Nominal and Constant Dollar Data
Ermanometry Research uses many disparate sets of historical data as tools for decoding past market activity and forecasting the future critical path of markets: nominal price data refers to data recorded as the actual price, or value, of the market under study.
For example, the DJIA intraday high of 01/08/99 would be recorded as 9647.7
"Constant dollar" data refers to data that has been adjusted inflation/deflation. This type of data is sometimes referred to as "inflation adjusted" data. A benchmark time period, such as the average for a month or year, or even a specific day, is chosen, and all prior and subsequent nominal prices are adjusted to the benchmark. The consumer price index is calculated in this manner. It is relatively unimportant what benchmark is chosen, because it is the relationships between the data entries that are of value. These relationships, relative positions on a chart etc., will be constant, regardless of the benchmark chosen.
Nominal and constant dollar data are the only two types of historical data that will be used for the examples that follow. However, there are other valuation variations that are used when doing intensive research on a specific market. The indices, whether constant dollar, or nominal price, are derived from stock prices denominated in US dollars. A chart of the DJIA denominated in Swiss Francs, the British Pound, or the new Euro will show a different picture than one denominated in US dollars, due to currency fluctuations.
If our market was flat, in US dollars, and the Brazilian currency was being devalued, it would take more Brazilian currency to "buy" the DJIA, and thus a chart denominated in Brazilian currency would show the DJIA moving up. This type of cross market valuation is particularly valuable when researching commodities such as crude oil, and metals, and very important for debt instruments. If the viewer is interested in this type of somewhat esoteric analysis the Topline Encyclopedia of Historical Charts is literally a gold mine of fascinating information.
Compare this chart with the next one to note the different formations generated by constant dollar data and nominal price data.
The DJIA and S&P 500 actually declined all the time from the mid-1960s to 1982, in constant dollars.
