for the S&P 500 over a period of at least four weeks.

When we take that step, we call it a “red-zone” forecast because we are basically drawing red boxes on our spaghetti forecasting charts generated by our standard model of how stock prices work to indicate the range into which we expect the S&P 500 will close each day during the period of the manual forecast. We posted that emergency red-zone forecast before the market opened on 7 February 2018, where we also laid out our assumptions: