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Robert Shiller was not only one of the few to
challenge the efficient market theory, as early as 1981 he was also the
first to connect fundamental data with market data.
His paper on ‘The Volatility of Stock markets
Prices’ published in 1987 uses dividend data and real interest rates to
seek evidence that true investment value changes through time
sufficiently to justify the price changes. His paper concluded that most
of the volatility of the stock market prices appears unexplained.
Shiller's volatility or fluctuations prove that
behavior of markets is not normal. Non normal distribution series is a
widely followed proof of inefficiency in prices. He illustrated his
fluctuation case (Fig. 2) where he plotted the fluctuations of market
prices compared to a fundamental value. The fluctuation in real market
were simply too large to explain.
One of the basic ideas of Orpheus performance cycle
is that performance is cyclical across time frames. If performance is
studied on a larger time, it has less volatility and when it is studied
on smaller period it has higher volatility. The rate of change is more
volatile at a smaller time frame than at a larger one. We plotted these
changes in performance of various degrees together and we could generate
a similar illustration (Fig.1) like Shiller's three decade old paper.
This opens up a potential debate whether it’s the
temporal changes that cause market volatility and inefficiency. If we
are correct about this than time cycles become a science, hedging can be
done profitably and performance (absolute or relative) can be
pinpointed.
This week we have introduced the Jiseki integrated
performance cycles on INR ETF (XEN) and DOW. The XEN (Fig. 5) cycles are
still pointing lower suggesting weakness on Indian Rupee and Dow Jiseki
spectrum of cycles (Fig. 6) are still positive and up. DOW 30 remains a
relative outperformer and still in absolute buy mode. Our negative case
on Sensex has a key hurdle at 18,000. Sub 18,000 get ready for more
fireworks.
Mukul Pal, CMT, Orpheus Capitals, Global Alternative Research
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