>>Think you must mean 1380..
Yes, the brain in stuck in low gear this morning. I am trying to do too many things at once.
Interesting take on the market.
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To: Rande Is (19610 )
From: KM
Friday, Jan 28 2000 2:17PM ET
Reply # of 19624
Apropos to your comments yesterday:
Even Panics Have Their Uses
By Laurel Kenner and Victor Niederhoffer
1/28/00 2:00 PM ET
The market took its prisoners on Monday and Thursday, and let them out of jail late
Thursday afternoon. If you were one of the freed, watch out for those jailhouse doors
on Monday. They're likely to clang shut again as it's the last day of the month, usually a
bearish day.
But on the first day of February, be ready to bet the house.
Lots of stops were taken out when Standard & Poor's 500 futures broke through yearly
lows at 1098 on Thursday. When the contract went from down 5 to down 25 in a
matter of minutes, energy drained from the rest of the marketplace; Traders with stock
for sale found few buyers; nobody wanted to get caught holding expensive stock in a
downturn. Innocent stocks like BroadVision (BVSN:Nasdaq - news), Conexant
(CNXT:Nasdaq - news) and Sun Microsystems (SUNW:Nasdaq - news) were
suspended in air, with no traction for climbing.
Friday, the market opened down 1%. Bonds were down as much as a full point, and
the major bullish underpinning of the market seemed to be eroding. Heart rates and
blood pressure rose, hair stood on edge and skin crawled.
But the torture ended after a one-minute decline that took the active March futures
contract down 0.5% more to 1392. Within 10 minutes, the market was back, and
smiles and small talk were heard in trader's offices. By early afternoon, the bond was up
a point and a quarter, sending the yield to the lowest since Dec. 13.
The market, like music, often speaks in the language of emotions. The S&P contract's
gut-wrenching, 75-point decline this week spoke mostly with fear in its voice: Investors
closed their eyes, drew their eyebrows together and hunched their shoulders.
We were both trained as classical pianists, and often listen to music as we ply our trades
of speculation and writing. The musical piece the market sounded most like to us this
week was the first movement of Beethoven's Fifth Symphony, when the fateful
short-short-short-long theme in a minor key collides with a major theme. The music
slows to a heartbeat, and it seems like the end of the world.
The human psyche at moments of panic takes the path of least resistance, and goes
straight to its most vivid, terrible memories. We were filled with a terrible awe as the
declines of Monday and Thursday revived recollections of calamities like the crash of
Oct. 19, 1987.
The problem with emotional reactions to market declines or other situations is that the
behaviors elicited are often dysfunctional and ineffective. Smashing the dinner plates or
selling out at market lows would hardly be what the doctor ordered. In hindsight, when
we feel tightness of breath and butterflies in the stomach, the appropriate reaction is to
buy. As the table illustrates, the market in each case was up one week later, with the
average coming to a very nice 4%.
Notable Panics
Date Decline that day (high to low) % Move next day (high to low) % Move next day
(close to close) % Change one week later
Oct. 19 1987 -25% +12% +5% +9%
Oct. 27, 1997 -8% +7% +5% +8%
Aug. 31, 1998 -7% +5% +4% -8%
Jan. 27, 2000 -3% +3% +1% --
Source: Bloomberg
Studies of other panic declines confirm that after the decline has hit 10%, it is generally a
good time to buy. Our favorite visual representation of this is an illustration to "The Wall
Street Rag" showing Scott Joplin laughing as the good times come back. The piece was
written in commemoration of the panic of 1907, when the Dow Jones Industrial
Average cratered 35%.
Vic's grandfather, also a speculator, studied with Scott Joplin, and was able to give the
composer some vivid details about that particular decline. The piece is supposed to be
played with syncopation, which to recalls the rapid down-and-up movements that
characterize panic situations.
While fear can paralyze when action is appropriate, it has another dimension, a highly
protective one. Hunched shoulders and frowning -- and sometimes, flight -- protect the
vital organs. Survival is the key in market battles. Investors who didn't get out of the
way during the 1987 debacle or the drawn-out crashes of the 1930s and 1970s met
with market death.
Each of the bull market-interruptus panics in the table above ended quickly as a
deus-ex-machina came to the rescue. The market rallied -- too late for some of us, true
-- but rally it did.
Someday, the rescuer won't arrive with such dispatch.
That day probably won't be this Monday. The bonds are too good for that; they moved
closer to 6% than 7% this week, removing one of the props of the negative market. And
we've had three panics in five days. Nevertheless, ends of months and Mondays are
usually bearish -- and they happen together only once a year. One of those was Aug.
31, 1998. So it's a good time to adopt the hardened glance of a seven-card-stud player
and look at the probabilities.
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