Shown below are two graphs that highlight the underlying exponential trending of the NASDAQ index. Graph 1 fits an exponential to 40 years of data. Graph 2 fits an exponential to 12 years of data.
Clearly there are many other factors and events that influence the trending of index and that overlay the underlying exponential. Examples of these include :
- government intervention;
- appearance of a disruptive technology;
- international conflicts/international cooperation;
- financial upsets/financial advancements;
- natural disasters;
- changes in the equities trading rules;
- the predilections and the moods of the buyers and sellers of equities
I believe that graphically emphasizing the underlying exponential trend of the past is a useful tool that can help reveal when and to what degree other factors are in play. And that this perspective can give a limited indication of how the index might trend in the future.
Note: the statistically fitted lines in the below cases are only indications of the underlying exponential growth of the past. No assumptions are made regarding the deviations from these lines and no attempts are made to factor them out.
The hypothetical examples noted in the text boxes in the graphs are nothing but that - hypothetical.
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Graph 1:
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Graph 2:
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