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Strategies & Market Trends : Ask DrBob -- Ignore unavailable to you. Want to Upgrade?

To: longdong_63 who wrote (796)	8/22/2000 9:27:02 AM
From: 1newportbeach1	Respond to of 100058

It's reddy Doody Time, Couldn't resist, borrowed from Mulan on RB Bull Haven and he took it from MetaMarkets: August 21 2000 Trading Desk Diary By Don Luskin It's Feddy Doody Time It's that time again, says Don Luskin, for the Fed to put on its silly song-and-dance. Hey there, boys and girls! What time is it? That's right! It's Feddy Doody time!! This week we've got the highest-rated kiddie show on Wall Street: the Fed Open Market Committee meeting! And it's even better than Howdy Doody, because nobody's sure who's the ventriloquist and who's the dummy. Wouldn't it be nice if the Fed let the markets pull the strings? If only the Fed would simply listen to the economy, adjusting the supply of money to meet the demand for money. But no. The Fed pulls the strings. Just a couple of short months ago the stock market was at all-time highs, the economy was growing at an historic pace, and unemployment was heading to zero. At that time I was saying that the Fed ought to lower rates -- which were then (as they are still) at historic highs in real terms -- to help meet the hypergrowth economy's demand for money. But of course the Fed did exactly the opposite in the mistaken belief that growth and employment cause inflation -- the result was a crash, as the stock market did an abrupt 180 from hope (of continued rapid growth) to fear (of a Fed-induced recession). So I won't be celebrating on Tuesday when the FOMC leaves rates unchanged, and publishes another elliptical greenspeak statement about imbalances of supply and demand and whatever else. The low price of gold and the inverted yield curve are crying out for the Fed to do what I said they should have done six months ago -- lower interest rates now! NASDAQ volatility There's been a lot of controversy on the discussion boards about the meaning of NASDAQ volatility as a predictive technical analysis tool. Several community members have pointed out that, traditionally, high volatility is associated with market bottoms (indicating peaks of uncertainty and fear) and low volatility is associated with tops (indicating peaks of complacency and overconfidence). This is indeed the classical interpretation. I remember reading the earliest empirical research on this in the mid-1970s by none other than the great Fisher Black (of the Black-Scholes formula, for which Scholes lived long enough to win the Nobel Prize -- Black missed it, because the prize cannot be awarded posthumously). I don't use tools like this for prediction, but rather for diagnosis. I've found over and over again that using rigidly defined levels of indicators as predictions of tops or bottoms all-too-often fails, because the levels are set rigidly based on historical norms. Remember Luskin's Second Law: while the four most expensive words on Wall Street are "this time it's different," at the same time the reality is that every time it's different. Therefore the proper way to use indictors like this is as part of a portfolio of insights that must be subjectively integrated into the unique time and place in which they occur. As you know if you've been following this column every day, I believe the correct way to integrate volatility at this point is just the opposite of the canonical interpretation. I believe that the market has been wounded, first by an historically steep run-up on ever-higher volatility, then by an historically steep decline on high but declining volatility. During this convulsion so many market participants were damaged so severely, that it will take a period of stability and recovery for them to be brought back into the market, for confidence to be restored. And the only way to do that is for volatility to stay low for a while.