Hello all: Ran across this in Yahoo this evening. Pretty fascinating stuff. It's long but I felt worth the read.
NEW YORK (Reuters) - Watch out for years that end in zero. They're bad for the stock
market. In fact, they're often big zeros.
Wall Street was given a taste this week of ``Stockalypse 2000' as the Nasdaq composite
index had a meltdown of 230 points, its largest one-day point loss ever, on Tuesday. The
Dow Jones industrial average slumped 360 points in its steepest drop since Russia's loan
default rocked global markets in late summer of 1998. By the end of the week, the market
bounced back strongly on a wave of bargain hunting.
Still, there was a creepy feeling of deja vu about Tuesday's selloff. For the past 100 years,
the first days of the years that end with ``0' have signaled the start of some nasty bear
markets.
In fact, since 1900, stocks have made important highs at the start of most of those years
before heading lower.
Peter Eliades, editor of Stockmarket Cycles, a financial newsletter and money management
firm in Santa Rosa, Calif., said that in seven of the 10 years since 1900 that have ended in
zeros, stocks reached peaks in the first few trading days of the year and then went into a
downward spiral.
In some cases, stocks made secondary tops because more important high water marks had
already been reached. But in all seven years, stocks slid lower after peaking in the opening
days of the year.
And this week, stocks plunged in the second trading session of the year 2000.
The facts:
1900 -- The market topped out on Jan. 2, and the level proved to be the highest of the next
10 months. 1910 -- Topped out on Jan. 3 and the high was not beaten for five years and
seven months. 1920 -- Stocks peaked Jan. 3 and the high went unchallenged for five years.
1940 -- Jan. 3 was the highest close of the next five years. 1960 -- Jan. 4 struck the highest
finish for 16 months. 1970 -- Jan. 5 was the highest of the next 11 months. 1990 -- Jan. 2
set the peak for the next four months.
``The major market moves, or anything that can be described as bubbles, all seemed to end
around the end of decades,' Eliades said.
Further proof:
Japan's stock market bubble burst on Dec. 29, 1989, and the gold rush that sent the price
soaring to a record $800 an ounce ended abruptly in early January of 1980.
It may be hard to explain the market's behavior, but some of the selling in the new year may
be linked to Uncle Sam.
``There's a certain tax logic to the centennial pattern, with the major market tops coming
during periods when the market had been doing well,' Eliades said.
This week, investors with capital gains may have been selling for tax reasons, to delay
paying the tax on their profits until 2001.
Meanwhile, experts say the jury is still out as to whether Wall Street is witnessing the
unraveling of one of the greatest bull markets ever.
The selloff has raised worrying questions because the bull market has been likened to
``Tulipmania' -- the mother of all market bubbles that sent tulip prices in Holland rocketing
6,000 percent from 1634 to 1637 before crashing. But now, it's Internet stocks instead of
tulips.
The tulip boom came undone as prices dropped 90 percent after the ``biggest fool' had
paid the highest price. Suddenly, people realized that they were not investing, but rather
betting, on tulip prices.
Indeed, history may be repeating itself. Internet stocks have shot up 1,000 percent or more
even though the majority of them have not earned a penny.
Internet stocks recently have made a lot of people rich and that's apparently all that matters
to investors. The people who have struck gold over the past couple of years have been
ignorant about the meaning of stocks' valuations.
The technology-laced Nasdaq index last year produced an eye-popping gain of 85.6
percent but the betting is that the spectacular rise won't be repeated this year.
Speculative rallies are like rubber bands. They stretch until they break and send stocks
reeling.
Still, some Wall Streeters sensed that the market has so much intrinsic support from
powerful buyers -- such as (401)k retirement accounts -- that it can avoid a sustained
freefall, perhaps indefinitely.
During the brief corrections over the past five years, investors have been reluctant to
abandon their stock holdings and the pullbacks have simply been viewed as buying
opportunities, which have kept stocks from locking into a sustained downtrend.
But few people will disagree that the meteoric rise in the technology stocks has been
overdone.
Many experts say technology shares could go through a major shakeout because the biggest
buyers of the ``dot.coms' have been speculators or day traders -- who would be the
weakest source of support in a head-spinning market fall.
Speculators who trade with money borrowed from home equity loans or margin accounts
are not exactly long-term investors. They would be the first to run for the exits.
Stock market officials have shown concern about the explosive rise in margin debt.
Recently, the New York Stock Exchange and the National Association of Securities
Dealers, Nasdaq's parent, sought to tighten margin requirements for day traders.
In November, margin debt soared to 3 percent of disposable personal income, the highest
on record, eclipsing the old high of 1.3 percent set before the market crash of 1987.
Raymond DeVoe Jr., market strategist for Legg Mason Wood Walker, said the investors
who chased up Internet stocks after a minor dip in November may now be margined up to
their eyeballs.
``A lot of people are now concerned about how they stand in their margined accounts after
this week's 15 and 20 percent decline in some stocks, and this could bring a vicious circle of
selling,' he said.
DeVoe said the direction of the market is in the hands of Federal Reserve Chairman Alan
Greenspan, who is free to raise interest rates at will, now that there are no more distractions
from the Y2K computer bug.
After pushing rates up three times since last June, the inflation-fighting Fed deferred another
increase in December for fear of adding uncertainty over Y2K.
The Fed's big concern is that skyrocketing stock prices -- one of the powerful forces that
have fueled the economic good times -- may come to a sudden halt. The market has made
people rich and the wealth effect has fanned the economy's spectacular growth, which, in
turn, has fired up corporate profits.
Now the Fed has the tricky job of producing a hoped-for 'soft landing' by slowing the
economy down without putting it into a tail-spinning slide.
Perhaps, blunt force by the central bank could be the thing that will break the back of the
bull market -- and at the same time make more believers in bear markets at the end of
decades.
For the week, the Dow Jones industrial average was up 25.44 points at 11,522.56. The
Nasdaq composite index fell 186.69 points to 3,882.62 and the Standard & Poor's 500
index was off 27.78 at 1,441.47.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com).
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