Forecast of Top Index Funds for Investing in the Stock Market

Outlook in 2014 for the Leading Exchange Traded Funds for Equities: DI ! "#$ and %%%

2014 Update

A &arket 'rief
by

"te(en )i*

MintKit Investing
www.mintkit.com

Disclaimer This b ie! is p ovided as a eso" ce !o in!o mation and ed"cation. The contents e!#ect pe sona# views and sho"#d not be const "ed as ecommendations to any investo in pa tic"#a . $ach investo has to cond"ct d"e di#igence and design an agenda tai#o ed to individ"a# ci c"mstances.

% 2014 MintKit.com

&ho t &"mma y
A "ndown o! the top inde' !"nds sets the stage !o an o de #y app oach to !o ecasting and investing in the stock ma ket. The #eading benchma ks o! the bo" se a e !o"nd in the (ow )ones Ind"st ia# Ave age* the &+, inde' o! -00 giants* and the .asda/ ta##y o! 100 heavyweights. 0o these beacons o! the stock ma ket* the t acking vehic#es take the !o m o! (IA* &,1 and 222 espective#y. The ma3o mi#estones and #ike#y moves !o the e'change t aded !"nds a e sketched o"t !o 2014 and beyond.

$'tended &"mma y
A eview o! the top inde' !"nds sets the stage !o a cogent app oach to !o ecasting and investing in the stock ma ket. 0o this p" pose* the p ime vehic#es #ie in the e'change t aded !"nds !o the #eading benchma ks4 the (ow )ones Ind"st ia# Ave age* the &+, -00 inde'* and the .asda/ 100 ya dstick. The t acking vehic#es !o these beacons a e !o"nd in (IA* &,1 and 222 espective#y. 5y cont ast to pop"#a pe ception* the ea# and !inancia# ma kets a e inte twined not on#y in the !"t" e b"t a#so the p esent which in t" n sp ings ! om the past. 6iven this backd op* the adept investo e'amines the #andma ks in the backwa d di ection as we## as the conditions in the c" ent envi onment. Mo eove the o"t#ook ove the months to come depends not on#y on the c" ents in motion ight now b"t a#so the conto" s o! the #andscape downst eam. 0o this eason the s" vey at hand d aws pa t#y on* and !#eshes o"t* the p ospects !o this yea and beyond. 0 om a p actica# stance* the companies #isted in the stock ma ket ea n thei #iving within the economy at #a ge. That m"ch is t "e even in the case o! vi t"a# !i ms s"ch as on#ine 7

etai#e s and b oke age ho"ses. 0o this eason* the agg egate #eve# o! economic o"tp"t p#ays a vita# o#e in co po ate ea nings and th"s the p ice action on the bo" se. In the ea# economy* the conditions have not changed a g eat dea# ove the past !ew yea s. 8n the downside* the po#iticians o! the 9est have gone o"t o! thei way to so#idi!y the disto tions in the ho"sing secto in the a!te math o! the !inancia# c isis o! 200:. Anothe boondogg#e #ay in the p op;"p o! some o! the biggest and most "np od"ctive !i ms in the economy. In this #ight* t i##ions o! do##a s we e wasted in the !o m o! bai#o"ts !o a gagg#e o! g"tted banks. To make matte s wo se* the st "ts p"t in p#ace have p evented the p ope ty ma ket ! om shedding the mo"ntain o! b#"bbe it had pi#ed "p d" ing the manic b"bb#e in ea# estate in the "n;"p to the !inancia# !#ap. 0o this eason* the g owth ate !o the enti e economy is destined to be meas#y we## into the 2020s. In pa tic"#a * the p ospects !o the ind"st ia# nations a e #ack#"ste at best. 0o this eason* the eme ging ma kets o! the wo #d wi## have to p#od a#ong in spite o! the gene a# weakness in the wea#thy egions. 8n a positive note* tho"gh* the s#owdown in the b"dding ma kets has "n its co" se !o now. A case in point is <hina* which wi## cont ib"te mo e to the g owth o! the wo #d economy in 2014 than it did ove the past co"p#e o! yea s. In sho t* the o"t#ook !o the ea# economy has imp oved somewhat since the same time #ast yea . 8n one hand* we can e'pect the ich nations o! the wo #d to p"tte a#ong and make way by abo"t 2.0 pe cent a!te ad3"sting !o the s/"ee=e o! in!#ation based on the o!!icia# !ig" es bandied abo"t by gove nment agencies. Meanwhi#e the eme ging egions as a g o"p wi## cont ib"te the #ion>s sha e o! the "pt" n in g#oba# o"tp"t thanks to an "ps" ge o! -.?@. As a es"#t* the wo #d economy is s#ated to e'pand by some 7.0@ ove the co" se o! 2014.

Thanks to the patchy b"t imp oving conditions in the tangib#e economy* the stock ma ket is poised to c#imb highe as we##. The chee y o"t#ook shows "p in the "pwa d s#ant o! the top inde' !"nds ove the co" se o! the yea . As an e'amp#e* the !i st mi#estone !o (IA A a#so known as the Dia*onds A #ies at a p ice o! B140.C1. This #andma k is #ike#y to be eached by the midd#e o! the yea . The mi#epost in sight #ies a modest B17.:7 beyond the initia# !ig" e o! B1?4.7D cha#ked "p by (IA at the beginning o! )an"a y. In othe wo ds* the (iamonds a e s#ated to ise b"t not get ve y !a d" ing the !i st ha#! o! the yea . &ad#y* the o"t#ook is not m"ch bette !o the second ha#!. 0o one thing* the ma ket wi## #ike#y st "gg#e as "s"a# ove the co" se o! the s"mme . 0o a second thing* the bo" se wi## ente its weakest st etch o! the yea as &eptembe o##s a o"nd. To add to the dampe * the cent a# bank in the U.&. wi## #ike#y w ap "p the #atest o"nd o! /"antitative easing a o"nd that time. As the sp ee o! money c eation winds down* the to ent o! ! esh cash !#ooding into the ma ketp#ace wi## no #onge be monst o"s b"t me e#y massive. As a es"#t* the bo" se is apt to s"!!e a b eakdown o! midd#ing si=e. The s#"mp wi## #ike#y amo"nt to a ha#!way t ip to the th esho#d o! 1-@ that ma ks the #ow end o! a !"##;b#own c ash in the U.&. In that case* the setback wi## es"#t in a knockdown in the ba##pa k o! C o : pe cent. 6iven the specte s on the ho i=on* the s"mme and a"t"mn wi## be a good time !o the ca"tio"s investo to stay c#ea o! the stock ma ket. 8n the othe hand* the bo" se sho"#d egain its !ooting and t amp "pwa d once mo e d" ing the #ast /"a te o! the yea . 8n a negative note* tho"gh* the U.&. bo" se is "n#ike#y to ise m"ch beyond its p io peak set ea #ie in the yea . In othe wo ds* (IA wi## st "gg#e to egain its initia# mi#estone in the B1C: =one. 5y way o! compa ison* the (iamonds c#osed o"t 2017 at a p ice o! B1?-.4C. In that case* a high o! B1C: amo"nts to a modest inc ease o! C.?@. .ot a g eat es"#t.

0 om a di!!e ent ang#e* s"ppose that the t end #ine ove the past co"p#e o! yea s manages to ho#d "p. In that case* the amp;"p ove the yea is a hike o! 21.?@ which in t" n imp#ies a mi#epost at B1D0.D1. This second and #ast ma ke !o 2014 ep esents a gain o! some 1-.4@ ove the p ice o! B1?-.4C eco ded at the end o! #ast yea . The act"a# !ig" e at the c#ose o! this yea wi## o! co" se depend on a s#ew o! !acto s. A case in point is the amo"nt o! money con3" ed o"t o! thin ai by the cent a# bank. Anothe samp#e invo#ves an "ptick in the appetite !o isk amongst the investing p"b#ic. 6iven the h"ge "n;"p o! the U.&. bo" se #ast yea * a ho de o! investo s wi## pi#e into the a ena. At the same time* the p#aye s at the head o! the pack wi## begin to t" n thei ga=e towa d !a ;!#"ng sho es in sea ch o! g eene past" es. In that case* the #agging ma kets o"nd the wo #d sho"#d t" n in a m"ch bette pe !o mance than they did #ast yea . $'amp#es in this vein "n the gam"t ! om ! om 5 itain to Ko ea. In the !inancia# !o "m* the #eading benchma ks o! the bo" se tend to move in "nison* as in the case o! a peak o a t o"gh that c ops "p at the same time. 8n the othe hand* the magnit"de o! the moves tends to di!!e somewhat. Mo e p ecise#y* &,1 is p one to head in the same di ection as (IA b"t advance a tad mo e in e#ative te ms. The sto y is simi#a !o 222* a t acking !"nd which a#so goes by the nickname o! %u+es, The main di!!e ence #ies in the tendency o! the #atte to disp#ay even #a ge swings in p ice than its ma3o iva#s. 0o these easons* a !o ecast !o &,1 A a#ias the "-.ders o "-iders A is #a ge#y ed"ndant when a p o3ection is a# eady avai#ab#e !o the (iamonds. And #ikewise !o the 2"bes. As the yea wea s on* the second and #ast #andma k !o (IA #ies a o"nd 1-.4@ beyond its c#osing va#"e o! B1?-.4C in 2017. 5ased on the ecent patte ns in the ma ketp#ace* we can m"#tip#y the #atte pe centage by a st etch !acto o! 1.10C !o the &pyde s. The es"#t is an

"pt" n o! some 1C.0@. That is* the !ina# mi#estone !o &,1 in 2014 sho"#d #ie a o"nd 1C pe cent highe than its c#osing va#"e at the end o! #ast yea . 9e can obtain a simi#a estimate !o the 2"bes. The p od"ct o! 1-.4@ !o (IA and a sca#ing !acto o! 1.2:? !o the inde' !"nd comes o"t to 1D.:@. As a backd op* 222 c#osed o"t the yea at a p ice o! B:C.D?. 5ased on the #atte two !ig" es* the #ast mi#estone !o the t acking !"nd stands at B10-.7:. In compa ison to the st"nted advance o! (IA and &,1* we can a#so !o esee a b ighte !"t" e !o 222 !o a di!!e ent eason. 8n one hand* the &pyde s and (iamonds have a# eady passed thei a##;time peaks and a e now p#owing into "nknown te ain. 5y cont ast* the 2"bes have amp#e oom to advance be!o e they egain thei histo ic peak notched at the height o! the Inte net c a=e. At the end o! 2017* the .asda/ !"nd w apped "p the yea at a p ice o! B:C.D?. The #atte !ig" e is a !a c y ! om the =enith o! B272.:: to"ched in Ma ch 2000. As a co"nte point* tho"gh* the #atte p ice has to be ha#ved d"e to a 2;!o ;1 stock sp#it in the second ha#! o! Ma ch 2000. In that case* the co esponding p ice today t" ns o"t to be B11?.44. The #atte !ig" e #ies within a stone>s th ow o! the #ast mi#estone o! B10-.7: p o3ected !o 2014. In view o! the histo ica# eco d* the mass o! investo s wi## do thei da nedest to shove the 2"bes "p to thei a##;time high. And i! the cent a# bank p ints "p eno"gh money o"t o! the ethe in the inte im* the madding c owd may we## s"cceed. As a "#e* we can e'pect the bo" ses in the b"dding egions to advance by o"gh#y twice as m"ch as the (iamonds o &pyde s. 0o instance* a gain o! 1-@ !o (IA sho"#d es"#t in an "p#i!t o! 70@ o so !o the eme ging ma kets. To s"m "p* the t io o! inde' !"nds !o the U.&. bo" se wi## t amp onwa d and "pwa d th o"gh a se ies o! =ig=ags as "s"a#. The sto y wi## "n!o#d in a simi#a !ashion !o the othe stock ma kets o"nd the g#obe.

A#tho"gh the e a e p#enty o! e'ceptions* the bo" ses in the b"dding egions o!ten advance o"gh#y twice as m"ch as the (iamonds o &pyde s. In that case* an "pt" n in (IA sho"#d es"#t in a hea#thy gain !o the eme ging ma kets. 8n a negative note* the !eisty ma kets a#so tend to be the most vo#ati#e. Meanwhi#e the mass o! investo s emain somewhat skittish. As a es"#t* the inte nationa# c owd may ho#d back on moving in ea nest into the sp o"ting ma kets "nti# the #ast /"a te o! the yea . E E E Keywords: 0o ecast* &tocks* 0inancia#* Ma kets* $conomy* Investing* Investment* $T0* $'change T aded 0"nds* 8"t#ook* (IA* &,1* 222* .asda/* U&A* $me ging* 5 itain* 6e many* <hina* India

E E E

A compa ison o! the top inde' !"nds #ays the g o"ndwo k !o a cohe ent app oach to investing in the stock ma ket. In this e!!o t* the !i st step is to si=e "p the #eading benchma ks o! the bo" seF name#y* the (ow )ones Ind"st ia# Ave age* the &tanda d + ,oo >s Inde' o! -00 titans* and the .asda/ ya dstick o! 100 heavyweights. 0 om a p actica# stance* the companies #isted in the stock ma ket ea n thei #iving within the economy at #a ge. That m"ch is t "e even in the case o! vi t"a# o"t!its s"ch as on#ine etai#e s* b oke age ho"ses* and m"t"a# !"nds. Gega d#ess o! the ind"st y* the agg egate #eve# o! economic o"tp"t p#ays a vita# o#e in the !#ow o! ea nings !o the companies and th"s the !o t"nes o! thei e/"ities on the bo" se. In te ms o! ecent t ends* the o"t#ook !o the ma ketp#ace as a who#e has not changed a g eat dea# ove the past !ew yea s. A p o!o"nd ca"se o! the ma#aise #ies in the st"mb#ing b#ocks th own "p by a a!t o! gove nments in the wake o! the !inancia# c isis o! 200:. &ince the !inancia# !#ap a#ong with the 6 eat Gecession* the po#iticians o! the 9est have gone o"t o! thei way to b"tt ess the disto tions in the ho"sing secto . A second* and e#ated* botch #ay in the p op;"p some o! the biggest and most "np od"ctive !i ms in the economy. In this cape * t i##ions o! do##a s we e s/"ande ed in the !o m o! bai#o"ts !o a passe# o! ove si=ed banks. The inso#vent !i ms we e the ve y c#ods that had !omented the !inancia# c isis in the !i st p#ace* then had !a##en on thei own swo ds a!te go ging on mo"nds o! mo tgage;based assets. To make matte s wo se* the st "ts p"t in p#ace by the po#s have p evented the p ope ty ma ket ! om casting o!! the mo"ntain o! b#"bbe it had amassed d" ing the manic amp;"p o! ea# estate p io to the !inancia# b#ow"p. Unde no ma# conditions* the ho"sing secto is D

a p ime engine o! g owth !o the economy at #a ge. Un!o t"nate#y* the th ong o! misg"ided po#iticos have th own "p mo"nds o! !ette s designed to Hs"ppo tI the b"#ge in ea# estate. 0o this eason* the shack#ed ma ket has been "nab#e to shed the g otes/"e !#ab it had acc"m"#ated d" ing the o gy o! spec"#ation in the "n;"p to the !inancia# b"st. .ot s" p ising#y* the economy as a who#e has been "nab#e to toss o!! the deadweight and egain its vita#ity. As a es"#t* the g owth ate wi## emain st"nted we## into the 2020s. .eed#ess to say* the o"t#ook !o the yea to come e!#ects the !eeb#e hea#th o! the b#ighted egions. As a di ect o!!shoot* the pace o! economic o"tp"t wi## sca ce#y b"dge ! om the anemic #eve#s seen #ast yea . 8n a positive note* tho"gh* the s#owdown in the eme ging egions has "n its co" se. As an e'amp#e* <hina wi## p#ay a #a ge o#e in e'panding the g#oba# economy in 2014 than it did #ast yea . In #ine with ea #ie ema ks* howeve * the p ospects !o the ind"st ia# nations a e tepid at best. 0o this eason* the b"dding egions o! the wo #d wi## have to s#og a#ong amid the gene a# weakness in the g#oba# ma ketp#ace. To s"m "p* the o"t#ook !o the wo #d economy has imp oved s#ight#y since the same time #ast yea . Mo e p ecise#y* we can e'pect the ich nations o! the wo #d to p"tte a#ong and p ess ahead by abo"t 2 pe cent a!te ad3"sting !o in!#ation based on o!!icia# !ig" es t otted o"t by gove nment agencies. In ga"ging the standa d o! #iving* howeve * the inc ease in economic o"tp"t o"ght to take acco"nt o! the g owth o! the pop"#ation d"e to net immig ation into the wea#thy co"nt ies. 0o instance* a ep esentative !ig" e is an inc ease in head co"nt o! o"gh#y 1 pe cent a yea in a a!t o! co"nt ies inc#"ding the U.&. In that case* an "pt" n o! 2@ !o the economy in toto comes o"t to a c "mb o! 3"st 1@ pe pe son. 8n the "pside* tho"gh* the sp ight#y nations o! the wo #d a e poised to !a e m"ch bette . A case in point is <hina o India* which wi## advance seve a# times !aste than the ich nations as a g o"p. 10

Thanks to the b#oom o! the ea# economy* howeve modest* the stock ma ket is s#ated to !o##ow s"it. The chee y o"t#ook shows "p in the "pwa d s#ant o! the top inde' !"nds ove the co" se o! the yea . In the sections to come* we begin with a /"ick s" vey o! !o th ight techni/"es !o !o ecasting the stock ma ket. The assets in the ma ketp#ace espond to a s#ew o! !acto s anging ! om the co" se o! the economy to the mood o! the investo s. In that case* a #"cid app oach to p ediction o"ght to integ ate a m"#tit"de o! d iving !o ces in the ea# economy as we## as the !inancia# !o "m. The second item on the agenda invo#ves a b ie! s" vey o! the histo y and nat" e o! the #eading benchma ks o! the bo" se. A co"p#e o! ya dsticks have estab#ished themse#ves as ho"seho#d names whi#e othe ga"ges a e #ess !ami#ia to the gene a# p"b#ic. 8" thi d task dea#s with a backwa d #ook at o" !o ecasts ! om #ast yea . A n"mbe o! p edictions t" ned o"t p etty m"ch as envisioned* whi#e some othe s we e o!! the ma k. A !o" th !"nction is to e'amine the o"t#ook !o the ea# economy ove the ne't co"p#e o! yea s. The ea#m o! tangib#e goods and se vices se ves as the backg o"nd against which the assets in the !inancia# !o "m p#ay o"t thei espective o#es. The !i!th topic conce ns the o#e o! the cent a# bank in evving "p the ea# economy and sho ing "p the stock ma ket. The vo#"me o! money c eation has a h"ge impact on the p ospects in the ma ketp#ace inc#"ding the bo" se. The si'th aim is to e'amine the p ospects !o the inde' !"nds that t ack the #eading benchma ks o! the stock ma ket. In pa tic"#a * the !o ecasts sketch o"t the #ike#y pathway ove the co" se o! this yea and beyond. The #ast section ta#ks abo"t the dange s o! patchy and !a"#ty in!o mation in the va#e o! e'change t aded !"nds. In a !ie#d acked by apid change* the sh ewd p#aye has to take e't a steps in o de to sc o"nge "p a c#"tch o! t "sty data to s"ppo t a t enchant p og am o! investment. 11

pward and Downward Modes of Forecasting

The techni/"es !o !o ecasting the stock ma ket !a## into two b oad g o"ps4 funda*ental and technical. $ithe type o! methodo#ogy can be "sed to assess the p ospects !o the panop#y o! inst "ments anging ! om so#ita y stocks to compo"nd benchma ks. The !"ndamenta# app oach dea#s with the comme cia# aspects o! the ente p ise standing behind a stock* a#ong with thei impact on the wo th o! the e/"ity. 0o this p" pose* the vita# !acto s span the spect "m ! om the hea#th o! the economy in gene a# to the o"t#ook !o ea nings !o the !i m in pa tic"#a . 5y cont ast* the technica# app oach e#ies so#e#y on the in!o mation avai#ab#e in the !inancia# !o "m. In this #ight* the p ima y !acto s #ie in the histo y o! p ices a#ong with the vo#"me o! t ansactions. Most o! the p#aye s in the a ena e#y chie!#y o enti e#y on one type o! app oach o the othe . 8n one hand* the !"ndamenta# app oach is most "se!"# !o ga"ging the p ospects !o the ma ket ove the #ong ange. 5y cont ast* the technica# scheme is best s"ited !o p edictions ove the nea te m. At a basic #eve#* a sha e o! stock ep esents a s#ice o! owne ship in the "nde #ying !i m. The sha eowne has a c#aim on the t ove o! c" ent assets as we## as the intake o! !"t" e p o!its. 0o this eason* the va#"e o! a sha e ove the #ong ha"# depends !o the most pa t on the #ot o! the company in the ea# economy. The p ospects !o a b"siness tend to va y s#ow#y ove time. 8n the othe hand* its e/"ity is apt to bo"nces a o"nd a g eat dea# a#ong the way. 0o this eason* the !"ndamenta# app oach is o! #imited he#p in si=ing "p the p ospects !o a stock ove the nea te m. In many cases* the action in the stock ma ket depends mo e on the mood o! the investing p"b#ic than the o"t#ook !o the co po ate secto . An e't eme e'amp#e c ops "p in the ! othy va#"ation o! stocks at the peak o! a b"bb#e o the !i esa#e p ices at the pit o! a panic. In 12

between* the ma ket has a way o! !#opping a o"nd in esponse to the shi!ty sentiments o! the madding c owd. &o what type o! methodo#ogy sho"#d a se io"s p#aye take "pJ The answe depends on the pa tic"#a ci c"mstances o! the decision make . An e'emp#a #ies in the p#anning ho i=on !o an envisioned p#ay. 8n one hand* a game who p#ans to b"y a stock and ho#d it !o a hand!"# o! yea s o a co"p#e o! decades can #a ge#y igno e the antics o! the ma ket ove the sho t "n. In that case* the !"ndamenta# mode is the methodo#ogy o! choice. 8n the othe hand* a p"nte who intends to take advantage o! the gy ations o! the ma ket ove the span o! a !ew days o weeks need not wo y ove m"ch abo"t the !"ndamenta# !acto s behind a stock. Instead* the main conce n sho"#d be a !itting choice o! vehic#e to ide the waves in the ma ketp#ace. In this #ight* one c "cia# t ait #ies in the ob"stness o! the asset. That is* the vesse# sho"#d be a ha dy ig that has a neg#igib#e chance o! going b"st a## o! a s"dden. A second iss"e invo#ves the nat" e and e'tent o! the swings in p ice. Idea##y* the vehic#e sho"#d e'hibit #a ge swings to the "pside and downside in a eg"#a !ashion. As it happens* #egions o! p#aye s !a## in the midd#e catego y between the hype active t ade and the stando!! investo . A showcase is !o"nd in the pa t;time game who p#ans to ho#d a stock !o a !ew months o a co"p#e o! yea s at most. 8n the downside* tho"gh* the midd#ing ange is a#so the most cha##enging po tion o! the p#anning ho i=on. To e'p#ain the nat" e o! the p edicament* the simp#est app oach is to begin with a co"p#e o! co"nte points. 0o sta te s* we conside a stock inde' which has advanced at a b#iste ing pace ove the past /"a te . A!te the giddy move* the benchma k is a #ot mo e #ike#y to swoon athe than s" ge even !" the ove the ne't co"p#e months. 0o this eason* it doesn>t take a ocket scientist to iss"e a downbeat !o ecast !o the nea !"t" e. 17

9e can a#so cite a co"nte e'amp#e towa d the #ong end o! the time sca#e. 0o instance* a ma ket benchma k is !a mo e #ike#y to ise than to !a## ove the co" se o! a co"p#e o! decades no matte what whe e it happens to #oite today. In that case* a soothsaye can sa!e#y p edict a move to the "pside witho"t having to e'amine the ent ai#s o! bi ds o ead any tea #eaves. The chee y es"#t wi## a#most s" e#y come to pass ega d#ess o! the vicissit"des o! the ma ket in the inte vening yea s. 5y cont ast* !o ete##ing the ma ket ove the midd#ing ange is the to"ghest task o! a##4 the e a e no pat answe s that can be whipped o"t with abandon. 8n a positive note* tho"gh* the inte mediate st etch is the bai#iwick o! the !"ndamenta# app oach as we## as the technica# one. To ecap* a !o ecast ove the midd#ing ange is the most cha##enging o! a##. Un!o t"nate#y* the midd#e g o"nd is p ecise#y whe e my iads o! investo s !ind themse#ves. 0o the b"#k o! p#aye s* then* the on#y cogent app oach is to combine the !"ndamenta# and technica# modes o! ana#ysis. In that case* the ne't /"estion is how best to !"se the dive gent techni/"es. To this end* we can identi!y two kinds o! schemes4 "pwa d o downwa d modes o! integ ation. The !o me tack begins with a mic o#eve# ana#ysis o! the conditions in the ma ketp#ace then moves "pwa d in o de to integ ate the high;#eve# aspects. 5y cont ast* the #atte app oach begins with a b oad scan o! the big pict" e and d i##s down to the nitty; g itty o! a speci!ic asset. $ithe st ategy invo#ves a !"sion o! the !"ndamenta# and technica# !acets. As an e'amp#e* conside the bottom;"p app oach. The "pwa d th "st may begin with the o"t#ook !o ea nings !o a given company. This app aisa# can then be combined with the technica# !eat" es o! the p ice action the stock ma ket in o de to !ig" e o"t the best point o! ent y !o b"i#ding "p a stake. 8n the othe hand* the top;down app oach is spot#ighted by the ana#ysis o! a speci!ic stock sta ting ! om a gene a# tendency o! the ma ket as a who#e to c#imb highe in ecent yea s. 14

The b oad pict" e can then be combined with othe ma c o#eve# !acto s s"ch as the c" ent po#icy o! the cent a# bank in e'panding o cont acting the poo# o! money s#oshing a o"nd the !inancia# system. The pano amic view then sets the backd op !o ga"ging the p ospects !o a stock in te ms o! the o"t#ook !o co po ate p o!its. Anothe samp#e o! a mic o#eve# t ait #ies in the #atest eading o! p"b#ic sentiment ega ding the e/"ity in pa tic"#a * as in the case o! a !a##ing p ice despite a ising st eam o! ea nings !o the !i m. In these ways* the top;down scheme can integ ate s"nd y aspects o! the !"ndamenta# as we## as technica# schemes. The sto y is simi#a !o the bottom;"p app oach to !"sion. In the sections to come* we wi## have occasion to emp#oy the !"ndamenta# as we## as technica# modes o! ana#ysis a#ong with a combo o! both. In the p ocess* we wi## take "p both the "pwa d and downwa d methods !o combining the two types o! techni/"es.

Top !xchange Traded Funds for the Stock Market

At the dawn o! the mi##enni"m* the United &tates contin"es to p#ay the sta ing o#e in the wo #d o! !inance. 8n one hand* the sway o! the p imo in the g#oba# economy has sh "nk a g eat dea# since the heady days ight a!te the c#ose o! the &econd 9o #d 9a . 8n a positive note* the main ca"se o! the comedown happens to be a hea ty one. The dec#ine o! the co#oss"s in a e#ative sense stems not ! om the sh inkage o! the U.&. economy b"t ! om the "pg owth o! the eme ging ma kets. (espite its waning c#o"t* howeve * the U.&. sti## se ves as the standa d bea e in the g#oba# ma ketp#ace. 9hen the stock ma ket in Ame ica sags* !o instance* the bo" ses in othe co"nt ies tend to d oop even mo e. 6iven the dominance o! the spea head in the !inancia# !o "m* the mass media o"nd the wo #d o"tine#y epo t on the goings;on in the U.&. In this conte't* the best;known

1-

benchma k o! the stock ma ket is none othe than the Ame ican icon known as the (ow )ones Ind"st ia# Ave age K()IAL. The benchma k was c eated in the twi#ight o! the 1D th cent" y as a p o'y !o the #oca# bo" se as a who#e. In its c" ent !o m* the inde' is a simp#e ave age o! the stock p ices !o 70 heavyweights #isted in the U.&. ma ket. The enowned names within the pantheon "n the gam"t ! om Mc(ona#d>s and 9a#;Ma t to I5M and 5oeing. The ()IA is t acked by an inde' !"nd known as the &,(G (ow )ones Ind"st ia# Ave age. The #atte poo# t ades in the U.&. ma ket "nde the ticke symbo# o! DI . In spite o! its pop"#a ity* the (ow inde' s"!!e s ! om a co"p#e o! d awbacks. 8ne handicap invo#ves the !act that the ya dstick cove s on#y a sma## s#ice o! a stock ma ket that happens to contain a my iad names. To b ing "p a second weakness* the composite inde' is obtained as a simp#e ave age o! the stock p ices. 0o this eason* a ! actiona# change in the va#"e o! a high;p iced e/"ity has a bigge impact on the benchma k as a who#e compa ed to a e#ative shi!t o! simi#a si=e !o a stock t ading at a #owe p ice. As an e'amp#e* a ise o! one;tenth !o an e/"ity which t ades at B200 at the o"tset amo"nts to B20. 5y cont ast* a simi#a move !o a stock p iced at B20 comes o"t to B2. In that case* the p icey iss"e wi## have 10 time times the impact on the (ow inde' as its #ow; p iced co"nte pa t. In the #a ge scheme o! things* howeve * the p ice #eve# depends !o the most pa t on the n"mbe o! sha es o"tstanding A which is me e#y a matte o! administ ative choice. In othe wo ds* the abso#"te p ice does not e!#ect the int insic wo th o! the company no its t "e impact in the ea# economy no !inancia# !o "m. 1et the (ow ya dstick acts as i! the aw p ice does p#ay a ma3o o#e. In o de to add ess these !#aws* a nove# benchma k was concocted in the s"mme o! the 20th cent" y. The inde'* d "mmed "p by a se vice p ovide named &tanda d + ,oo >s* cove s -00 o! the #eading companies #isted on the bo" se. The va#"e o! the ya dstick is a 1?

weighted ave age o! the stock p ices. In this !o m"#a* the weights denote the e#ative he!t o! the widgets in te ms o! thei tota# va#"ation on the bo" se. The to"chstone cove s many o! the biggest names in the U.&. ma ket. The membe s o! the ci c#e "n the gam"t ! om App#e and Mic oso!t to $''on and ,!i=e . In the !inancia# comm"nity* a pop"#a #abe# !o the &tanda d + ,oo >s -00 inde' is !o"nd in "#/. A notab#e e'ception app#ies to 1ahoo 0inance A the most pop"#a po ta# amongst the investing p"b#ic A which #ikes to e!e to the benchma k as 0"#1. The e'change t aded !"nd !o &,M inde' !#ies "nde the banne o! "#$. 5y cont ast* a co"p#e o! sto ied benchma ks dea# on#y with the stocks #isted on the .asda/ e'change. The t ading netwo k ente ed the mainst eam o! c"#t" e in the th oes o! a b"bb#e in Inte net stocks d" ing the #ate 1DD0s. Amid the ga#e o! hype and hoop#a* the ne'"s /"ick#y t" ned into a stap#e o! the evening news a## ac oss the p#anet. 9hen the mass media epo t on the stat"s o! the .asda/ bo" se* they "s"a##y e!e to a b oad;based benchma k o! the ma ket. In this #ight* the .asda/ <omposite inde' cove s scads o! common stocks as we## as "ncommon widgets. Among the #atte a e e'change t aded !"nds and #imited pa tne ships. Anothe kind o! vehic#e #ies in the *erican De-ositor. 2ecei-t KA(GL* a sec" ity which ep esents a 3ot o! e/"ity in a company that happens to be based ab oad. In t acking the mot#ey types o! inst "ments* the <omposite benchma k comp ises mo e than 7*000 components. In sho t* the .asda/ <omposite inde' is a b oad meas" e o! the e/"ities #isted on the e'change. This ya dstick is the "s"a# benchma k epo ted by the !inancia# media th o"gho"t the p#anet. 8n the othe hand* a t acking !"nd wo"#d be ha d;p essed to keep t ack o! tho"sands o! stocks* many o! which come and go in sho t o de . The b"#k o! the e/"ities on the .asda/ e'change be#ong to sma## companies that pop "p and die o"t within a !ew yea s. 0o this eason* t acking the <omposite inde' wo"#d entai# a heavy #oad in the !o m o! administ ative ove head as we## as t ansaction costs. 1C

A #eane a#te native #ies in a compact inde' that cove s 100 o! the #eading names on the .asda/ e'change. In comp"ting the ya dstick* the ave age p ice depends on a set o! weights dete mined by the e#ative wo th o! the companies within the stock ma ket. The .asda/ 100 inde' inc#"des o"t!its that a e based o"tside the U.&. In this way* the benchma k di!!e s ! om the stance taken by the ()IA. Mo eove * !inancia# !i ms a e e'c#"ded ! om the .asda/ 100 ya dstick. As a es"#t* the te't" e o! the benchma k di!!e s ! om that o! the ()IA as we## as the &,M. In the !inancia# comm"nity* a common abb eviation !o the .asda/ 100 inde' is !o"nd in 3D/. Meanwhi#e* the t acking !"nd !o .(M spo ts the ca## sign o! %%%. 8ve the sho t te m* the t io o! benchma ks !o the stock ma ket may move independent#y o! each othe . 0o instance* the (ow inde' and its t acking !"nd might c eep "pwa d ove the co" se o! an ho" whi#e the othe two ya dsticks and thei o!!sp ing !"nds happen to s#ide #owe . 8n the othe hand* the th ee benchma ks tend to move in "nison ove #onge spe##s #asting a !ew days o mo e. The #inkage o! the ya dsticks o! co" se shows "p in the common di ection o! movement o! the t acking !"nds* whethe to the "pside o downside. (espite the pa a##e# heading* tho"gh* the e'tent o! the moves can di!!e by a good#y amo"nt. As a "#e* the stocks o! #a ge !i ms tend to !#"ct"ate #ess than those o! thei sma##e b eth en. &ince the (ow inde' cove s 70 o! the biggest names on the bo" se* the t acking !"nd is wont to be mo e dem" e than the othe s. As we noted ea #ie * the &,M keeps t ack o! -00 weighty stocks. $ven so* the 3"nio membe s within the t o"pe a e compact !i ms that #ies c#ose to the c#ass o! midd#eweights than the ci c#e o! titans. As a es"#t* the &pyde s tend to be a mite mo e !#ighty than the (iamonds.

1:

5y cont ast* the .asda/ 100 inde' cove s the biggest companies #isted on the namesake e'change. 8n the othe hand* some o! the these conce ns a e not that h"ge. 0 om a di!!e ent s#ant* the .asda/ e'change contains a host o! techno#ogy;based !i ms. 8n the who#e* the e/"ities o! the technica# so t a e p one to be mo e vo#ati#e than ave age. 0o these easons* the 2"bes tend to "nde go wi#de swings than the &pyde s which in t" n a e mo e 3"mpy than the (iamonds. These ha##ma ks o! the t acking !"nds a e visib#e in the e#ative pe !o mance o! the vehic#es in ecent yea s. The cha t be#ow* co" tesy o! 1ahoo 0inance K!inance.yahoo.comL* cove s a st etch o! !ive yea s ending in ea #y 2014. To se ve as a base#ine* the b#"e c" ve po t ays the path o! (IA th o"gho"t the inte va#. Meanwhi#e* the g een a c depicts the co" se o! the &pyde s ove the same st etch. A#tho"gh &,1 was #a"nched in )an"a y 1DD7* the p ice #eve# has been eset so that its t ace on the cha t sta ts o"t at the same point as the a c !o (IA. 9e can see ! om the e'hibit that the &pyde s we e wont to o"tpace the (iamonds ove the co" se o! the ha#!; decade. 5y cont ast* the path o! the 2"bes is ende ed in ed. The inde' !"nd was #a"nched in Ma ch 1DDD whi#e the Inte net ! en=y was in !"## swing. The p ice #eve# has been ad3"sted so that it sta ts o"t at the same point as the b#"e #ine !o the (iamonds at that 3"nct" e. The bottom pane in the g aphic shows the vo#"me o! t ansactions !o (IA. The most p ominent !eat" e is a spike in ea #y 200D. In the depths o! the 6 eat Gecession* the madding c owd #ost its senses and so#d o!! eve ything in sight inc#"ding the titans o! the stock ma ket and the ea# economy. 1et thei !ea s t" ned o"t to be ove b#own* and the wo #d did not come to an end a!te a##. The bottom pane a#so evea#s a co"p#e o! sma##e s" ges in the vo#"me o! t ading. A case in point is the sp" t in a"t"mn 2011 in tandem with a new!o"nd c ash o! the stock ma ket.

1D

8n the othe hand* the b#ow"p o! the bo" se that a"t"mn was anothe point#ess !#ap. The g"sh o! panic stemmed ! om in!#ated !ea s abo"t the debt c isis in $" ope a#ong with the demo#ition o! the g#oba# economy. In #ine with o" !o ecast a o"nd that time* howeve * the wo #d has managed to t "dge a#ong in spite o! the b o"haha in $" ope KKim* 2012L. In !act* the stock ma ket and the ea# economy kept on t "cking and managed to c#imb highe in the yea s to !o##ow.

Sway of Market "enchmarks and Index Funds

In the eyes o! the gene a# p"b#ic o"nd the g#obe* the (ow )ones Ind"st ia# Ave age is the mascot o! the stock ma ket. The inde' is wide#y epo ted in the !inancia# sections o! gene a# newspape s and evening b oadcasts. To a #esse e'tent* the sto y is simi#a !o the .asda/ ma ket. As we noted ea #ie * the "s"a# ya dstick epo ted by the p ess happens to be the <omposite met ic athe than the

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.asda/ 100 inde'. $ven so* the "ps and downs o! the stock e'change a e epo ted wide#y in some !o m o othe by the mass media not on#y in the U&A b"t a o"nd the wo #d. 5y cont ast* the &+, -00 benchma k is nowhe e c#ose to being a ho"seho#d name. The ya dstick #inge s in the shadows* !a emoved ! om the conscio"sness o! the society at #a ge. That is the o de o! in!#"ence !o the chie! benchma ks o! the bo" se. 8n the othe hand* the impact o! the inde' !"nds happens to va y inve se#y with the !ame o! the namesake benchma ks. Mo e p ecise#y* the &pyde s p#ay the dominant o#e* !o##owed by the 2"bes then the (iamonds. The o de o! p ominence shows "p in te ms o! the tota# va#"e o! the !"nds "nde management as we## as the dai#y vo#"me o! t ading. 0 om this stance* (IA is o! #esse impo t than its main iva#s. I! a sing#e inde' !"nd had to be c owned as the top dog* then &,1 wo"#d win the tit#e hands down. 0 om a di!!e ent ang#e* the dominance o! the &pyde s is consistent with the cent a# o#e p#ayed by the "nde #ying inde' within the !inancia# comm"nity. 0o the b"#k o! p o!essiona#s A anging ! om !"nd manage s to academic esea che s A the most pop"#a benchma k is !o"nd in the &+, -00. 0 om the standpoint o! the gen"ine investo * howeve * the choice o! one vehic#e ove anothe does not make a g eat dea# o! di!!e ence. The main eason #ies in the a##ied motion o! the "nde #ying benchma ks as we## as thei t acking !"nds. As an e'amp#e* the (iamonds tend to move in "nison with the &pyde s. That is* (IA is p one to shi!t in the same di ection* and by a compa ab#e amo"nt* when &,1 ises o !a##s by a sing#e pe cent o mo e. In that case* a !o ecast !o &,1 is !o the most pa t a ed"ndant e'e cise in a s" vey that happens to !eat" e (IA as we##. ("e to the tie;"p o! the inde' !"nds* an e!!icient co" se o! action is to sketch o"t the path o! the (iamonds then "se the mapping as a sta ting point !o the &pyde s as we## as the 2"bes. The o"tcome !o the #atte two vehic#es is apt to mi o to a high deg ee the e#ative changes in p ice !o (IA. 21

In b ie!* the ove a## behavio and p"nch #ine do not va y a g eat dea# amongst the chie! benchma ks. 0o this eason* a po t ait o! one is tantamo"nt to a sketch o! the othe .

#its and Misses over the $ast %ear

A yea ago* we p esented a b"nch o! !o ecasts A ove the span o! a yea and mo e A ega ding the g#oba# economy and the !inancia# ma kets. 8n one hand* the acc" acy o! the #ongish p edictions emain to be seen. 8n the othe hand* we can eview the t" no"t !o the yea ;#ong p edictions. Taken as a who#e* the bodements t" ned o"t to be !ai #y ight yet somewhat #acking. In the p o!essiona# comm"nity A anging ! om the p actitione s in the pits to the esea che s on the side#ines A the most pop"#a benchma k o! the stock ma ket #ies in the &+, inde' o! heavyweights. This ya dstick cove s -00 o! the #a gest companies on the U.&. bo" se. (espite the #isting on an Ame ican e'change* howeve * many o! the !i ms obtain a he!ty ch"nk o! thei p o!its ! om !a ;!#"ng ope ations o"nd the g#obe. As we e'pected a yea ago* the U.&. economy t" ned in a s"bd"ed pe !o mance in the midst o! a modest advance by the g#oba# economy at #a ge. Thanks to the benign envi onment* the ea nings o! the !i ms cove ed by the &+, benchma k e'panded as we##. In #ine with o" e'pectations* the income #eve# did contin"e to c#imb highe . 0 om a #a ge stance* the p o!its o! the companies within the inde' have isen in the wake o! a hai y p#"nge in 200D in the th oes o! the 6 eat Gecession. As a e!e ence point* conside the net income !o the stocks within the &+, inde' on a 12; month basis. At the beginning o! 200D* the ave age ea nings came o"t to an ann"a# s"m o! B17.71 pe sha e* a!te ad3"sting !o in!#ation and !i'ing the amo"nt in te ms o! constant do##a s at the p ice #eve# !o .ovembe 2012.

22

A yea onwa d* the co esponding !ig" e soa ed to B-C.?: pe sha e. 5y the beginning o! 2011* the intake swe##ed to B:2.24 pe "nit and contin"ed to g ow th o"gho"t the yea . Meanwhi#e the pe tinent !ig" e !o )an"a y 2012 was B::.:-. In !act* the ea nings had hit ock bottom at BC.42 pe sha e back in Ma ch 200D. A!te that !#op* the p o!its c#imbed steadi#y ove the yea s to !o##ow. A notab#e e'ception a#ong the way was a sma## hicc"p in Ma ch 2012 when the intake s#ipped by 14 cents compa ed to the p io month KM"#tp#.com* 2017L. 5ased on an ann"a# samp#ing o! the data* howeve * the on#y b#ot in the pict" e was a sma## dip in )an"a y 2017 when the ea nings s#ipped a tad to B:?.:D. 5y &eptembe the same yea * howeve * the p o!it st eam egained its vim and ose to BD2.CD KM"#tp#.com* 2014L. As things t" ned o"t* Ma ch 200D was a#so the point at which the stock ma ket had hit its nadi . The &+, -00 inde' p#"mbed a #ow o! ???.CD points whi#e the t acking !"nd !e## to B?C.10. 5ased on the #ast !ew pa ag aphs* we can see that the stock ma ket t" ned a o"nd p ecise#y when the p o!it #eve# sta ted to ecove . In othe wo ds* the investing p"b#ic was simp#y keeping "p with the ongoing !#ow o! ea nings !o the companies cove ed by the &+, benchma k. &o m"ch !o the !anci!"# notion that the stock ma ket a#ways p edicts the ea# economy ahead o! time. To ecap* the p o!its o! the companies within the &+, -00 have been ising steadi#y since the !inancia# c isis o! 200: a#ong with the wo #dwide ecession. The ea nings pe sha e on a yea #y basis hit a #ow o! B17.71 in )an"a y 200D b"t c#imbed highe to each B:D.?? by )"ne 2012* with !" the gains to come. In this way* the stock ma ket has been s#ogging highe in spite o! the occasiona# !#a e;"p o! 3itte s in the !inancia# comm"nity. A showcase o! the #atte was the c ash o! the stock ma ket in a"t"mn 2011. Nooking in the !o wa d di ection* we can e'pect an "pt" n in pe !o mance ! om a a!t o! bo" ses o"nd the wo #d which have wa##owed in a !"nk ove the past yea and mo e.

27

A big eason !o the #abo ed p og ess o! the eme ging ma kets #ay in the wo ies o! the investing p"b#ic ove a s#owdown in <hina in tandem with knock;on e!!ects th o"gho"t Asia and the est o! the wo #d. As "s"a#* tho"gh* the seve e angst o! the madding c owd t" ned o"t to be #a ge#y g o"nd#ess. As we noted ea #ie * the po#iticians o! the 9est have opted to st ang#e thei economies by p opping "p the h"#king disto tions in the ea# economy ca"sed by the ! en=y o! spec"#ation in ea# estate d" ing the "n;"p to the !inancia# c isis o! 200:. Unde no ma# conditions* howeve * the ho"sing secto acts a p ima y engine o! g owth !o the enti e economy. The same is t "e o! co" se in an inve se sense. I! the p ope ty ma ket is bo"nd "p in chains* then the est o! the economy can at best me e#y #imp a#ong. In the absence o! a who#esa#e change in po#icy* the b"#k o! 9este n ma kets wi## contin"e to gnash and g ind we## into the ne't decade KKim* 2011* 2012L. In that case* the tangib#e economy as we## as the stock ma ket wi## have to st "gg#e mighti#y in o de to make any headway at a##. 8n the othe hand* the e is no good eason !o the sp o"ting egions o! the wo #d to behave in a simi#a !ashion. 0o one thing* the eme ging ma kets can and sho"#d t ade with each othe in g eate vo#"mes and th"s !oste thei m"t"a# g owth. As a happy conse/"ence* the "ps" ge o! the sp y egions wi## #ead to the "ptake o! impo ts ! om 9este n co"nt ies in g eate vo#"mes. The p od"cts in demand span the gam"t ! om #"'" y ca s and designe 3eans to b#ockb"ste !i#ms and c oss;bo de to" ism. As a es"#t* the g o"ndswe## o! g owth wi## he#p to "p#i!t the b#ighted nations o! the 9est in spite o! thei #itany o! se#!;in!#icted wo"nds and co"nte p od"ctive schemes. A yea ago* o" main task was to th ash o"t a c#"tch o! !o ecasts !o the t io o! inde' !"nds that t ack the #eading benchma ks o! the stock ma ket. In the p ocess* we began with a p o3ection !o the (iamonds* then moved on to the &pyde s !o##owed by the 2"bes.

24

The e we e seve a# easons !o sta ting o"t with the (IA athe than its iva#s. 0o one thing* the (iamonds keep tabs on the (ow )ones Ind"st ia# Ave age* which boasts the #ongest t ack eco d by !a . A second* and e#ated* eason invo#ved the !act that the (ow inde' happens to be the #eading icon o! the stock ma ket !o my iads o! investo s as we## as obse ve s. The beacon ho#ds sway not on#y in the U.&. b"t th o"gho"t the wo #d. To b ing "p a thi d !acto * the (ow tends to be mo e stab#e than eithe o! its chie! iva#s. The eason is that the benchma k cove s 70 o! the biggest names in the ma ketp#ace. 5y cont ast* the .asda/ ya dstick spans a b oade a ay o! the top 100 !i ms within its compass. Meanwhi#e the &+, -00 inde' keeps t ack o! a #a ge g o"p o! sta#wa ts. As a es"#t* each o! the e'pansive benchma ks contains a a!t o! !i ms that a e c#ose to the stat"s o! midd#eweights athe than heavyweights. In #ine with the no m in the stock ma ket* the sma##e contende s tend to be mo e !#ighty than thei #a ge b eth en. A#tho"gh e'ceptions can a ise* the (ow inde' tends to be mo e dem" e than its yo"nge sib#ings. An e't eme e'amp#e c opped d" ing the Inte net b"bb#e o! the #ate 1DD0s* when the (ow did not come c#ose to 3oining the mind#ess sp" t o! the stock ma ket as a who#e. Meanwhi#e* an e'amp#e c#ose to the "s"a# state o! a!!ai s c opped "p d" ing the amp;"p o! the bo" se in the second ha#! o! 2017. A mini;b"bb#e in the U.&. showed "p in the p ice action !o &,1 and 222* which kept acing highe with ha d#y a pa"se. In #ine with the no m* howeve * the (iamonds eased "p a#ong the way and took a !ew months to catch its b eath. To wit* the esting point t" ned o"t to be a mi#epost in the B1-C =one. 8n the othe hand* the &pyde s and 2"bes kept dashing "pwa d. As a es"#t* the c ispness o! the mi#estone !o the (iamonds A which showed "p as a ho i=onta# od on the p ice cha t* as we wi## see be#ow A t" ned into a smea ed =one in the case o! &,1 as we## as 222.

2-

The es"#ting po t ait #ooked as i! the #ast po tion o! the cha t !o each o! the &pyde s and 2"bes had been st etched "pwa d so that the ho i=onta# st ipe had mo phed into a m"shy amp s#oping "pwa d. In othe wo ds* the e was no #andma k to speak o! A me e#y a m"dd#ed mess. 6iven this backd op* the (iamonds have thei att actions as the mainstay !o cha ting the co" se o! the bo" se going !o wa d. A !o ecast !o (IA can then se ve as the sp ingboa d !o p#otting the !"t" e o! &,1 as we## as 222. In the mode n e a* the (ow inde' hit a ma3o peak at 11*C-0.70 points at the height o! the Inte net ! en=y at the t" n o! the mi##enni"m. Then the ya dstick b oke down with the est o! the stock ma ket ove the ne't co"p#e o! yea s. 5y the midd#e o! the decade* howeve * the benchma k eco"ped its #osses and eached a new!o"nd =enith at 14*1D:.10 in 8ctobe 200C. Then the inde' c "mp#ed in stages* #eading to a bottom in Ma ch 200D in the th oes o! the 6 eat Gecession. 5y a"t"mn 2012* howeve * the (ow had eco"ped the b"#k o! its #osses and was p"shing highe with new!o"nd g"sto. 6iven this backd op* it was c#ea to "s at the beginning o! 2017 that the (ow wo"#d b eak th o"gh its p evio"s peak ove the co" se o! the coming yea . Mo eove * the e was no good eason !o the ya dstick to hit a wa## and kee# ove at the p io ape' set in 200C. As a es"#t* a !o ecast o! the benchma k was e#ative#y st aight!o wa d. 5y cont ast* a p ediction !o &,1 had to contend with a co"p#e o! knotty iss"es. 9e wi## take a c#ose #ook at the st"mb#ing b#ocks in the sections to come.

Performance of DIA Nast )an"a y* the (iamonds #ed the #ine"p o! !o ecasts !o the chie! benchma ks o! the stock ma ket. Acco ding to the set"p at the time* the !i st mi#estone !o the yea #ay at a p ice o! B140.C1 pe sha e. Mo eove * we noted that the #andma k was #ike#y to be eached by the midd#e o! the yea KKim* 2017L. 2?

The cha t be#ow* co" tesy o! &tockcha ts Kstockcha ts.comL* po t ays the p ice action ove the co" se o! 2017. 0o each stick !ig" e in the diag am* the ve tica# st oke depicts the ange o! va#"es A ! om #ow to high A d" ing a sing#e day o! t ading* whi#e the ho i=onta# tick denotes the p ice #eve# at the c#ose o! the day. The mi#epost at B140.C1 is depicted by a g een ho i=onta# #ine on the #e!t side o! the e'hibit above. As we can see ! om the g aphic* the initia# ta get was eached we## within the sched"#e #aid o"t at the beginning o! 2017.

Acco ding to the de!a"#t scena io that we envisaged* the (iamonds wo"#d t "dge "pwa d in a mo e o #ess steady !ashion "nti# it app oached its !i st ta get. Then (IA wo"#d !a## back and s" ende a big po tion o! the advance. A!te the p"##back* the ig wo"#d p ess !o th once mo e and t amp past the !i st ma ke . As things t" ned o"t* the inde' !"nd !o##owed a s#ight#y di!!e ent path. Instead o! s#ogging highe at a meas" ed pace* the p#odde took time o"t !o a pa"se d" ing the month o! 0eb "a y. A!te gathe ing its st ength* the sta#wa t p essed on once mo e and t "dged past the !i st mi#estone witho"t a hitch.

2C

Nast yea * we a#so sketched o"t a second mi#epost at the B14- #eve# and opined that the ma ke wo"#d be eached by the end o! the yea . 8nce again* the p ediction t" ned o"t to be va#id b"t conse vative. The (iamonds b eached the ba ie !o the !i st time d" ing the sp ing. 8n the othe hand* the vehic#e had a ha d time gaining t action a!te this stage. As #ate as 8ctobe * the inde' !"nd was sti## hove ing in the vicinity o! the second mi#epost. Unde no ma# conditions* the (iamonds sho"#d have ended the yea in the gene a# envi ons o! B14-. As a point o! e!e ence* (IA c#osed o"t 2012 at a p ice o! B170.-:. In that case* the second ma ke at B14- stood 11.0@ beyond the te mina# p ice at 2012. 8n the othe hand* #ast yea di!!e ed /"ite a bit ! om the "s"a# t ek o! the stock ma ket. Anothe notab#e !eat" e o! the !o egoing cha t is a ba ie in the neighbo hood o! B1-C* as indicated by the ed st ipe. In o" p esage #ast yea * we !ai#ed to ta#k abo"t a thi d mi#estone at this #eve#. In any sobe p o3ection o! the stock ma ket* the thi d #andma k wo"#d not have shown "p "nti# 2014. 1et it did pop "p ahead o! sched"#e. &ad#y* the p emat" e o"tc op t" ns o"t to be a bad omen !o the nea !"t" e. 9ithin the ne't month o two* the (iamonds wi## #ike#y !a## back to the ed #ine o even c "mp#e be#ow the ba ie . Mo eove * the hasty move to the thi d mi#epost #ast yea means that the ma ket wi## #ike#y t" n o"t to be anemic at #east d" ing the !i st ha#! o! 2014. 5"t we a e getting ahead o! o" se#ves. 9e o"ght to s" vey some othe topics be!o e d "mming "p a systematic !o ecast !o the c" ent yea and beyond.

Performance of SPY and QQQ 8n the who#e* the sto y o! the (iamonds ove the past yea app#ies to the &pyde s and 2"bes as we##. As an e'amp#e* &,1 behaved p etty m"ch as e'pected d" ing the !i st ha#! 2:

o! the yea . To b ing "p anothe samp#e* the s"dden sp" t to the "pside towa d the end o! 2017 is bad news !o the inde' !"nd ove the months to come. The main !eat" es o! the sto y #ine we e simi#a !o 222. In view o! the pa a##e#s* we wi## e! ain ! om going into detai# ega ding the pe !o mance o! the &pyde s and 2"bes.

Outcome for Emerging Markets A yea ago* we made a b oad;based !o ecast !o the eme ging egions. Mo e p ecise#y* an advance by the !#agship benchma ks o! the U.&. o"ght to #ead the way !o a peppy pe !o mance by the bo" ses in the sp o"ting egions. A mode# o! "pg owth in the eme ging ma kets is !o"nd in a comm"na# poo# known as the 0i st T "st I&$ <hIndia Inde' !"nd K0.IL. The "nde #ying benchma k is maintained by I&$ $T0 Oent" es* a division o! the Inte nationa# &ec" ities $'change Kise.comL. The benchma k cove s a se#ection o! -0 names amongst the companies based in <hina and India. Mo eove * the stocks in the po t!o#io take the !o m o! Ame ican (eposita y GeceiptsF name#y* e/"ities which a e c" ent#y t aded on stock e'changes within the &tates. In #ine with the "pswe## o! the U.&. bo" se as a who#e* the inde' !"nd !o <hindia t" ned in a ste##a pe !o mance. Mo e p ecise#y* 0.I soa ed by 74.:@ ove the co" se o! 2017. 8! #esse impo t was the dividend yie#d amo"nting to some 0.:@. 8n the othe hand* the b"oyant mood o! the investo s within the U.&. did not ca y ove to the eme ging ma kets as a who#e. As a es"#t* the bo" ses in the b"dding egions t" ned in a disma# showing. In the ea#m o! b"dding ma kets* a pionee is !o"nd in a t acking vehic#e known as the i&ha es M&<I $me ging Ma kets !"nd K$$ML. Meanwhi#e* a second beacon #ies in the Oang"a d 0T&$ $me ging Ma kets $T0 KO98L.

2D

The cha t be#ow* adapted ! om 1ahoo 0inance K!inance.yahoo.comL* cove s the pe iod ! om the o##o"t o! O98 in sp ing 200- "nti# the end o! 2017. The g aphic po t ays the e#ative pe !o mance o! the inde' !"nds !o the eme ging ma kets as we## as the !#agship vesse#s in the !o m o! &,1 and (IA. As we can see ! om the #e!t po tion o! the e'hibit* the b"dding ma kets ose mo e than twice as m"ch as &,1 and (IA "nti# the end o! 200C. Then the sap#ings !e## o"gh#y twice as ha d d" ing the time o! t o"b#es be!o e and a!te the !inancia# c isis o! 200:.

A!te that stage* the dynamos again ose a o"nd twice as m"ch as the Ame ican benchma ks ove the ne't co"p#e o! yea s. Then the b"dde s c "mp#ed once mo e by thei "s"a# e'tent a o"nd the time the stock ma ket c ashed in a"t"mn 2011. In these ways* the eme ging ma kets have a way o! moving o"gh#y twice as m"ch in the same di ection as the chie! benchma ks o! the U.&. 8n the othe hand* the standa d behavio has changed d amatica##y ove the past co"p#e o! yea s. The abe ant state o! a!!ais is a#so e!#ected in the dive gent pe !o mance o! mat" e co"nt ies s"ch as <anada* 5 itain and 6e many. The standa d bea e s !o these ma kets

70

#ie in a t io o! inde' !"nds known as i&ha es M&<I <anada K$9<L* i&ha es M&<I United Kingdom K$9UL* and i&ha es M&<I 6e many K$96L. The cha t be#ow spans the same time ! ame as the !o egoing g aphic. The main di!!e ence is that (IA and $$M have been ep#aced by $9<* $96 and $9U.

The b#"e #ine shows the e#ative motion o! the O98 !"nd. The comm"na# poo# bo"nced a o"nd a good dea# b"t has gone nowhe e ove the past !o" yea s. 5ased on histo ica# data ! om 1ahoo 0inance* the t acking vehic#e was va#"ed at B41.00 pe sha e at the end o! 200D. 0o" yea s onwa d* the c ate had c ept "p by one;thi d o! a sing#e pe cent to a p ice o! B41.14 at the c#ose o! 2017. Meanwhi#e* we can see ! om the ed c" ve that the <anadian benchma k has !o the most pa t !o##owed the co" se o! O98 in ecent yea s. As an e'amp#e* $9< has gone nowhe e !ast ove the past co"p#e o! yea s. A p ime eason !o the #o"sy pe !o mance #ies in the conce ns o! the investing p"b#ic ove the pace o! g#oba# g owth. As it happens* <anada is a ma3o e'po te o! aw mate ia#s as we## as a !inancia# cente !o the mining ind"st y th o"gho"t the p#anet. 0o these easons* the !o t"nes o! the #oca# bo" se depend on to the e'pectations o! the gene a# p"b#ic ega ding the o"t#ook !o economic g owth in the b"dding egions inc#"ding the demand !o nat" a# eso" ces. 71

To cast a g#ance at $" ope* the 5 itish ma ket has !a ed somewhe e between the "pg owth o! the bo" se in the U.&. and the c "mmy t" no"t o! the #agge s inc#"ding <anada. 8n one hand* the bo" se in Nondon does ha bo a a!t o! companies !oc"sed on the p od"ction and dist ib"tion o! nat" a# eso" ces. 8n the othe hand* the ma ket a#so contains scads o! !i ms within the !inancia# secto in gene a# as we## as othe b anches o! the economy anging ! om etai#ing to in!otech. 6iven this backd op* the st"nted pe !o mance o! $9U e!#ects the 3itte s amongst inte nationa# investo s ega ding the ! ai#ty o! the g#oba# economy at #a ge. The !#aky behavio o! the he d shows "p in the cont asting t" no"t !o 6e many. 0 om the a c shown shaded in #ight p" p#e* we can see that $96 has !a ed at #east as we## as &,1 since the beginning o! 2012. 6iven the tepid state o! the economy ac oss $" ope as a who#e* the ob"st pe !o mance o! the 6e man !"nd does not stem ! om the hea#th o! the domestic ma ket no its nea by neighbo s. To b ing "p a te##ing e'amp#e* the cent a# bank o! 6e many eckoned that the g oss domestic p od"ct g ew by a me e 0.?@ in 2017. This meas#y pe !o mance was in t" n set to be !o##owed by a pa#t y pace o! 1.C@ in 2014* then by 1.:@ in 201- K(e"tsche* 2017L. (espite the m"ted conditions in the egiona# economy* the investing p"b#ic has adopted a sang"ine view o! the ea nings downst eam !o 6e man companies in gene a# d"e to thei abi#ity to se## mo"nds o! goods th o"gho"t the sp y egionsF name#y* the eme ging co"nt ies. In this #ight* the p od"cts on o!!e span the ainbow ! om !ancy ca s to capita# e/"ipment. In the mode n e a* the b"#k o! g owth in the g oss wo #d p od"ct comes ! om the eme ging ma kets. 0o this eason* the companies in the b"dding co"nt ies a e sitting in the d ive >s seat. In that case* the stock ma kets in the nascent egions o"ght to !#o" ish in #ike !ashion.

72

1et the swa m o! inte nationa# investo s has been wa y o! stepping in ea nest into the vib ant ma kets. 8ve the past co"p#e o! yea s* in pa tic"#a * the !ea o! vo#ati#ity in the eme ging egions has kept the madding c owd at bay. The t epidation wi## o! co" se !ade away soone o #ate . 9hen that happens* the b"dding ma kets wi## en3oy a powe !"# s" ge as they make "p !o #ost time. To s"m "p* a host o! bo" ses o"nd the wo #d have t ai#ed !a behind the ob"st pe !o mance in the U.&. ove the past co"p#e o! yea s. $ven so* the set"p is bo"nd to change d amatica##y within the ne't yea o so. An e'amp#e #ies in the #agging bo" ses o! $" ope which a e s#ated to !a e m"ch bette ove the yea to come. In a simi#a way* the eme ging ma kets a e s" e to egain thei st ide and b#oom !aste than the benchma ks o! the U.&. as time goes by.

& "road 'iew of the $ast

To bo ow the wo ds o! an $ng#ish ba d4 9hat>s past is p o#og"e !o the mo ow. In o de to pee into the !"t" e in a #"cid way* then* we need to sta t by #ooking in the backwa d di ection. 0o this p" pose* the !i st task invo#ves a !itting s" vey o! the big pict" e. In o" case* we wi## begin with the t" no"t o! the #eading inde' !"nds since the eve o! the mi##enni"m. The cha t be#ow* co" tesy o! M&. Money Kmoney.msn.comL* spans the pe iod ! om ea #y 1DDD ti## the end o! 2017. The b#"e c" ve in the g aphic po t ays the p og ess o! the (iamonds since the heyday o! the Inte net c a=e. The !i st peak in the cha t occ" ed a o"nd the t" n o! the mi##enni"m* a!te which the benchma k !e## apa t. The b" st o! the digita# b"bb#e sent the stock ma ket as a who#e into the pits ove the ne't co"p#e o! yea s.

77

The (ow inde'* a#ong with the stock ma ket as a who#e* took a co"p#e o! yea s to ecove ! om the smash"p. Then the t acking !"nd ma ked o"t a highe peak in the a"t"mn o! 200C be!o e c "mb#ing in stages to a t o"gh in sp ing 200D. At the beginning o! #ast yea * howeve * the vene ab#e benchma k t amped past its p evio"s s"mmit. 8n the who#e* the &pyde s !o##owed a simi#a path ove the same timespan. The main di!!e ence was that &,1 had a de#ayed eaction in =ooming past the p io cei#ing set d" ing the digita# c a=e o! the #ate D0s. Instead o! b eaking th o"gh the p evio"s peak it had !o med in sp ing 2000* the inde' !"nd b"mped into the ba ie and !e## back a co"p#e o! times. A!te the abo tive attempt in 200C* the ya dstick b oke down in a agged !ashion "nti# it hit ock bottom a co"p#e o! yea s #ate . Then the sta#wa t p"shed !o wa d once mo e. In sp ing 2017* the et" nee !ina##y managed to move past its p io peak. 8n the othe hand* the sto y di!!e s somewhat !o the 2"bes. The .asda/ inde' o! 100 giants soa ed to abs" d heights d" ing the ! oth o! the Inte net ! en=y. 9hen the b"bb#e 74

popped* the inde' !"nd took a co"p#e o! yea s to come down to ea th. 5y the time 222 hit the deck in a"t"mn 2002* it had #ost mo e than :0 pe cent o! its va#"e ! om the p io top. &ince then* the 2"bes have been t "dging "pwa d in tandem with its o#de pee s. The ya dstick !o med a #oca# peak in a"t"mn 200C be!o e c "mp#ing in a agged !ashion "nti# the da kest days o! the 6 eat Gecession in sp ing 200D. Then the inde' !"nd ecove ed in stages ove the ne't co"p#e o! yea s. In ea #y 2011* the 2"bes b"mped against its ecent peak set in a"t"mn 200C. Un!o t"nate#y* the benchma k did not get ve y !a be!o e it !e## back d" ing the c ash o! the stock ma ket in a"t"mn 2011. 8n the "pside* tho"gh* 222 p"shed past its mino s"mmit in a decisive !ashion in ea #y 2012. A!te that stage* the benchma k has been dashing highe at a b isk pace. 8n a negative note* 222 sti## has some way to go be!o e it eaches the giddy heights sca#ed in the th oes o! the Inte net c a=e. That ape' wi## pose a h"#king ba ie to !" the p og ess !o the comeback kid.

Facing Forward
In the ea# economy* the o"t#ook !o g owth ove the ne't co"p#e yea s is mo e s"nny than "s"a# since the !inancia# c isis o! 200: a#ong with the 6 eat Gecession. As an e'amp#e* the 9o #d 5ank e'pects the g#oba# economy to e'pand by 7.0@ this yea K9o #d* 2014L. Meanwhi#e the <on!e ence 5oa d !o esees a s#ight#y highe pace o! g owth amo"nting to 7.1@ K<on!e ence* 2017L. In ecent yea s* the vo#"me o! economic activity in the eme ging egions has been compa ab#e to the o"tp"t in the mat" e ma kets. As a es"#t* the "pswe## o! the deve#oping co"nt ies wi## comp ise the #ion>s sha e o! economic g owth !o the wo #d as a who#e. Mo e p ecise#y* the sp o"ting egions a e s#ated to s" ge by -.?@ ove the yea to come. 5y cont ast* the ich co"nt ies wi## e'pand by a me e 2.0@.

7-

0 om a di!!e ent ang#e* the ea nings o! the companies #isted in the stock ma ket !o m a so#id b idge between the ea# and !inancia# ma kets. To begin with* the intake o! p o!its in the co po ate secto depends #a ge#y on the vita#ity o! the tangib#e economy. In addition* the !#ow o! ea nings a!!ects a c "cia# ga"ge watched c#ose#y by the investing p"b#icF name#y* the atio o! the stock p ice to the ea nings pe sha e. 6iven this backg o"nd* the income st eam has a he!ty impact on the !o t"nes o! the stock ma ket. In this and othe ways* the #ot o! the companies in the ea# economy p#ay a decisive o#e in the !o t"nes o! thei e/"ities on the bo" se. 8n the "pside* the ea# economy is s#ated to !a e bette in 2014 than it did #ast yea . A#tho"gh the gains wi## be mode ate* the mass o! investo s can #ook !o wa d to a do##op o! hea#thy gains even so. 5y cont ast* the stock ma kets in !a ;!#"ng co"nt ies a e #ike#y to show mott#ed es"#ts. 8n the downside* the b"oyant bo" ses in the U.&. and some othe co"nt ies a e bo"nd to g ind highe at a #abo ed pace whi#e they take some time to digest to the bee!y gains they en3oyed #ast yea . $ven so* the b"i#d"p o! the ea# economy in the eme ging egions wi## n"dge "p the #oca# bo" ses as time goes by. &oone o #ate * the th ong o! inte nationa# investo s wi## shake o!! the 3itte s and et" n to the sp o"ting ma kets as hotbeds o! g owth. As a es"#t* the #agging ma kets o! Asia and othe egions sho"#d begin to !ee# the positive vibes by the end o! this yea .

Impact of Money $rinting

A p ominent so" ce o! economic data in the U.&. is !o"nd in the &t. No"is 0ed* a b anch o! the cent a# bank. Acco ding to the #atest !ig" es p o!!e ed by this o gan* the <ons"me , ice Inde' K<,IL ose at an ann"a# ate o! 1.2@ ove the co" se o! 12 months ending in .ovembe 2017 K0ede a#* 2014aL.

7?

The same so" ce asse ts that the g oss domestic p od"ct K6(,L g ew at a nomina# ate o! 7.7@ on an ann"a# basis ove the co" se o! a yea ending in the thi d /"a te o! 2017. Meanwhi#e the co esponding ta##y on a H ea#I basis A that is* a!te ad3"sting !o the bane o! in!#ation based on o!!icia# !ig" es p"b#ished by the gove nment itse#! A came o"t to 1.:@. &ad#y* the p ospects going !o wa d a e not m"ch ca"se !o ce#eb ation eithe . 5ased on a ecent !o ecast t otted o"t #ast a"t"mn* the 6(, was s#ated to g ow by a mite "nde 7@ !o the enti ety o! 2014 K0ede a#* 2017bL. Meanwhi#e* a ta##y by the 5" ea" o! $conomic Ana#ysis shows that the g owth o! co po ate p o!its s#ipped to 1.D@ in the thi d /"a te * down ! om 7.7@ d" ing the p evio"s st etch. 8ve the past !o" /"a te s "nti# #ast a"t"mn* the income st eam ose by a modest ate amo"nting to -.C@ K5" ea"* 2017L. <#ea #y* the #atte !ig" e did not come c#ose to 3"sti!ying a whopping s" ge in the benchma ks o! the bo" se. An e'amp#e in this vein was the #eap o! 2D.C@ by the t acking !"nd in the !o m o! &,1. 8n the !inancia# ! ont* a standa d meas" e o! the money s"pp#y dea#s with the stockpi#e o! cash co"p#ed with with nea ;cash assets. In this conte't* a ya dstick known by the snappy name o! &one. 4ero &aturit. KMPML e!e s to the poo# o! #i/"id assets which can be t" ned in a !#ash into ha d cash. In that case A "n#ike #oads o! othe assets s"ch as time deposits A the mat" ity date !o s"ch an asset is =i#ch. 0 om a p agmatic stance* MPM denotes the poo# o! money which is eadi#y avai#ab#e !o spending and cons"mption th o"gho"t the ea# economy as we## as the !inancia# !o "m. 5y cont ast* a b oade de!inition o! money !oc"ses on the o#e o! the c" ency as a medi"m o! e'change. As an e'amp#e* a c"stome co"#d pay !o a bag o! g oce ies by handing ove some cash o w iting a check. In this #ight* &1 cove s the sto eho"se o! physica# money in the !o m o! coins and bi##s in addition to the !"nds contained in demand deposits. An e'amp#e o! the #atte is a checking 7C

acco"nt. Anothe samp#e is a 3egotia+le Order of 5ithdra6al K.89L acco"nt at a comme cia# bankF this type o! set"p o!!e s a modic"m o! inte est payments on the cash ba#ance* yet pe mits the c"stome to w ite d a!ts against the amo"nt he#d on deposit. The p" pose o! the M1 ya dstick is to t ack the amo"nt o! money that is mo e o #ess in active ci c"#ation. 0o this eason* the met ic does not inc#"de conventiona# !o ms o! savings acco"nts. A b oade de!inition o! money is !o"nd in &2* which cove s the components within M1 as we## as othe !o ms o! nea ;cash. The #i/"id assets in the #atte catego y inc#"de the ba#ances in savings acco"nts as we## as money ma ket !"nds p#"s time deposits o! mode ate si=e. 8n one hand* a const ained asset o! this so t is #ess handy as a medi"m o! e'change. $ven so* each !o m o! wea#th can be conve ted into ha d cash in sho t o de . &"ppose that an individ"a# moves a wad o! B1*000 ! om a checking acco"nt into a money ma ket !"nd. 0 om the standpoint o! the save * the amo"nt o! cash avai#ab#e !o spending has ha d#y changed since the t ansaction co"#d be eve sed at wi##. In !act* the owne co"#d we## t eat the cash in the money ma ket !"nd as a demand deposit i! the acco"nt comes with a packet o! checks. 0o these easons* the t ans!e o! cash ! om one type o! acco"nt to anothe has es"#ted in no mate ia# change in the eyes o! the save . 8n the othe hand* the t ans!e o! !"nds o"t o! the checking o"t ed"ces the t ove o! money acco ding to the M1 meas" e. 5y cont ast* the ove a## amo"nt eckoned by M2 emains "nchanged. In view o! this distinction* the #atte ya dstick ep esents a bette meas" e o! the amo"nt o! money avai#ab#e !o spending by cons"me s. 6iven this backd op* M2 is a g"ab#y the most pop"#a meas" e o! money "sed by the economist. In ecent decades* howeve * MPM has a#so come to p#ay a g owing o#e in ga"ging the scope o! the money s"pp#y. 0o these easons* we wi## take "p this pai o! ya dsticks in si=ing "p the vo#"me o! money s#oshing a o"nd the ma ketp#ace. The p ecise ate o! money c eation o! co" se va ies ove time. $ven so* an e'amp#e wi## spot#ight the di==y pace at which the stockpi#e is being di#"ted and the c" ency th"s weakened. 7:

5ased on the #atest estimate avai#ab#e !o 8ctobe 2017* the vo#"me o! MPM g ew at an ann"a# ate o! 17.-?@. 8ve the same inte va#* M2 e'panded even mo e to the t"ne o! 14.C?@ on a yea #y basis K0ede a#* 2017aL. 0 om a #a ge stance* conside the poo# o! MPM in the agg egate. At the beginning o! 2000* the na ow meas" e o! money stood at B4.7CC t i##ion do##a s a!te ad3"sting !o seasona# va iations. 5y the time o! the #atest ta##y in .ovembe 2017* howeve * the stockpi#e had ba##ooned to B12.1:C t i##ion K0ede a#* 2014bL. &imp#y p"t* the money s"pp#y nea #y t ip#ed ove a timespan #asting #ess than 14 yea s. The b"i#d"p came o"t to a compo"nd ate o! ann"a# g owth o! a mite "nde C.C@. Meanwhi#e* the sto y did not di!!e m"ch ! om the standpoint o! the M2 ya dstick. At the beginning o! 2000* the b oade ga"ge amo"nted to B4.?47 t i##ion do##a s a!te seasona# ad3"stments. 5y .ovembe 2017* the co esponding !ig" e had soa ed to B10.D74 t i##ion K0ede a#* 2014cL. In that case* the compo"nd ate o! g owth came o"t to a tad "nde ?.4@ a yea . In the ea# economy* we a e to#d that the tota# o"tp"t has been g owing at a pa#t y pace o! some 1.:@ a!te ad3"sting !o in!#ation acco ding to o!!icia# estimates o! the "pt" n in the cost o! #iving. In that case* what happens when the s"pp#y o! money ises by nea #y :@ a yea acco ding to the MPM ya dstick* and s#ight#y #ess in te ms o! the M2 met icJ The do##a is b eaking down chop;chop* that>s what. 8n one hand* a good ! action o! the "ps" ge in the money s"pp#y gets stashed away in bank va"#ts. A!te the nea ;death e'pe ience o! the !inancia# c isis o! 200:* the !o#ks in the banking ind"st y have ba#ked at doing thei 3obs. That is* the bankste s a e now #oath to #end money not on#y to be se k spec"#ato s b"t to hea#thy companies as we##. 8n the othe hand* neithe MPM no M2 inc#"des the cash t"cked away in the depths o! a bank va"#t. In othe wo ds* each o! the ya dsticks keep t ack o! the heap o! moo#a that peop#e can p"t to eady "se in o de to b"y goods and se vices.

7D

In that case* one po tion o! the s" ge in the money s"pp#y wi## nat" a##y t ick#e into the ho"sing secto . .ot s" p ising#y* the p ope ty ma ket has been c eeping "pwa d in ecent yea s witho"t any good ca"se. 0 om a di!!e ent standpoint* the median #eve# o! income in the U.&. has stagnated o even dec#ined ove the past decade. Meanwhi#e* the cost o! #iving has s" ged !a beyond the pi!!#ing !ig" es t otted o"t by the gove nments o! the 9est. 6iven the c"tdown o! wea#th by way o! #owe income as we## as highe o"tgo* the ave age dwe##ing is sti## g oss#y ove p iced thanks to the misg"ided schemes o! the po#iticians in p oping "p the p ope ty ma ket. ("e to the p#etho a o! cont ived c "tches* the ho"sing ma ket wi## not ecove its hea#th no egain its st ide in !"## meas" e "nti# the 2020s. As a es"#t* the tangib#e economy wi## a#so have to #imp a#ong !o anothe decade o so KKim* 2012L. &o what happens to the est o! the money p"mped o"t by the cent a# bankJ The obvio"s destination #ies in the !inancia# !o "m inc#"ding the va#e o! stocks and bonds. As a di ect o"tg owth* the #eading benchma ks o! the bo" se have been dashing "pwa d !o no good eason. The in "sh o! money po" ing into the !inancia# system has to go somewhe e. 0o this eason* the mass o! investo s have been eage to 3"mp on any e'c"se* whethe ea# o imagined* to pi#e into the stock ma ket.

Top !xchange Traded Funds for the Stock Market

At the dawn o! the mi##enni"m* the United &tates contin"es to p#ay the dominant o#e on the !inancia# stage. 8n one hand* the in!#"ence o! the p imo in g#oba# a!!ai s has dwind#ed a #ot since the heady days ight a!te the &econd 9o #d 9a . The main ca"se o! the comedown happens to be a hea#thy one. The e#ative dec#ine o! the co#oss"s stems not ! om the sh inkage o! the U.&. economy b"t ! om the "pg owth o! the "nde deve#oped co"nt ies. 40

(espite its waning c#o"t* howeve * the U.&. sti## se ves as the spea head and be##wethe in the g#oba# ma ketp#ace. 9hen the stock ma ket in Ame ica st"mb#es* !o e'amp#e* the bo" ses in othe co"nt ies a e p one to p#"nge. 6iven the p imacy o! the titan in the !inancia# !o "m* the mass media o"nd the wo #d epo t o"tine#y on the goings;on in Ame ica. In the conte't o! the stock ma ket* the best known icon #ies in the (ow )ones Ind"st ia# Ave age K()IAL. The benchma k was concocted in the twi#ight o! the 1D th cent" y in o de to se ve as a p o'y !o the stock ma ket as a who#e. In its c" ent !o m* the inde' is a simp#e ave age o! the p ice #eve# !o 70 heavyweights #isted on the U.&. bo" se. The sta#wa ts within the pantheon ange ! om Mc(ona#d>s and 9a#;Ma t to I5M and 5oeing. The ()IA is t acked by an inde' !"nd known as the &,(G (ow )ones Ind"st ia# Ave age. The #atte t ades in the U.&. ma ket "nde the ticke symbo# o! DI . As a es"#t* the inde' !"nd has taken on the nickname o! Dia*onds. In spite o! its pop"#a ity* the (ow inde' s"!!e s ! om a !ew d awbacks. 8ne handicap #ies in the !act that the benchma k cove s on#y a sma## s#ice o! a stock ma ket that contains a my iad e/"ities. To b ing "p anothe downside* the composite inde' is obtained as a simp#e ave age o! the sha e p ices. 0o this eason* a ! actiona# change in the va#"e o! a high;p iced e/"ity has a #a ge impact on the ove a## ya dstick compa ed to a simi#a move !o a stock with a #owe p ice tag. 1et the abso#"te p ice depends in #a ge pa t on the n"mbe o! sha es o"tstanding* and has no di ect #ink to the int insic wo th o! the ente p ise no its impact in the ma ketp#ace. In o de to add ess these !#aws* a nove# benchma k was #a"nched in 1D-C. 0ashioned by a se vice p ovide named &tanda d + ,oo >s* the inde' cove s -00 o! the #eading names in the stock ma ket. The benchma k comp"tes the ave age va#"e as a weighted s"m o! the stock p ices. In the p ocess* the weights e!#ect the e#ative he!t o! each company in te ms o! its tota# va#"ation in the stock ma ket. 41

The benchma k cove s many o! the biggest !i ms #isted on the U.&. bo" se. The membe s o! the ci c#e "n the gam"t ! om App#e and Mic oso!t to $''on and ,!i=e . In the !inancia# comm"nity* a common abb eviation !o the &tanda d + ,oo >s -00 inde' #ies in "#/. A notab#e e'ception is !o"nd in 1ahoo 0inance A the most pop"#a po ta# amongst the investing p"b#ic A which #ikes to denote the benchma k as 0"#1. The e'change t aded !"nd !o &,M inde' !#ies "nde the banne o! "#$. The #atte vehic#e is a#so known as the "-.ders o "-iders. 5y cont ast* a co"p#e o! sto ied benchma ks dea# on#y with the stocks avai#ab#e in the .asda/ ma ket. The ne'"s ente ed the mainst eam o! c"#t" e in the th oes o! a b"bb#e in Inte net stocks d" ing the #ate 1DD0s. Amid the g"sh o! hype and hoop#a* the stock e'change t" ned into a ho"seho#d name a## ac oss the p#anet. 9hen the !inancia# media epo ts on the .asda/* they "s"a##y e!e to a b oad;based benchma k o! the ma ket. In this #ight* the <omposite inde' cove s scads o! o dina y stocks as we## as e#ated vehic#es. Among the #atte a e e'change t aded !"nds and #imited pa tne ships. Anothe type o! sec" ity #ies in a packet o! !o eign sha es known as an *erican De-ositor. 2ecei-t KA(GL. 6iven the mot#ey types o! inst "ments* the <omposite benchma k cove s mo e than 7*000 components. In sho t* the .asda/ <omposite is a b oad meas" e o! the e/"ities #isted on the namesake e'change. This ya dstick is the "s"a# benchma k epo ted by the !inancia# media o"nd the wo #d. 8n the othe hand* a t acking !"nd wo"#d !ace a h"ge b" den in t ying to keep "p with tho"sands o! stocks* many o! which come and go in sho t o de . The b"#k o! the e/"ities on the .asda/ e'change be#ong to sma## companies that pop "p then die o!! within a matte o! yea s. 0o this eason* t acking the <omposite inde' wo"#d entai# a heavy b" den in the !o m o! administ ative ove head as we## as t ansaction costs.

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A #eane a#te native #ies in a compact inde' that cove s 100 o! the #eading names on the .asda/ e'change. In comp"ting the ya dstick* the ave age p ice depends on a set o! weights dete mined by the ove a## wo th o! the company in the stock ma ket. The .asda/ 100 inde' inc#"des companies that a e based o"tside the U.&. In this way* the benchma k di!!e s ! om the set"p behind the ()IA. In addition* !inancia# !i ms a e e'c#"ded ! om the .asda/ 100 ya dstick. As a es"#t* the te't" e o! the benchma k di!!e s somewhat ! om the composition o! the ()IA as we## as the &,M. A common abb eviation !o the .asda/ 100 inde' is !o"nd in 3D/. Meanwhi#e* the t acking !"nd !o .(M spo ts the ca## sign o! %%%. The #atte e/"ity is a#so known as the %u+es. 8ve the sho t te m* the t ip#et o! benchma ks !o the stock ma ket may move indepedent#y o! each othe . 0o instance* the (ow inde' and its t acking !"nd might c eep "pwa d whi#e the othe two ya dsticks and thei e/"ity !"nds s#ide #owe . 8n the othe hand* the th ee benchma ks tend to move in "nison ove #onge spe##s #asting a !ew days o mo e. The tie;"p o! the ya dsticks o! co" se shows "p in the common di ection o! movement o! the co esponding !"nds* whethe to the "pside o downside. (espite the a#ignment in heading* tho"gh* the ange o! motion can di!!e by a good#y amo"nt. As a "#e* the stocks o! #a ge !i ms tend to !#"tte #ess than those o! thei sma##e pee s. &ince the (ow inde' cove s 70 o! the biggest names on the bo" se* the t acking vehic#e is wont to be mo e sedate than its iva#s. As we noted ea #ie * the &,M keeps t ack o! -00 #a gish !i ms. $ven so* the membe ship happens to contain a smatte ing o! compact !i ms that a e c#ose to the midd#eweight g o"p than the heavyweight c#ass. As a es"#t* the &pyde s tend to be a mite mo e !#ighty than the (iamonds.

47

5y cont ast* the .asda/ 100 inde' cove s the biggest names within the .asda/ inde'. 8n the othe hand* some o! the these conce ns a e not that big. 0 om a di!!e ent s#ant* the .asda/ e'change contains a host o! techno#ogy;based !i ms. 8n the who#e* the e/"ities o! the technica# so t a e p one to be mo e ! isky than ave age. 0o these easons* the 2"bes tend to "nde go wi#de swings than the &pyde s which in t" n can be a tad mo e amb"nctio"s than the (iamonds.

#eft of Market "enchmarks versus Index Funds

0o the wo #d at #a ge* the (ow )ones Ind"st ia# inde' se ves as the poste chi#d !o the stock ma ket in gene a#. The benchma k is wide#y epo ted in the !inancia# sections o! gene a# newspape s and TO b oadcasts. To a #esse e'tent* the sto y is simi#a !o the .asda/ ma ket. As we noted ea #ie * the "s"a# ya dstick epo ted by the p ess happens to be the <omposite inde' athe than the .asda/ 100 ve sion. 9hicheve ga"ge is chosen* tho"gh* the "ps and downs o! the e#ect onic e'change a e epo ted o"tine#y by the mass media not on#y within the U&A b"t a o"nd the wo #d. 5y cont ast* the &+, -00 is nowhe e c#ose to being a ho"seho#d name. The benchma k #inge s in the shadows* !a emoved ! om the conscio"sness o! the society at #a ge. 8n the othe hand* the signi!icance o! the inde' !"nds happens to be the inve se o! thei ta get benchma ks. In othe wo ds* the &pyde s p#ay the dominant o#e* !o##owed in t" n by the 2"bes then the (iamonds. The o de o! p ominence shows "p in te ms o! the capita# ent "sted by the investing p"b#ic as we## as the t ading vo#"me in the stock ma ket. 0 om this stance* then* (IA ca ies #ess weight than its main iva#s. I! a sing#e !"nd we e to be c owned as the kingpin* the obvio"s choice #ies instead in &,1 A o in 222 to a #esse e'tent.

44

The p ominence o! the &pyde s is consistent with the cent a# o#e p#ayed by its co esponding benchma k in the !inancia# comm"nity. 0o the b"#k o! p o!essiona#s A anging ! om !"nd manage s to academic esea che s A the most pop"#a ya dstick #ies in the &+, -00 inde'. 0 om a p agmatic stance* howeve * the #ot o! the (iamonds is #inked c#ose#y to the !o t"nes o! the &pyde s. That is* (IA tends to t ave# in the same di ection* and by a compa ab#e amo"nt* when eithe vesse# makes a si=ab#e move. In that case* a !o ecast o! the &pyde s is !o the most pa t a s"pe !#"o"s e'e cise within a s" vey that happens to !eat" e the (iamonds as we##. 0o these easons* we wi## !oc"s most#y on (IA in this eview. The t" no"t !o the &pyde s wi## #ike#y mi o to a high deg ee the e#ative motion o! the (iamonds. The same app#ies to the 2"bes* a#tho"gh to a s#ight#y #esse e'tent.

Trends in the (orld !conomy

8ve the ne't co"p#e o! yea s* the g#oba# economy is s#ated to ch"g a#ong as it has done o! #ate. 8n the "pside* tho"gh* the o"t#ook at this stage is a tad bette than it has been in a co"p#e o! yea s. Acco ding to a p e#imina y estimate by the 9o #d 5ank* the g#oba# economy g ew by 2.2@ ove the co" se o! 2017. 5ette yet* the g owth ate is e'pected to ise to 7.0@ d" ing the yea to come* !o##owed by an "pt" n o! 7.7@ in 201-. In #ine with the gene a# "pt" n* the U.&. sho"#d e'pand by 2.:@ this yea * !o##owed by 7.0@ ne't yea . 5y way o! compa ison* the inc ease #ast yea was a s#ende 2.0@. 5y cont ast* the e" o a ea wi## #ag the Ame ican be##wethe by eking o"t a gain o! 0.D@ this yea then 1.-@ the ne't. 9eak as the n"mbe s a e* they o"tshine the mis!o t"ne o! negative g owth ates acked "p ove the past co"p#e o! yea s* inc#"ding the downt" n o! min"s 0.?@ in 2017.

4-

As "s"a# in the mode n e a* the deve#oping co"nt ies wi## #ead the way to highe g owth4 -.?@ in 2014 !o##owed by -.C@ the ne't* in the wake o! a gain o! -.1@ #ast yea . Among the ma3o economies o! the wo #d* the top p i=e goes to <hina as "s"a#. The Midd#e Kingdom sho"#d cha#k "p a g owth ate o! :.0@ this yea !o##owed by C.D@ the ne't. As a point o! e!e ence* the "pt" n in 2017 was C.C@. The othe heavyweight is !o"nd in India. The sta#wa t is p o3ected to e'pand by ?.-@ this yea * then ?.C@ the ne't. 5y compa ison* the go;gette acked "p -.C@ in 2017 K9o #d* 2014L. In b ie!* the p ospects !o the yea to come a e bette than they have been ove the past co"p#e o! yea s. The advance o! the ea# economy wi## be a tonic !o a host o! stock ma kets* many o! which missed o"t on the "ps" ge #ast yea in the U.&. as we## as a gagg#e o! othe co"nt ies o"nd the wo #d.

Fresh "inge of Money )reation

In the midd#e o! (ecembe 2017* the cent a# bank decided to ease "p on its ongoing sp ee o! quantitati(e easing K2$L. The #atte te m* !ancy as it may so"nd to the "ninitiated* is simp#y a e"phemism !o p inting "p gobs o! money and p"mping the g"she into the !inancia# system. Unde no ma# conditions* the cent a# bank e'pands the money s"pp#y by p inting "p a mo"nd o! cash o"t o! thin ai and "sing the heap to p" chase the debt ch" ned o"t by the e'ec"tive b anch o! the gove nment. In the case o! the U.&.* !o instance* the 0ede a# Gese ve cond"cts ope ations in the open ma ket in o de to b"y the bonds that have been iss"ed by the T eas" y (epa tment. The p" chase o! a sec" ity by the cent a# bank p ovides the !o me owne with a do##op o! money that can be "sed to b"y goods and se vices in the ea# economy. In a t ansaction o! this so t* the se##e may take a va iety o! !o ms anging ! om so#ita y investo s and co po ate conce ns to m"t"a# !"nds and !o eign states. 4?

It makes scant di!!e ence whethe the ecipients o! the moo#a "se the p oceeds at once in o de to pay thei bi##s* o opt instead to ho#d onto the cash. &oone o #ate * the b"#k o! the money obtained ends "p as cash ese ves in bank acco"nts. In a hea#thy economy* the banks ho#ding the deposits wo"#d p"t the !"nds to "se by #ending them o"t in e'change !o an in!#ow o! inte est payments. 8n the opposite side o! the t ansaction* the bo owe s can "se the #oans to !inance thei e'pendit" es by way o! cons"mption o investment. In the a!te math o! the !inancia# c isis* howeve * #egions o! comme cia# banks have chosen to hoa d the cash in thei va"#ts athe than #end it o"t. As a es"#t* the standa d scheme o! the cent a# bank !o p"mping money into the ma ketp#ace has been p"t o"t o! commission. As an a#te native* the nationa# bank has taken to b"ying "p gobs o! !inancia# p od"cts d "mmed "p by p ivate !i ms. In pa tic"#a * the p" chase o! mo tgage bonds e'pands the poo# o! pa ticipants that get thei hands di ect#y on the newbo n do"gh stamped o"t by the cent a# bank. In b"ying "p ood#es o! bonds in the c edit ma ket* the nationa# bank sho es "p the p ices o! the ta get widgets A and by e'tension a## manne o! debt sec" ities. Meanwhi#e* a #o!ty p ice co esponds to a #ow yie#d on the dividends th own o!! by the b"oyed inst "ments. In othe wo ds* the e!!ective ate o! inte est t" ns o"t to be pa#t y. Acco ding to a enowned so" ce o! in!o mation on pe sona# !inance* the ave age ate o! inte est on ce ti!icates o! deposit at U.&. banks at the beginning o! 2014 came o"t to a meas#y ate o! 0.C0@ on an ann"a# basis. Mo eove * the ave age ate o! inte est on money ma ket acco"nts ac oss the nation amo"nted to a piti!"# 0.12@ pe yea K5ank ate.com* 2014L. 0 om a di!!e ent ang#e* the inte est ates did not come c#ose to matching even the st"nted ates o! in!#ation p oc#aimed by the cent a# gove nment. Mo eove * the pidd#ing payo"ts we e a 3oke compa ed to the act"a# hike in the cost o! #iving !aced by the mass o! cons"me s. 4C

.o wonde the investing p"b#ic has been despe ate to p"t thei money to wo k in some way o othe . &ince the stock ma ket seemed to be on a o##* the eage beave s we e /"ick to 3"mp on the bandwagon. 9hethe the sp" t o! the bo" se co"#d be 3"sti!ied on ationa# g o"nds was o! scant conce n !o the antsy c owd. 8n the downside* tho"gh* a c"tdown o! the to ent o! money p inting means that the e wi## be #ess by way o! newbo n cash to sho e "p the !inancia# !o "m. 0o this eason* a wind; down o! the 2$ p og am is act"a##y bad news !o stocks. $ven so* the =ea#o"s he d chose to inte p et the !o thcoming change in moneta y po#icy as a sign that the cent a# bank no #onge needed to p op "p the !inancia# !o "m in o de to ev "p the economy. That>s got to be a good thing* ightJ In esponse to the #atest dec ee by the 0ede a# Gese ve* the mass o! investo s shed thei inhibitions and shoved the bo" se to new!o"nd heights in the weeks to !o##ow. In this way* the !#ood o! money "shing into the !inancia# !o "m wi## contin"e to p"mp "p the stock ma ket ove the ne't ha#! yea . 5ased on p evio"s o"nds o! 2$ ove the past seve a# yea s* the c" ent sp ee o! money p inting is #ike#y to #ast "nti# the a"t"mn. To add to the downbeat news* that segment o! the ca#enda happens to be a pa #o"s one !o the stock ma ket even "nde no ma# conditions. 9hen the in "sh o! moo#a s#ows down* the bo" se wi## s"!!e the do"b#e whammy o! a shaky season co"p#ed with a th"mping s/"ee=e o! the money spigot. As a es"#t* the bo" se wi## have scant choice b"t to t"mb#e to some e'tent. The d "bbing is #ike#y to "n in the ba##pa k o! C pe cent ! om its p io peak eached a !ew months ea #ie in the yea .

!TF Forecast for DI&

9hi#e the !"t" e depends on the past* the #inkage does not app#y in e/"a# meas" e to a## time ! ames. As an e'amp#e* the c" ent envi onment is #ike#y to have a g eate impact on the path o! the ma ket ove the nea !"t" e athe than the #ong ange. Nooking in the 4:

opposite di ection* the !#ow o! ecent histo y sho"#d p#ay a #a ge o#e than the "n o! the distant past in swaying the co" se o! events going !o wa d. ,"t anothe way* the impo t o! the #essons g#eaned by #ooking backwa d tends to dwind#e as the window o! app aisa# moves !" the away ! om the c" ent date. The sto y is simi#a !o the mo'ie o! any p o3ections in the !o wa d di ection. 6iven this backd op* the tho"ght!"# investo has to t ade o!! the cohe ent pict" e o! an e'pansive view ve s"s the g eate e#evance o! a compact window !oc"sed on ecent events. 0o instance* the decision make has to ba#ance the wea#th o! in!o mation contained in a #ong histo y o! stock p ices against the p"nch o! a sho t eco d cove ing on#y the ecent past. 0o o" p" poses he e* a !itting comp omise between the opposing !acto s #ies in a span o! seve a# yea s. In o de to p ovide a ba#anced pict" e* the inte va# o"ght to inc#"de an "ps" ge as we## as a smackdown o! the stock ma ket. In te ms o! p actica# too#s* a he#p!"# aid #ies in a g aphic disp#ay o! week#y data !o (IA ove the co" se o! 7 yea s ending in ea #y )an"a y 2017. 0o this p" pose* the e'hibit be#ow has been adapted ! om &tock<ha ts Kstockcha ts.comL* a standa d eso" ce !o se io"s investo s o! a technica# bent. 6iven its ta get a"dience o! savvy "se s* the on#ine po ta# !eat" es a p#etho a o! schemes !o ca ying o"t dive se !o ms o! technica# ana#ysis. (espite the wea#th o! too#s on o!!e * tho"gh* we wi## e/"i e nothing in the way o! !ancy t icks. Instead* a simp#e scheme based on vis"a# c"es wi## meet o" needs. In !act* a #ean and p#ain app oach sho"#d t" n o"t to be at #east as in!o mative !o the #ong; ange investo as a convo#"ted p obe based on a heap o! a cane techni/"es. The backbone o! the cha t be#ow #ies in a se ies o! stick !ig" es* each o! which is known as a +ar. An icon o! this st ipe depicts the e't eme va#"es o! the p ice #eve# ove a pa tic"#a timespan.

4D

In o" case* each s#ot o! time spans a sing#e week. 8ve this st etch* the c itica# points take the !o m o! the 8pen* Qigh* Now and <#ose K8QN<L va#"es o! the p ice #eve# d" ing the inte va#. 8n a given ba * the top and bottom ends o! the ve tica# st oke co epond to the ma'im"m KQighL and minim"m KNowL va#"es o! the p ice ange d" ing the week. Meanwhi#e* a st"b on the #e!t side o! the stake depicts the va#"e at the beginning K8penL o! the pe iod. In a simi#a way* a tick to the ight side denotes the p ice at the end K<#oseL o! the week. I! the te mina# va#"e !o the week happens to be #owe than the initia# !ig" e* the enti e ba is co#o ed in ed. 8the wise the doodad is ende ed in b#ack. The e is o! co" se no g"a antee that the path downst eam wi## esemb#e the e'pe ience o! the past. $ven so* the histo y o! p ices po t ays the scope o! behavio to date a#ong with an ink#ing o! the events to come. In the !o egoing cha t* the go#den amp t aces the ascent o! (IA since the c ash o! the stock ma ket in a"t"mn 2011. At the beginning o! )an"a y 2017* the #atest va#"e at B1?4.7D stood a !ai amo"nt above the t end #ine.

-0

6iven its #o!ty pe ch* the inde' !"nd is #ike#y to !#o"nde at this 3"nct" e "nti# the m"#tiyea "pt end catches "p to it. 0 om this point onwa d* one scena io !o (IA is to hove a o"nd its c" ent p ice "nti# the go#den amp ises eno"gh to meet it as the sp ingtime o##s on. In the second vignette* the inde' !"nd wi## !a## back by o"gh#y B10 within the ne't month o two. &ince the stock ma ket happens to be ove p iced at this 3"nct" e* the second scena io is a #ot mo e #ike#y. In that case* the (iamonds wi## c "mp#e within the !i st co"p#e o! months o! the yea . The obvio"s s"ppo t d" ing a p"##back #ies at the B1-C #eve# ma ked o"t by the p" p#e beam on the g aphic. A!te a co"p#e o! months o! conso#idation* the ma ket wi## be eady to t "dge "pwa d once mo e. As a es"#t* (IA sho"#d en3oy a p#easant "pswing ove the co" se o! the sp ing. 5ack in the a"t"mn o! 2012* the inde' !"nd to"ched a #ow o! B121.24. Qa#! a yea #ate * (IA !e## back to anothe t o"gh at B147.--. The di!!e ence in height between the two !#oo s came o"t to B22.71. Meanwhi#e* the high va#"e !o the inde' !"nd be!o e it b eached the p" p#e mi#estone was B1--.D1. I! we add the #ast two va#"es* the es"#t is B1C:.22. The #atte !ig" e ep esents a ma3o oadb#ock !o the (iamonds. This mi#epost wi## #ike#y be eached by the beginning o! the s"mme . The #andma k in sight #ies a modest B17.:7 beyond the initia# !ig" e o! B1?4.7D at the beginning o! )an"a y. In othe wo ds* the ma ket is s#ated to ise b"t not get ve y !a d" ing the !i st ha#! o! this yea . The o"t#ook is not m"ch bette !o the second ha#!. 0o one thing* the ma ket has a gene a# habit o! th ashing a o"nd d" ing the dog days o! s"mme . 0o a second thing* the bo" se wi## ente its weakest po tion o! the yea as &eptembe comes a o"nd. To add to the dampe * the 0ede a# Gese ve wi## #ike#y w ap "p the #atest o"nd o! /"antitative easing a o"nd that time. Nast (ecembe * the cent a# bank decided that the -1

ts"nami o! money c eation was #osing its mo3o in pe king "p the economy at #a ge KGobb* 2014L. In that case* it wo"#d make scant sense to keep on p inting "p scads o! money and bashing in the do##a as a es"#t !o no good eason. As the p og am o! 2$ winds down #ate this yea * the to ent o! ! esh money !#ooding into the ma ketp#ace wi## no #onge be monst o"s b"t me e#y massive. 6iven this backd op* the bo" se is s#ated to s"!!e a b eakdown o! midd#ing si=e. The t"mb#e wi## #ike#y e'tend ha#!way towa d the th esho#d o! 1-@ that ma ks a mi#d case o! a !"##;b#own c ash in the U.&. In othe wo ds* the !#ap sho"#d es"#t in a downcast in the ba##pa k o! C o : pe cent. 6iven the specte s on the ho i=on* the s"mme and a"t"mn wi## be a good time !o the ca"tio"s investo to stay c#ea o! the stock ma ket. 8n the othe hand* the ma ket sho"#d egain its !ooting and t amp "pwa d once mo e d" ing the #ast /"a te o! the yea . 8n a negative note* tho"gh* the U.&. bo" se is "n#ike#y to ise m"ch beyond its p io peak ma ked o"t ea #ie in the yea . 0o one thing* (IA wi## st "gg#e to egain its !i st mi#estone set in the B1C: =one. As a point o! e!e ence* the (iamonds c#osed o"t 2017 at a p ice o! B1?-.4C. In that case* a high o! B1C: amo"nts to a gain o! some C.?@. .ot a !ab"#o"s t" no"t. 0 om a di!!e ent ang#e* s"ppose that the t end #ine ove the past co"p#e o! yea s manages to ho#d "p. In the !o egoing cha t* we see that the go#den amp ose to o"gh#y B1-2 at the end o! 2017 ! om a sta ting point #ying 3"st "nde B12- a yea ea #ie . The inc ease o! a o"nd B2C by the t end #ine amo"nts to a ise o! 21.?@. In the de!a"#t sc ipt* we can e'pect the #ast mi#estone o! 2014 to be highe by a simi#a amo"nt. To begin with* the p" p#e #ine denotes the p evio"s #andma k in the ba##pa k o! B1-C. In that case* an inc ease o! 21.?@ p#aces the #ast mi#epost o! the c" ent yea a o"nd B1D0.D1 o so. This second ma ke ep esents a hike o! o"gh#y 1-.4@ ove the c#osing va#"e o! B1?-.4C ! om #ast yea .

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The act"a# !ig" e at the end o! 2014 wi## o! co" se depend on a s#ew o! !acto s. A case in point is the amo"nt o! money con3" ed o"t o! thin ai by the cent a# bank be!o e it gives "p its p o!#igate ways. Anothe samp#e invo#ves an "pt" n in the appetite !o isk amongst the investing p"b#ic. 6iven the h"ge "n;"p o! the stock ma ket in the U.&. #ast yea * a swe##ing th ong o! investo s wi## s" e#y pi#e into the ing. 8n the othe hand* the spea heads at the head o! the pack wi## ease "p on the #oca# bo" se and sta t to t" n thei ga=e towa d !o eign sho es. In that case* the #agging ma kets in othe pa ts o! the wo #d sho"#d t" n in a m"ch bette pe !o mance than they did #ast yea . $'amp#es in this vein "n the gam"t ! om ! om 5 itain to Ko ea. 9e wi## et" n to the topic o! eme ging ma kets in a s"bse/"ent section.

!*uivalence of $rice and Time

In the disc"ssion above* we #aid o"t a !o ecast !o the (iamonds in te ms o! the p ice #eve# as we## as the time ! ame !o each t" ning point. 8n the othe hand* the two !acto s o! p ice and time happen to be somewhat ed"ndant ! om a p agmatic stance. The p#ainest way to e'p#ain the tie;"p is to take "p a simp#e e'amp#e. <onside a stock named A#pha whose p ice at the beginning o! the yea happens to be B20. Mo eove * this widget is #ike#y to c#imb highe in a steady !ashion "nti# it eaching a p ice o! B2: at the beginning o! May. A!te to"ching the peak* the stock is s#ated to c "mb#e by BC o so ove the co" se o! the s"mme . 6iven this oadmap* an investo co"#d pick 3"st one o! the key !acto s as a g"ide to decision making. As an e'amp#e* s"ppose that the p ice #eve# is chosen as the ya dstick to t ack.

-7

In that case* the p#aye o"ght to "n#oad some o a## o! thei ho#dings o! A#pha when the p ice #eve# advances beyond the mid;20s. 0o instance* the th esho#d !o "n#oading the sha es might be B2? o B2C. In !act* a b"sy investo who has p ecio"s #itt#e time to !idd#e with thei po t!o#io co"#d p"t in a standing o de !a in advance o! the #andma k on the ho i=on. 0o this p" pose* the apt mechanism is a #imit o de which emains va#id "n#ess and "nti# it is cance#ed o e'ec"ted. 0o instance* the p oactive o de co"#d be iss"ed at the beginning o! the yea in o de to se## the e/"ity i! and when the p ice #eve# eaches B2?.-0 o mo e. A!te p#acing the o de * the investo need not pay any !" the attention in the inte im. 0 om a di!!e ent ang#e* the same game co"#d !oc"s on the time#ine athe than the p ice. In that case* the investo may igno e the stock ma ket "nti# the day o! eckoning d aws nea . 8n the othe hand* on#y a da edevi# wo"#d wait "nti# the ve y #ast moment be!o e making a move. As a "#e* a stock p#ods a#ong at a meas" ed ate in the "pwa d di ection* b"t has a way o! p#"nging head#ong d" ing a !#op to the downside. 0o this eason* it>s bette in gene a# to be a who#e #ot ea #y than a #itt#e bit #ate in d"mping a stake. In #ine with this motto* the p "dent p#aye co"#d move into action a o"nd the beginning o! Ap i# o the eabo"ts. That wo"#d be a good time to e'it the position in A#pha be!o e it !o ms a top at the beginning o! the !o##owing month. In se##ing the stock* the c" ent p ice does not p#ay m"ch o! o#e !o the sh ewd p#aye !oc"sed on the sched"#e o! mi#estones. I! the acto sti## be#ieves that a peak wi## !o m at the onset o! May* then they sho"#d /"it the position at hand ega d#ess o! the c" ent p ice. As an e'amp#e* it makes no di!!e ence i! the stock happens to be t ading at B21* o B7:* o some othe va#"e in ea #y Ap i#. I! the e/"ity is set to t"mb#e ove the co" se o! the s"mme * then now is a g eat time to /"it the ing.

-4

6iven this backd op* it makes scant di!!e ence whethe the p#aye keeps t ack o! the ma ket in te ms o! p ice o time. In a p agmatic sense* one app oach is e/"iva#ent to the othe . Time+$rice !*uivalence. 0 om a p actica# stance* a !o ecast o! the ma ket by p ice is e/"iva#ent to a p esage by time. In view o! the p ecept above* a p ediction by time as we## as p ice happens to be ed"ndant in a st ict#y #ogica# sense. 5y saying this* we o! co" se do not mean that a d"a# !o ecast is who##y point#ess. The !inancia# !o "m esemb#es #i!e in gene a# in that some things a e mo e #ike#y than othe s even tho"gh nothing is ce tain. 0o this eason* a d"a# app oach in te ms o! time as we## as p ice has a #ot to ecommend itse#!. ,"t anothe way* the ed"ndancy o! a tempo a# !o ecast se ves to bo#ste the con!idence in a p ice ta getF and vice ve sa. And that>s the eason why the p evio"s section has p esented both types o! !o ecasts. In the #a ge scheme o! things* the p ice #eve# !o each asset di!!e s in gene a# ! om the co esponding !ig" e !o any othe ob3ect. $ven so* a #ot o! widgets in the stock ma ket tend to move togethe . As an e'amp#e* a peak !o &,1 is apt to be a t" ning point !o (IA as we## as 222. And the sto y is simi#a at the #ow end o! the cyc#e* as the benchma ks o! the bo" se to"ch a bottom and t" n the co ne in "nison. 0o this eason* an a"g" y !o &,1 in a tempo a# sense is #a ge#y ed"ndant when a !o ecast o! (IA has been p ovided. The sto y is simi#a !o 222. Mo eove * the "#e o! Time;, ice $/"iva#ence means that it makes no ea# di!!e ence what the p ice #eve# happens to be at each t" ning point. I! the ne't ma3o move is downwa d* !o instance* then the p ope tack is to get o"t o! the ma ket. I! the ne't si=ab#e move "ns in the "pwa d di ection* then the game wo"#d do we## to step into the ba=aa . --

In #ine with these p ecepts* the wise investo opts to "n#oad any ho#dings in &,1 o 222 when (IA appea s be !o ming a top. <onve se#y* the best time to ac/"i e a ! esh stake in one o mo e o! the inde' !"nds is when (IA is s#ated to advance in ea nest. In addition* we know that the si=e o! a move !o the &pyde s tends to be simi#a to that o! the (iamonds* a#beit a bit mo e. 0" the mo e* the 2"bes a e p one to shi!t even mo e than eithe o! its weighty iva#s. As a es"#t* the !o ecast o! a change in p ice !o (IA is in #a ge meas" e tantamo"nt to the p eview o! a move !o &,1 o 222. To s"m "p* the chie! benchma ks o! the stock ma ket tend to t ave# in "nison a o"nd the ma3o bendsF name#y* the t" ning points that de#ineate the he!ty moves to the "pside o downside. 0o this eason* a !o ecast o! a top o bottom !o one ya dstick co esponds to a #ike ca## !o the othe s.

$redictions for S$% and ,,,

In the p eceding section* we saw that a !o ecast !o &,1 is p etty m"ch ed"ndant when a p o3ection is a# eady avai#ab#e !o (IA. And #ikewise !o 222. 0o this eason* we wi## !o go a detai#ed ana#ysis o! the "ps and downs in sto e !o the kind ed benchma ks. Instead* we wi## take a top;down view o! the mi#estones on the ho i=on. To set the backd op* o" !i st task at this stage is to e'amine the behavio o! the inde' !"nds in the ecent past. The cha t be#ow* once again co" tesy o! M&. Money* shows the e#ative pe !o mance o! the th ee beacons ove the co" se o! a sing#e yea ending with the onset o! 2014.

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5ased on the bo'ed !ig" es towa d the top ight co ne o! the g aphic* we can in!e that (IA c#imbed by 27.02@ ove the co" se o! the yea . 5y cont ast* &,1 ose by 2-.4D@ whi#e 222 s" ged by 2D.?0@. These va#"es a e ep esentative in the sense that the &pyde s tend to ise a bit mo e than the (iamonds* and the 2"bes even mo e than the &pyde s. In ga"ging the t" no"t !o &,1 compa ed to (IA* the atio o! gains is 2-.4DR27.02F that is* the e#ative !acto is abo"t 1.10C. ,"t anothe way* &,1 ose by 1.10C pe cent on ave age !o each "ptick o! a sing#e pe cent by (IA. 9e can pe !o m a simi#a ana#ysis !o 222 in e#ation to (IA. The es"#t is a st etch !acto o! 1.2:?. These sca#ing !acto s may be "sed to map o"t the mi#estones !o the sp ye benchma ks. 0o instance* we noted that the second #andma k !o (IA #ies a o"nd 1-.4@ beyond its c#osing va#"e o! B1?-.4C ! om #ast yea . I! we m"#tip#y the !o egoing pe centage by the st etch !acto o! 1.10C !o the &pyde s* the es"#t is an "pt" n o! some 1C.0@. In othe wo ds* the de!a"#t #ocation o! the !ina#

-C

mi#estone !o &,1 in 2014 #ies a o"nd 1C pe cent beyond the c#osing va#"e o! the inde' !"nd at the end o! #ast yea . 9e can pe !o m a simi#a ca#c"#ation !o the 2"bes. The p od"ct o! 1-.4@ !o (IA and the sca#ing !acto o! 1.2:? !o 222 comes o"t to 1D.:@. 9e know that the 2"bes c#osed o"t 2017 yea at a p ice o! B:C.D?. 5ased on the #ast two !ig" es* the #ast mi#estone !o the inde' !"nd amo"nts to B10-.7:. At the height o! the Inte net c a=e* 222 !o med a peak at a nomina# p ice o! B272.::. 8n the othe hand* the #atte p ice has to be ha#ved d"e to a 2;!o ;1 stock sp#it in the second ha#! o! Ma ch 2000. In that case* the pe tinent p ice at this 3"nct" e happens to be B11?.44. The #atte !ig" e #ies within a stone>s th ow o! the second mi#estone o! B10-.7: that we ca#c"#ated !o the 2"bes. In view o! the p io peak* the mass o! investo s wi## do thei da nedest to p"sh the inde' !"nd towa d its a##;time high. And i! the cent a# bank p ints "p eno"gh money o"t o! the ethe a#ong the way* the madding c owd co"#d we## s"cceed. The .ada/ 100 Inde' eached an a##;time high o! 4*:1?.7- points in sp ing 2000 be!o e b eaking down and #osing mo e than :0@ o! its va#"e ove the ne't co"p#e o! yea s. That s"mmit now acts as a magnet !o the mass o! investo s. In the #ang"age o! chaos theo y* the g#a ing peak acts as an attractor4 a point towa d which a system within the vicinity tends to move. The #andma k beckons the vehic#e* ega d#ess o! the p ecise state o! the ma ket. ,a t#y as a es"#t* the .asda/ ma ket has been "shing towa d the ob3ective at a b ee=y pace ove the past yea . 9hen the #ooming ta get is eached* the mi#estone wi## then contin"e to act as an att acto by posing a h"ge ba ie to !" the advancement. 0o this eason* the ma ket wi## !a## back by a he!ty amo"nt a!te egaining the histo ic ape'. These events wi## o! co" se !ind e'p ession in the movements o! the t acking !"nd. As a es"#t* the 2"bes wi## soa towa d thei p io peak b"t a e "n#ike#y to b eak the ba ie anytime soon. -:

In these ways* the t io o! inde' !"nds !o the U.&. bo" se wi## t amp onwa d and "pwa d th o"gh a se ies o! =ig=ags as "s"a#. The sto y wi## "n!o#d in a simi#a !ashion !o the othe stock ma kets o! the wo #d. A#tho"gh the e a e p#enty o! e'ceptions* the bo" ses in the b"dding egions o!ten advance o"gh#y twice as m"ch as the (iamonds o &pyde s. In that case* an "pt" n o! 1-@ !o (IA wi## p od"ce an "p#i!t o! 70@ o so !o the b"dding benchma ks o! the wo #d. 8n the othe hand* the dynamic ma kets a#so tend to be a #ot mo e vo#ati#e than thei Ame ican co"nte pa ts. Meanwhi#e the mass o! investo s emain somewhat skittish at this stage. As a es"#t* the inte nationa# c owd is #ike#y to ho#d back on moving in ea nest into the sp o"ting ma kets "nti# the #ast /"a te o! the yea .

$ractical Thrust of the Forecasts

The #ine"p o! !o ecasts in the p eceding sections di!!e s in a vita# sense ! om the mass o! p edictions iss"ed by the ta#king heads in the !inancia# media. At the onset o! a new yea * the "s"a# ca## invo#ves the te mina# va#"e o! the benchma ks at the ve y end o! the ca#enda yea . An a"g" y o! this so t has the advantage o! being simp#e to e'p ess and easy to e'p#ain to the viewing a"dience. 8n the othe hand* the bodement s"!!e s ! om a co"p#e o! d awbacks. 0o one thing* a ba e;bones !o ecast o! this so t is di ect#y e#evant on#y to the sma## s"bset o! investo s who happen to evise thei po t!o#ios p ecise#y once a yea * and at the beginning o! )an"a y at that. 8n the othe hand* an a#oo! p#aye o! this so t has scant choice b"t to emain committed to the stock ma ket at a## times. As a co"nte e'amp#e* it>s ha d to imagine a #"cid investo who says something #ike the !o##owing4 H9hat* is the benchma k going to ise by a me e D pe cent this yea J That>s #ess

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than the minim"m th esho#d o! 14.7 pe cent that I demand. &o I>m not going to p"t any money into the stock ma ket at a## this yea .I Instead o! staying c#ea o! the bo" se* the game who tends to thei acco"nt on#y once a yea has #itt#e choice b"t to emain engaged at a## times. 0o this eason* any e!!o t to o"tpace the benchma ks o! the ma ket has to e#y so#e#y on the de!t se#ection o! stocks. That is* the vehic#es within the pe sona# po t!o#io wi## have to o"tpace the ma ket ave ages. In that case* a p ecise !o ecast o! the ma ket is #a ge#y point#ess. As an e'amp#e* a !o ecast o! g owth amo"nting to :@ athe than 1-@ wi## have scant bea ing on the choice o! a #ive#y stock ove a s#"ggish one. 0o these easons* the "s"a# pa ade o! p edictions t otted by the !inancia# media is o! #itt#e "se to the b"#k o! investo s. I! the ca##s a e to have some p actica# impo t* then a bette scheme by !a is to ta#k abo"t the highs and #ows ove the yea to come. The advantage o! picking o"t the ma3o #andma ks a#ong with the t" ning points #ies in the p actica# edge !o the investo who is wi##ing to "pdate thei po t!o#io mo e than once a yea . In othe wo ds* a position in a pa tic"#a asset may be initiated o te minated in t"ne with the "ps and downs o! the stock ma ket at #a ge. To b ing "p a simp#e scena io* s"ppose that the bo" se has been ising !o seve a# months and is nea ing its ne't mi#estone. I! the investo ag ees with the !o ecast o! the t" ning point* then the game o"ght to t im thei sai#s. An e'amp#e in this vein is to se## o!! the most isky assets within a eti ement po t!o#io. Anothe samp#e is to wait "nti# the ne't t o"gh be!o e committing a ! esh dose o! cash into the stock ma ket. In these ways* an ink#ing o! the t" ning points in the ma ketp#ace is a #ot mo e he#p!"# than a igid !o ecast o! the !ina# destination at the ve y end o! the ca#enda yea . And the nimb#e tack is the app oach we have taken in this s" vey.

?0

Scope of Market Forecasts

The !"t" e is an o"tg owth o! c" ent conditions co"p#ed with p io events. 0o this eason* the sage p#anne #ooks in the backwa d di ection as a p e#"de to mapping o"t the p ospects going !o wa d. 8n one hand* a #ong view o! the past can p ovide a heap o! data !o a sweeping ana#ysis. 8n the downside* tho"gh* the distant past tends to have #ess o! an impact than do ecent events on the co" se o! the !"t" e. 6iven this backd op* the see has to ba#ance the ichness o! a b"#ky database against the c#a ity o! a compact pict" e. As a "#e o! th"mb* a #ong histo y is most apt !o sketching o"t the ma3o o"tc ops #" king on the distant ho i=on. 8n the othe hand* a data set o! modest si=e be!its a !o ecast o! the nea !"t" e. 0o o" p" pose he e* a window o! 7 yea s seemed #ike an apt comp omise in ga"ging the p ospects ove the yea to come. The timespan is a !itting t adeo!! between the opposing !acto s o! e'cessive c#"tte ve s"s skimpy data. The #ine"p o! !o ecasts given in the p evio"s sections ep esents the most #ike#y co" se o! events ove the coming yea and beyond* based on the action to date in the ea# and !inancia# ma kets. 8n the othe hand* the de!a"#t pathway co"#d o! co" se be de ai#ed by any n"mbe o! !#"kes. The sideswipes o! this so t can take the !o m o! nat" a# disaste s as we## as h"man actions. An e'amp#e o! the !o me is a ! eakish snowsto m that knocks o"t the powe g id th o"gho"t the easte n seaboa d o! the United &tates* th"s th owing the egiona# economy !o a #oop. Meanwhi#e an instance o! the #atte is a so!twa e vi "s that w eaks havoc on the !inancia# netwo ks o! the wo #d. 0o these easons* any !o ecast has to be taken with a g ain o! sa#t. This ema k is not meant to downp#ay the impo tance o! p ediction in the va#e o! !inance no anywhe e e#se. 2"ite the opposite* in !act. ?1

The eign o! chance and #"ck is a eason !o p#anning with mo e ca e athe than #ess. 9hi#e nothing is ce tain* some things a e mo e #ike#y than othe s. Mo eove a cogent p#an #aid o"t in advance is s" e to boost the odds o! s"ccess in b inging !o th a !avo ab#e es"#t. In the absence o! any big s" p ises* the ma kets o"nd the p#anet a e on t ack to p ess ahead in 2014 a#ong the #ines desc ibed ea #ie . 5ette yet* the o"t#ook !o the yea s to !o##ow is a bit b ighte sti##.

& )aveat on !xchange Traded Funds

&ince the eve o! the mi##enni"m* the !ie#d o! e'change t aded !"nds has e'panded at an e'p#osive ate. The pop"#a ity o! the vehic#es sp ings ! om a n"mbe o! !acto s anging ! om the ease o! hand#ing and the e!!iciency o! t ansactions to the dive sity o! o!!e ings and the s" vivabi#ity o! the vehic#es. 8n the "pside* the p o!"sion o! inde' !"nds is a godsend !o the mass o! investo s d"e to the convenience and a!!o dabi#ity o! pa ticipating in a m"#tit"de o! ma kets o"nd the wo #d. 8n the downside* tho"gh* the 3e3"ne !ie#d s"!!e s ! om a c#"tch o! teething p ob#ems that beset any domain in its in!ancy. A p ime e'amp#e #ies in the di!!ic"#ty o! obtaining so#id in!o mation on the s#ew o! o!!e ings in the ba=aa . In this e!!o t* the hap#ess investo !aces a heap o! st"mpe s in dea#ing with the de#"ge o! con!o"nding data. 8ne mode o! con!"sion sp ings ! om the shee n"mbe and dive sity o! the p od"cts c#amo ing !o the investo >s attention. Anothe b"gbea #ies in the o"tpo" o! sham data on e'change t aded !"nds ! om othe wise espectab#e so" ces o! in!o mation KMintKit <o e* 2014L. In seeking o"t the best vehic#es !o investment* an initia# step is to so t the pop"#ation o! inde' !"nds in te ms o! thei ta get ma kets a#ong with the p ospects in sto e. 9ithin each

?2

g o"p* a sta#wa t can se ve as a base#ine !o compa ison and pe haps even the vehic#e o! choice. 0 om a di!!e ent ang#e* a cogent way to dea# with con!#icting in!o mation is to compa e and cont ast the data p ovided by the #eading po ta#s. A e#ated tack is to eview the n"ggets in!o mation ! om a pa tic"#a so" ce and dete mine whethe the !acts appea to be inte na##y consistent. In addition* the tho"ght!"# investo o"ght to eview the p ice eco d ove time in a g aphic !o mat in o de to obtain an int"itive g asp o! the action in the ma ketp#ace. Anothe eco" se is to con!i m whethe the vis"a# p#ot appea s to be consistent with some key pieces o! n"me ic data. An e'amp#e o! the #atte #ies in the ma'im"m #eve# o the te mina# va#"e o! a se/"ence o! stock p ices. As in any domain acked by ampant g owth* the va#e o! e'change t aded !"nds is hamst "ng by a sho tage o! te##ing and t "sty in!o mation. 8n the "pside* tho"gh* the din and smog that b#anket the !ie#d wi## do"bt#ess c#ea "p with the passage o! the yea s and decades. In the meantime* tho"gh* the p "dent investo has to contend with the !e ment and the m"dd#e by d awing on pe sona# ese ves o! g"mption and 3"dgment. 6iven the amp#e att actions o! e'change t aded !"nds* a modic"m o! e't a e!!o t is s" e#y 3"sti!ied in o de to pick o"t the p ope in!o mation needed to b"i#d "p a so"nd p og am o! investment.

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