Manfred, what do you think of this article? I know this has nothing to do with medical science BUT in trying to make money in Biotechs????>>>>>>>>>>>>>>Friday October 6, 9:20 am Eastern Time
Daily Speculations: From the Stock Market to a Market of Stocks
Laurel Kenner and Victor Niederhoffer, Columnists
Speculators stand-ins Linet and Steenbarger chew the market fat.
Editor's Note: Daily Speculators Kenner and Niederhoffer have asked their many friends and associates occasionally to contribute their insights to the column. Today's column features a dialogue between Speculators' consulting psychologist Dr. Brett N. Steenbarger and frequent Niederhoffer interlocutor Frank Linet.
Linet and Steenbarger are the yin and yang of speculation. Linet is a South Floridian specializing in small biotechnology firms with a superior track record of innovation. He is the epitome of the fundamental investor. Steenbarger hails from upstate New York, where he teaches at an academic department of psychiatry and specializes in the short-term trading of market-index instruments. Steenbarger relies upon multivariate, ``nearest neighbor'' models to time his trades.
Linet: Euclid, like our speculative duo of Kenner and Niederhoffer, enjoyed a cold beer and a perfect number -- the first perfect number is six. For those among the audience who are a bit rusty on perfect numbers, any number that will divide into its own without leaving any residual is the perfect number! The Greeks, even in fine party togas, knew of only TWO other perfect numbers: 496 and 8,128.
Steenbarger: Are EuCliddng me? If you go into the Yahoo! search engine and type in ``perfect,'' you'll find over 1000 web pages indexed. The quest for perfection is timeless, from the Pythagoreans' fascination with symmetry to the heroism of Ayn Rand.
Traders, alas, long for perfection in the markets, hoping that a perfect order will reveal itself in the form of angles, waves, cycles, and number sequences. Like Plato, they view market prices as shadows on the cave wall, reflections of perfect, unchanging essences expressible only in mathematics and music. For them, it is a stock market, not a market of stocks: a single, homogeneous entity obeying universal law.
Linet: Dr. Brett, we all at one time or another dwelled in the market's womb as blind cavefish, and per Darwinian and Niederhofferian evolution some among us were spawned as speculators while others were spawned as investors. So it has always baffled me as to why, in a market world filled with Swedish equities and German equities, Indian, Israeli, and Scottish equities -- not to mention multi-marketed indices, the American investor strives to beat, meet, or compete with the dowdy Dow, the sloppy S&P -- while Alan Greenspan favors the Wilshire 5000!
Steenbarger: You're absolutely right. The Dow, S&P, and even the Nasdaq don't begin to capture the range of stocks trading in today's market.
You'll be interested to know, Linet, that I performed a little data analysis on 17 of your favorite small-cap biotech holdings. I went back 3 years and computed the correlation between daily price changes in each of the stocks and the same day price changes in the Biotech (Nasdaq:$BTK), Nasdaq Composite (Nasdaq:$COMPQ), and NYSE Composite (Nasdaq:$NYA) indices.
The average correlation between daily changes in these stocks and the Biotech Index was only .338. The correlations with the Nasdaq and NYSE were even smaller: .258 and .161, respectively. That suggests that less than 10% of the variance in the movement of these stocks can be attributed to broader market trends. Trying to time the purchase or sale of these small-cap biotech stocks based upon general market factors is apt to have limited success.
I was even more surprised to see that the average correlation among the 17 stocks was only .161. These small-cap biotechs are true lone wolves, trading much more idiosyncratically than stocks that are widely held and traded by institutions.
Linet: Brett, the market is as elusive as the kabuki masked dancer. One investor approaches as a matador to tame, ride, or banish the bull. Other dancers, perhaps masked as speculators, become bulls though masked as wolves with gnarling teeth that grip but do not pierce the bear but prolong the dance with a waltz that in turn slows or fuels the masked partners from fluid graceful minuet fragilities to Sousa crescendo victors.
Each participant is cached in a multitude of logical and psychological masks and perhaps the mask one wears or adorns with bravo is only used for S&P dances. Other masks are forged and sanctified for the Russell dance, the hustle mask for the Nasdaq melodies that one moment are 4/4 beat and in an minute transform into the small-cap mask, tear-dried in April and yet still salty of tears from recent melodies scored by Xoma (Nasdaq:XOMA - news), Onyx Pharmaceuticals (Nasdaq:ONXX - news), Axys (Nasdaq:AXPH - news) and other young Sioux dancers, prenatal tears shed by the glee and hopes of Genelabs (Nasdaq:GNLB - news), La Jolla Pharmaceutical (Nasdaq:LJPC - news), and Aronix Pharmaceuticals (Nasdaq:ARNX - news) warriors, upstart masked dancers.
The indices we seek to see are elusive, floating, and forgiving, but only if one is well masked, pensive, passionate, patient, adaptive and cunning.
Steenbarger: You've captured the market's rhythm perfectly. The small-cap mask is perhaps the most striking of all the kabuki ornaments.
When O'Shaughnessy researched his book ``What Works on Wall Street,'' he looked at the returns from firms as a function of capitalization size. Ten thousand dollars invested at the end of 1951 became $1 million when invested in large stocks. It became $800,000 when invested in companies with capitalizations over $1 billion. When invested in micro-cap stocks, however --those with capitalizations under $25 million -- the $10,000 returned over $29 million.
Such companies, he notes, are too small for the institutional investor, but a veritable gold mine for creative and unconventional souls like you, willing and able to do the research that separates the warrior dancers from the pie-in-the-sky romancers.
Note The 17 biotech stocks Linet favors include Axys Pharmaceuticals (Nasdaq:AXPH - news), Geron (Nasdaq:GERN - news), Medarex (Nasdaq:MEDX - news), Targeted Genetics (Nasdaq:TGEN - news), Genelabs Technologies (Nasdaq:GNLB - news), Alliance Pharmaceutical (Nasdaq:ALLP - news), Xoma Ltd. (Nasdaq:XOMA - news), Onyx Pharmaceuticals (Nasdaq:ONXX - news), Regeneron Pharmaceuticals (Nasdaq:REGN - news), Corvas International (Nasdaq:CVAS - news), Ribozyme Pharmaceuticals (Nasdaq:RZYM - news), Protein Design Labs (Nasdaq:PDLI - news), Cell Therapeutics (Nasdaq:CTIC - news), Cubist Pharmaceuticals (Nasdaq:CBST - news), Neose Technologies (Nasdaq:NTEC - news), Ortec International (Nasdaq:ORTC - news), and Abiomed (Nasdaq:ABMD - news).
Linet owns all of the above stocks. Steenbarger does not hold a position in any of the securities mentioned. Linet can be reached at frlinet@webtv.net. Brett can be found at steenbab@aol.com.<<<<<<<< |
