Hi,
Another loooong post but one I think some of the readers might find interesting.
Time to confront (and capture) the worthy market
The market is a worthy adversary that commands respect and reverence. Don't underestimate its fury or ability to do damage. That said, we think it's a good time to buy.
By Laurel Kenner and Victor Niederhoffer
Fish, you are going to have to die anyway. Do you have to kill me too?
-- Ernest Hemingway, "The Old Man and the Sea."
With a ferocity and malignity that was horrible to contemplate, the markets ended the week near their lows. The scorecard: Nasdaq, down 5%, Dow, down 3%, S&P 500, down 2%. Bulls should be thankful for a market holiday on Monday to lick their wounds.
NEW! Market news, updated every 30 minutes by Briefing.com
The carnage in the Nasdaq 100 ($NDX.X) is best understood by noting that its closing high on March 27, just two short months ago, was fully 52% above its close today of 3,101.
To make matters worse, the declines in many of the individual stocks in the indexes were considerably more painful that the averages themselves indicate. A rogue's gallery of the 10 worst performers in the Nasdaq 100 since March 27 appears here.
Worst of the Nasdaq 100
Stock % Chg. *
Legato Systems (LGTOE, news, msgs) -78.4
Novell (NOVL, news, msgs) -74.6
Qlogic (QLGC, news, msgs) -69.3
Parametric Technologies (PMTC, news, msgs) -69.1
Gemstar (GMST, news, msgs) -64.0
Immunex (IMNX, news, msgs) -63.0
CMGI (CMGI, news, msgs) -62.0
Compuware (CPWR, news, msgs) -61.8
Adaptec (ADPT, news, msgs) -60.4
Conexant (CNXT, news, msgs) -57.6
* From Nasdaq high on March 27 to May 26
The Nasdaq 100 this week was attracted to the magnetic South Pole of 3,000. At the futures contract's low of 2,897 on Tuesday, it looked like the end of the world. But then, miraculously, the Nasdaq rallied 13% to 3,300 in the first 15 minutes of trading before settling at 3,100. We would point out that Nasdaq's North Pole of 5,000 is as much an attractor as the South Pole of 3,000. Now that 3,000 has been breached and covered with lots of panic selling, it's time for the North Pole to exert its influence.
This wildness of the market this week reminded reader Brett Steenbarger of the Texas rodeos he used to frequent while living in Dallas. "Those bucking broncos find a way to gyrate in such a fashion as to throw off all those whose grip is not tight and whose bodies aren't centered," he wrote. In the same way, the market's gyrations "will wear down all but the most committed participants, at which point we'll have our breakout and a nice trending move."
When we started to write together in January this year, we were bearish. We said turns of decades and centuries tend to bring changes in fashion, in art, clothing and music, and we observed that markets also tend to switch course -- the Japanese Nikkei 225 in 1990 and Dow Jones Industrial Average in 1929 being unhappy examples.
We also wrote that while long-term prospects for stocks are as good as ever, the risks at the beginning of the 21st century looked similar to those at the start of the 20th. The difference was that an all-out panic had occurred in December 1899, taking the Dow average down 23% in about three weeks. In January, in an issue marking the start of the new century, the Commercial & Financial Chronicle -- the Barron's of its day -- wrote that the penalty of reckless speculation can never be escaped, and as terrible as the decline had been, investors were better off now that it was behind.
Like turns of the century, holiday periods are a traditional time for changes in trend to manifest themselves. The week after Memorial Day has been particularly salutary during recent years, with the S&P 500 rallying 2% or more that week in 1990, 1991, 1995 and 1999.
The average move was a gain of only 1%. But in these volatile times, that would correspond to a rise of 3% in the Nasdaq.
Demoralization and crackpot theories
More important than the seasonal tendency is the atmosphere of total demoralization that has been pulling stocks lower. Thursday's decline from the highs of earlier in the week was caused by some completely gratuitous and unsupported bearish views from Alan Greenspan at a San Francisco session of the National Association of Urban Bankers. As to why he's bearish this time: It's not that analysts' earnings expectations are too high, or that the wealth effect of stocks is about to trigger massive consumer spending. (Those were two emanations from earlier this year.) Now he's worried that investors are putting so much money in the stock market instead of the bank that financial institutions are being forced to raise capital for long-term lending by borrowing short-term. He appears to be afraid that will lead to a 1980s-style rout of the banking system.
On another front, you can hardly turn on a TV these days or pick up a magazine without seeing the visage of Prof. Robert J. Shiller talking about the excessive market volatility or the price-earnings ratios of stocks.
The Week Ahead
Economy
Data floods in after Monday's market holiday for Memorial Day. Tuesday brings consumer confidence numbers, the Conference Board's picture of consumer's spending strength. The Commerce Department's new homes sales figures are released Wednesday. Thursday, the National Association of Purchasing Managers gives its snapshot of manufacturing conditions and economic growth. Friday's employment report is the Labor Department's broad indicator of economic activity. Economic calendar
Companies
Hewlett-Packard (HWP, news, msgs) holds court with analysts on Wednesday and First Data (FDC, news, msgs) faces analysts Friday. Earnings reports are down to a trickle next week . . . Newbridge Networks (NN, news, msgs) and Ion Networks (IONN, news, msgs) both report Wednesday. Meanwhile, Charles Schwab (SCH, news, msgs) splits 3-for-2 on Wednesday and Newport (NEWP, news, msgs) splits 3-for-1 on Thursday. Events Calendar | Splits Calendar
Life
Pain at the pumps marks this Memorial Day holiday, when you'll fork over an average of $1.53 a gallon of gas, just 1 cent below the all-time high in March 1999. Sunday, 19-year-old rookie driver Sarah Fisher is set to make racing history in the Indianapolis 500. The Boss, Bruce Springsteen, plays Vegas. Buzz is up about the Wednesday premier of Survivor, the CBS reality show that pits 16 men and women against each other on a island in the South China Sea.
Greenspan and Shiller have been saying the same thing since Dow 3,000, and rather than revising their hypothesis as the data refute their theories, they have become even more convinced than ever that the market is wrong and they are correct. And they are not averse to trotting out many new and outdated theories to try to prove they are right.
Their crackpot theories would ordinarily be a laughing matter, fit for raised eyebrows at faculty lunches, if they did not contribute so inexorably and erroneously to the bearish backdrop that currently surrounds stocks.
But in such an environment there is opportunity. All the weak bulls have been relieved of their positions by such negativism. Only strong hands are left, and they will emerge as the stronger side, in our opinion, shortly after Memorial Day.
The secret life of four-letter stock symbols
Reader John Lamberg had a very modern flash of insight on the market's recent decline this year on a flight back to the East Coast from Los Angeles. His message reflects both how much and how little things have changed since the sober editorial in the Chronicle of 1899. "What happened," he wrote, "is that the public jacked into the infinite neuroelectronic void of the matrix in the fashion described by Gibson in Neuromancer. They stayed there too long believing the Net would provide for their every need and want. Cyber-food and cyber-health care for their virtual bodies. Cyber-entertainment to stimulate their cyber-minds. Cyber-casinos, anyone? All purchased with cyber-cash on a cyber-site while jacked in on their favorite cyber-portal.
"Well, one fine cyber-day in April the public decided to unplug. Perhaps a whiff of fresh air reached their senses. It smelled like freshly mowed grass. Their stomachs were hungry for real food. Their bodies wanted to visit real places where they could see and hear and touch and smell and taste real things. They wanted reality so badly they sold their cyber-stocks and bought real-world stocks."
Such shifts in sentiment occur in the same way that contagious diseases spread through the population. Richard Dawkins coined the term "meme" to describe the process of contagion.
Just as viruses are very small, memes that carry shifts in sentiment are elemental. In the stock market, we have discovered memes in at least one pure expression: letters of stock tickers.
Kenner & Niederhoffer
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Recent articles:
? Adapt or die in this Darwinian market, 5/19/00
? 5 rules to ace the market game, 5/12/00
? Comeback for heavyweights after a bruising week, 5/5/00
more...
For example, there is a correlation between the number of letters in a stock symbol and its relative performance since the end of 1997, when the Nasdaq started to rocket.
Steenbarger, the reader who suggested the theory to us, speculates that the reason for the divergence is that the limited supply of one-letter tickers were handed out long ago. So one-letter tickers belong to old companies a bit past their prime ? e.g., F, G and H -- and a few old-company wannabes that got the ones given up by companies that expired.
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Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In a special series of weekend columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community.
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Four-letter stocks belong to companies that list on Nasdaq, which has been more welcoming than the rule-bound New York Stock Exchange of newer, entrepreneurial companies -- the kind that are more about bits and bytes than molecules and factories.
The roster of one-letter stocks is filled with companies in down-to-earth businesses: cars [Ford (F, news, msgs)], razors [Gillette (G, news, msgs)], books [Harcourt General (H, news, msgs)], cereal [Kellogg (K, news, msgs)], metal [Inco (I, news, msgs)], oil [Phillips Petroleum (P, news, msgs)], trucking [Ryder (R, news, msgs)], clothes and hardware [Sears (S, news, msgs)], and planes [USAir (U, news, msgs)], which had the luck to be acquired this week. The most New Era company in the lot: Old Ma Bell, AT & T (T, news, msgs).
The four-letter stocks are the Nasdaq's new-blue chips, a list that includes Cisco Systems (CSCO, news, msgs), Oracle (ORCL, news, msgs) and Amgen (AMGN, news, msgs).
We tested the theory by looking at the one- and four-letter tickers of companies that were in the S&P 500 at the end of 1997 and still are.
We found that the 12 one-letter stocks had fallen 13% since the end of 1997, while the 29 four-letter stocks soared 89%.
But things switched at the end of February, as investors started looking en masse for something more substantial than a cyber-life. Since then, the one-letter stocks have gained an average of 16%. The four-letter list fell 15% in that period.
While the reader should take any columnist's forecast with a grain of salt, including our own, we feel that now is a good time to buy stocks. In our first column for MSN MoneyCentral, we noted that many stocks had suffered unprecedented declines of more than 50%, from above the round number of $200 to below the round number of $100. We hypothesized that once the bullish meme regains ascendancy, these stocks will show a vigorous rally.
The market, like the fish in "The Old Man and the Sea," is a worthy adversary that commands respect and reverence. It is never proper to underestimate its fury or the damage that it can do to unprepared or over-margined participants. But just as Santiago was able to conquer the fish through work, preparation, deception and tools, investors similarly equipped will also conquer.
The Down 35
Stocks that went from $200+ to 100-
Stock % Chg *
Human Genome Sciences (HGSI, news, msgs) 22.6
Protein Design Labs (PDLI, news, msgs) 19.0
Etek (ETEK, news, msgs) 17.7
Avanex (AVNX, news, msgs) 15.8
Medarex (MEDX, news, msgs) 8.4
Aether (AETH, news, msgs) 6.6
Affymetrix (AFFX, news, msgs) 5.9
VeriSign (VRSN, news, msgs) 2.0
Network Solutions (NSOL, news, msgs) 1.9
Phone.com (PHCM, news, msgs) -1.2
Virata (VRTA, news, msgs) -1.7
Rambus (RMBS, news, msgs) -2.7
Terayon (TERN, news, msgs) -4.6
Emulex (EMLX, news, msgs) -8.8
Powerwave (PWAV, news, msgs) -11.2
I2 Technologies (ITWO, news, msgs) -11.5
Genentech (DNA, news, msgs) -14.2
e.Piphany (EPNY, news, msgs) -14.3
Abgenix (ABGX, news, msgs) -14.9
Micromuse (MUSE, news, msgs) -15.1
Juniper (JNPR, news, msgs) -17.8
Inktomi (INKT, news, msgs) -21.3
Interwoven (IWOV, news, msgs) -21.3
Webmethods (WEBM, news, msgs) -24.4
Infosys (INFY, news, msgs) -24.6
Akamai (AKAM, news, msgs) -31.1
Commerce One (CMRC, news, msgs) -33.4
Incyte (INCY, news, msgs) -36.3
Freemarkets (FMKT, news, msgs) -37.7
Xcelera (XLA, news, msgs) -37.8
Qlogic (QLGC, news, msgs) -39.7
Qualcomm (QCOM, news, msgs) -39.7
Internet Capital Group (ICGE, news, msgs) -41.0
MicroStrategy (MSTR, news, msgs) -46.8
Ventro (VNTR, news, msgs) -49.5
* April 20 to May 26, 2000
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