Would You Like Some Peach Tea?
By Goran Yordanoff
February 24, 2001 12:30 PM EST
You are about to enter the world of market psychology. Leave the left side of your brain behind and enter a world that is devoid of reason, technical studies, or charts. This is a world where fear, greed, and uncertainty control the tape. A world where a rumor or a misinterpreted statement can cause billions of dollars to change hands in minutes. A world of deceit, manipulation, and ill-founded predictions. A world of self-fulfilling prophesies created by analysts and the media.
You see a sign ahead.... Fasten your seatbelt... you are about to enter... The Market Psychology Zone.
The "Zone" Diet For Stocks
Forget about the percentage of fat, carbohydrate and protein you need to limit yourself to for a moment. There exists a proper ratio for looking at the market properly, as well. Some traders will look at everything from an analytical angle. They look at charts, they look at their technical indicators and base their trading decisions solely on these criteria.
Worse yet, some traders and professional money managers have developed "models" which they use to evaluate potential opportunities. One of the greatest traders of our time, George Soros, took one of the biggest hits of his professional career by shorting Yahoo! (YHOO) as it was on its monster run a few years ago. He did so because his "model" told him too. His analysis told him it could not maintain its price levels at the time and would surely topple. Soros made a nearly $400 million dollar bet that YHOO would crash. It didn't. Soros lost. This is a man who essentially controlled foreign economies by controlling their currency. This man is one of the great geniuses of our time. He failed with YHOO because he didn't use my "zone" diet. This diet consists of 40% technical analysis, 40% psychology and sentiment, and 20% gut. There is no doubting that Mr. Soros had perhaps the best technical analysis of anyone in the world. There is also no doubting that Mr. Soros had perhaps the greatest "gut" of any trader of our time. What he didn't have at the time of the YHOO trade was consideration for the psychology and sentiment in the market at the time.
Should YHOO have reached its highs of $250 per share? Should YHOO have had a market capitalization in the hundreds of billions of dollars? Absolutely not. But it did. It did because a force greater than all the fund managers in the world put together was running rampant... the force of market psychology. Market psychology generated an upward force that even the greatest stock market wizards in history couldn't comprehend, much less fade. Knowing what side the psychology of the market is on is truly the first criterion necessary for successfully evaluating a trade.
Let's Now Visit Our Famed Millionaires
Remember the "average investor gets rich from the stock market" deal we saw on television for so long? Remember how this helped fuel the desire for stocks and contributed so greatly to market psychology at the time? Well, let's check back with some of our old friends and see how things are going.
A towtruck pulls up and the passenger door swings open...
Truck Driver: Howdy, good buddy, need a lift?
Me: Hey, you're that millionaire truck driver from the Discover Brokerage commercial, right?
Truck Driver: Yup, hop on in, I got the next hot thing you want to get into.
Me: (Jumping into towtruck, looking up at pictures on visor.) Say, where is the picture of that beautiful island you bought? You know, the one you bought with all the easy winnings you made trading tech stocks?
Truck Driver: (Smiles.) Oh that, heck, I didn't need that island anyway. Just got to be too much of a drag with all the paperwork and all.
Me: Paperwork?
Truck Driver: Yup, when I got all them pesky margin calls, I had to sign a bunch of papers in order to sell the island and meet my margin calls. You know the routine.
Me: You mean, you didn't realize those gains? You actually held the stocks?
Truck Driver: Yup, Peter Lynch told me the best holding period for a stock is forever, and plus, I didn't want to pay all that income tax to the government anyhow.
Me: Why do you have a picture of a double-wide here?
Truck Driver: Well, me and the family had to sell everything we had to meet our margin call and were lucky enough to find that trailer to move into to. Heck, it's only temporary. We're looking at our stocks to come back really strong during the second half of this year, you know, with Greenspan cuttin' rates and all. We're pretty confident that our VNTR, CMGI, DCLK, RNWK, VIGN, ICGE, and KANA will hit their old highs when that darn second half recovery starts. Shoot, everyone pretty much got it locked as a "sure thing."
Me: (Feeling breakfast starting to rise in my throat.) Please stop the truck right here please.... I need to get a manicure at this place.
(Jumping out the tow truck I walk into a beauty salon that is buzzing with activity and excitement. As I sit down at the manicurist table and put my hand in the bowl of warm water and Palmolive I hear a faint beeping sound.....)
Manicurist #1: Oh my God!! I got an email alert from Ameritrade!!!!
(a loud roar erupts)
Manicurist #2: Is it a 3 for 1 split?? Is it another upgrade? Let me guess, there is a $10,000 per share price target put on the stock????
Manicurist #1: (looking at pager...) Actually, umm.. it's not a split, its not a price target... its umm... a margin call.
Manicurist #2: Oh my, well, just go ahead and sell some more stock to meet it.
Manicurist#1: Well, remember all that Corning (GLW) I bought when it got all those upgrades at $340 a share and all those great fiber optics conferences it presented at? And I thought it was so cute when those people on CNBC would talk about the nickname they NYSE traders gave it, "Glow-worm" if I remember correctly. Well.. I'm below my minimum margin requirements and I don't have any more stock to sell because I took that huge margin loan out last year. I... I... I.. don't know what to do now...... but I'm sure it will be back to its old highs when we have our second half recovery that everyone has promised since Greenspan is so vigorously cutting rates.
(I quickly dropped a $10 on the table, told them to hold the peach tea and dashed out.... saddened by the plight of the average American who bought into the 'get rich quick and easy' scheme created by the stock market. I stop and ponder the fact that most Americans will research for weeks before they buy a television or VCR, yet they invest significant amounts of their life's savings with reckless abandon.
Send In the Clowns.... And Then The Crooks
The "plunge control team" and rumor mill put in an impressive two day showing on Thursday and Friday. On Thursday, with the DJI Average down nearly 200 points from its early morning highs, a rumor surfaced on the NYSE trading floor that the Federal Reserve may deliver an emergency rate cut before the end of the trading session. With the hype for a "second half recovery" already being milked for all it was worth, the surprise rate cut rumor seemed like a great vehicle for the bulls to manufacture as there would be no way to disprove it. (In case you haven't been around the past few weeks, the "second half recovery" battle cry has been revealed for the lie we all knew it was. Sort of like the old Scooby Doo episodes where they would un-mask the villain at the end of the show who would say, "and I would have succeeded if it weren't for you meddling kids!")
In yesterday's session, with still no rate cut being delivered from the Heavens all three indexes sold off hard until late in the session.
This, however, is where things get really sticky.
With about two hours left until the close, the following even actually took place. This is actually a true story.
(Phone rings in Goran's trading office......it's a call from a hedge fund manager with over $200 million under management.)
Goran: Hello?
Fund Manager: Hey, G-Man, look I just got a call from two equity desks about something going down at the Fed.
Goran: Oh, man, I was afraid that Greenspan was going to be influenced by Clinton's behavior..... those two hung out too closely together for too long,... this is going to be terrible... (interrupted by the fund manager..)
Fund Manager: No, No, you got it all wrong. Look. I got a call that Greenspan has ordered Chinese food for the Fed's meeting next Tuesday. Do you know what this means?
Goran: Umm.... It means Greenspan has a craving for Moo Shoo?
Fund Manager: No, No, you twit... Greenspan ordered the same food for the Fed's meeting on January 02 of this year. THE DAY BEFORE HE GAVE THE MARKETS THE SURPRISE CUT!!!
Goran: But, maybe Greenspan just likes Chinese food.. and why the heck is he placing the order four days in advance? That seems weird..... (interrupted by the fund manger again...)
Fund Manager: Look, dude, believe what you will. I'm getting long if the Fed is fixin' to cut rates again..Whoa!! There's a 50,000 bid on Instinet for the QQQ's, I gotta run!! (Click....... dialtone)
It took me several minutes to try to rationalize what I had just heard. It wasn't logical. It was actually bordering on absurd. But wait a minute, when did the stock market ever act in a rational and logical way, anyhow? At that moment it was clear to me that I had to shut off all my charts, shut off all my technical studies and just turn up CNBC. The "fix" was on and the biggest rumor mongers on the planet were about to get a fat juicy one handed to them on a silver platter.
Within minutes, CNBC reported: "something has come to our attention that is apparently a rumor which is circulating on the NYSE trading floor, I stress this is ONLY a rumor........."
The "rumor" was generated by a report on the newswires that ex-Fed governor Wayne Angell had stated that there was a 60% chance of a surprise interest rate cut in the first three days of next weeks trading.
This 'rumor' sent the futures markets into a frenzy of buying that lifted the DJI Average nearly 200 points and actually put the Nasdaq Composite in solidly positive territory. Whether it was right or not for this
The following is a chronology of newswire posts that hit the market: (taken from Briefing.com)
14:52 ET Breaking News: Bear Stearns chief economist and former Fed Governor Wayne Angell telling his sales force that there is a 60% chance that the Fed cuts rates next week.
15:10 ET Bear Stearns Comments: Hearing from Bear Stearns that the person actually making the prediction of Fed rate cut next week was John Ryding, a member of Wayne Angell's team at the firm.
15:50 ET Market Reversal: Market recovery continues with the focus on the Wayne Angell comments. Short squeeze has added to the pace of the move.
A 60% chance of a cut? Hmmm... I wonder what kind of model Mr. Angell used to generate the 60% probability. I mean, surely, when speculating about events which are purely out of the realm of technical analysis and rational evaluation there there must have been some factor that tipped the scales past the 50%/50% weighting. For example, each and every weekend I consider there to be a 50% chance that Claudia Schiffer will ring my doorbell and profess her lust for me. I don't think its probable, but hey, for the sake of being an optimist I always keep the 'chance' of it occurring alive and well. Hence, the 50% chance. But a 60% chance? Whoa, he must have really seen, heard, imagined, or fantasized about something that really got him excited about the probability of this cut happening. Oh, but hold on, it wasn't the former Fed Governor that said this, it was a member of his "team" at the firm. I wonder how far this "team" sits away from the Bear Stearns trading desk? I wonder if the Bear Stearns proprietary traders took advantage of this "team member" selfless and thought provoking call?
Do I think Bear Stearns profited off this call? I'll give it a slightly greater than 60% chance that they did.
Nevertheless, the line is now drawn in the sand . The gunfight at the OK Corral is coming and its gonna be at sundown on next Wednesday. The market is playing a dangerous game here and is putting the Federal Reserve in the most compromising position it has ever found itself in. The potential exists here for the Federal Reserve to totally lose its standing in the eyes of the international monetary community and paint itself as nothing but a whipping boy for the U.S. equity markets. I do not believe this to be the right path for our central bank nor do I believe an economic recovery to be in the cards until mid 2002. Further 'emergency' cuts will only send a dire message to the international community that our economy is no longer being managed with foresight, but rather, in a 'crisis control' manner that is totally dictated by the plight of our equity markets. Greenspan needs to think about the future of the U.S. and the integrity of the central bank and not about bailing out the people who bought JDSU at $144 a share.
Oddly, most people who consider technology stocks to be at ridiculously low levels have probably only been involved with the stock market for the past 2-3 years. Most technology and Dow stocks have appreciated incredibly in the past 3 years. Let's look at a few:
EMC: From a low of $6 in 1998 to current price of $45. An 800% increase.
JDSU: From a low of $8 in 1999 to current price of $33. A 400% increase.
AEOS: From a low of $7.5 in 1998 to current price of $55. An 850% increase. (Insiders have sold 6 million shares in past month)
KSS: From a low of $16 in 1998 to current price of $70. A $437% increase.
MO: From a low of $18 in 1999 to current price of $48. A 260% increase.
SGR: From a low of $4 in 1999 to current price of $51. A 1275% increase.
INTC: From a low of $16 in 1998 to current price of $30. An 88% increase.
BA: From a low of $32 in 1999 to current price of $64. Nearly 100% increase.
AOL: From a low of $7 in 1998 t |
