Mathematics & Markets – A Helicopter View of major stock market indices – April 10th, 2018

Mathematics & Markets –

A Helicopter View of major stock market indices – April 10th, 2018

 

Summary

  • All major stock market indices still point to significant medium and long term weakness
  • Nasdaq100 index shows overall unfavorable risk/reward
  • S&P500 index may experience short term upward potential towards 2.700 points

 

Perception and mathematical reality

From a mathematical point of view it is important to realize what happens when a market increases by a certain percentage in value, compared to when a market decreases similar percentage in value. Let’s use the 10% increase as example.

Starting with assets in value worth 100, such increase by 10% would result into an overall value in assets equal to 110. Now, what happens if our overall asset value decreases by 10%? Starting with assets worth 110, we would end up with an overall asset value of 99. After all, a 10% decrease of 110 equals 11.

Let us now do the same math starting with a downturn of 10%. Our assets are worth 100 initially, but after a downturn of 10% our assets are worth 90. What percentage increase do we need to get back to our starting point (assets worth 100)? The answer may be surprising but true. We need at least an 11% increase in value to undo a 10% decrease in value.

Although markets may go up several days in a row, we currently observe increasing volatility and should be aware that those few negative days may have a huge impact. It turns out that a given percentage decrease has more negative impact compared to a similar percentage increase. Please keep this in mind when reading this status update.

 

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