The Dow Jones Industrial Average and the Nasdaq Composite Index are continuing their steady growth this year in the face of continued economic uncertainty.
It leaves investors and other market-watchers to wonder just how much upside is left in the market. More to the point: to what extent can predictive analytics be used to guide us on the market’s likely direction?
Naturally, pundits are sharing all forms of bullish and bearish outlooks.
For instance, on the bearish side, equity markets are trading at an all-time high despite sluggish, real economic activity such as the high percentage of S&P 500 companies that have missed their 4Q 2012 earnings estimates (24.75%), according to Seeking Alpha.
Because they aren’t in sync with real economic conditions, equity markets could be poised for the kind of catastrophic plunge that occurred in 2007-2008 when the financial crisis went into overdrive, according to Seeking Alpha.
The use of analytics to predict stock market behavior is hardly new.
Historical data has been used for years to develop prediction models on market gyrations and to help investors identify and understand hidden patterns from the historical data, according to a recent blog post by industrial engineering students at Auburn University.
Yet even historical data doesn’t offer prognosticators any guarantees.
As the Auburn University students note, “We must understand that even if stocks have rallied every second for (sic) Thursday in May for the past 50 years, it doesn’t mean they will rally this year on the second Thursday in May. If history could determine what the stock market is going to do next, the world’s richest investors would be historians, data-processors and librarians.”
One sign that encourages forward progress is the Federal Reserve’s decision to continue pressing on with its stimulus policies.
As The New York Times notes, each time the Fed has paused in its efforts to stimulate the economy in recent years, “it has come to regret the decision as premature.”
So if the Fed continues with its current stimulus efforts – namely, buying $85 billion a month in Treasury and mortgage-backed securities to help prompt a drop in the US unemployment rate – such actions will likely reassure investors that the Fed’s intent is to stand pat with its stimulus plans.
While no one can say with any certainty where the markets are heading, analytics can help investors to identify key macroeconomic and business trends that can shape future performance.
Scientific research has even been conducted on the influence of social media chatter on stock market fluctuations.
For instance, a March 2011 paper entitled “Twitter mood predicts the stock market,” finds that fluctuations in the stock market may be predicted by dimensions of mood in public Twitter feeds.
In fact, the researchers find that the level of “calm” in the average tweet increases the accuracy of a self-organizing, fuzzy logic, neural network model in predicting up and down changes in the Dow Jones Industrial Average closing values to 87.6%.
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