2. Understand the Cyclical movement of your Selected Stock, a basis for prediction

Sand Storm! 2010: Act III, Scene 2; Do Seasonal Cycles Forecast Behavior?

This is an interesting question for any investor, to which the answer may change with time. Some stocks depend upon a seasonal market such as for eggs or natural gas or carpentry, and some appear to have seasonal effects because they report an "earnings surprise" every quarter. Since we believe that the market at least learns reasonably efficiently, as soon as cyclical behavior appears, it may vanish because some investor has hedged against that very behavior. The investment community distinguishes between business cycles, usually longer than one year, and seasonal cycles, by definition one year or less in duration. Instead of a snapshot, therefore, you might play back an example clip from the Blu-ray, the Prediction Chart 3.2 on a high resolution monitor. This chart is further discussed in the Predictions section on the Details page.

Because of the peculiar distribution of trading days throughout the year, any spectral analysis is horribly contaminated around the seven-day cycle: one might argue that the most transparent market always would be open, a wave of investment activity moving around the Earth to follow the local trading hours. At the least, such a 24/7 market would introduce much less sampling noise into the important signal from your Selected Stock. The DiligentInvestor econometric model therefore employs only the twelve fundamentals of one year, one-half year, one-third and so on down to one twelfth, or one month. In theory this sort of spectral analysis can perfectly represent no more than the closing price on twelve trading days, but can approximate smoothly varying behavior over the 250 or so trading days actually encountered. The power of spectral analysis arises from looking at all stocks in the dataset, so that you can see whether your Selected Stock responded at the same time as most others, or perhaps something unusual happened. Therefore the summary still image from the animation shows significant spectral power density of the Selected Stock on the background Spectra of all the stocks in the dataset.

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