Fourier Transform to Determine Market Cycles

Fourier Transform is one of the most important tools in the modern signal processing world.  It is widely used in communications, geology, acoustic and engineering field.  However, its capability to decompose time series data into frequency domain has extended its usage to other fields such as finance and business (Read more here).

In finance, moving average is a common indicator to track the movement of the stock market.  However, the period of the moving average indicator is normally selected at the discretion of the users, which sometimes may not be appropriate.  Fourier Transform is a good tool to determine the period for the moving average.  The following graph shows the significant period of the KLCI daily closing price determined by Fourier Transform.

From the graph, short term significant periods are 8 and 17 days while medium term significant periods are 28, 43, and 61 days.  Fourier Transform computations could be found in popular engineering software such as MATLAB or Excel Analysis ToolPak (Read more here).

“Recession” or “Rebound”?

In a previous article, stock market movement prediction using Google Trend search term (Read more here) was demonstrated.  This week, a new search term will be used to study the stock market direction.

In the following graph, the search term “Recession” frequency and the MSCI World Index were plotted together from 2004 to 2018.  The frequency of the search term is plotted in orange while the blue curve is the MSCI World Equity Index.

Coincidently, two significant peaks of the search term frequency (red circle) occurred at the reversal of the market down trend.  This suggests that market might rebound when the sentiment is very negative.  So, our next question is whether the current “recession” sentiment has reached its peak?  Google Trend might have the answer perhaps?

Asset Class Performance in 2018

Wondering you have chosen the correct investment in 2018?  The following graph shows the various asset class performance in 2018.  2017 market’s darlings such as cryptocurrency and oil were the biggest losers in 2018.  Bitcoin and Oil dropped more than 70% and 25% in 2018 respectively.  Hang Seng dropped 14% while S&P500 and KLCI dropped 6.2% and 5.9% respectively.  Gold lovers were not amused with their collection as their return was at negative 1.7%.  The safe haven was fixed deposit which yielded 3.5%.

In a previous article on P2P lending investment (Read more here), we featured the return could be at an average of 10%.  The author has experimentally invested in the P2P platform and gained 12.59% in 2018.  This shows that it is always good to diversify your portfolio in some alternative investments.

If you are interested to invest in P2P lending, you could sign up using the following link

https://fundingsocieties.com.my/sign-up-investor?referral=jakdytp6

Disclosure: The author will receive a one-time referral fee of RM50 for each new investor who signs-up via the above link AND invest at least RM1,000 (Read more here).