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Strategies & Market Trends : Drillbits & Bottlerockets -- Ignore unavailable to you. Want to Upgrade?

To: Stoctrash who wrote (5601)	3/16/2001 5:08:35 PM
From: MulhollandDrive	Respond to of 15481

Pain Train.....this guy seems downright prescient. Projection for Dow's return to norm: Pain By David Henry, USA TODAY NEW YORK — In another sign of the changed investor mood following six months of stumbling stock indexes, more people on Wall Street are asking how much pain they might feel if the market were to go back to normal returns after the five fattest years ever. This a change from early this year. Then, it seemed no one was interested in hypothetical talk about the market cooling down for any extended period. The Dow Jones industrial average had booked its fifth consecutive annual gain of more than 20%, and big tech stocks had carried the Nasdaq composite up 86%. The annualized price gain for the Dow for the five years was 24.6%. Jonathan Lin, a market analyst at Salomon Smith Barney, remembers the derision from some clients at the mention of ''reversion to the mean.'' That's the term from statistics used by bears to say the market's fat years will be followed by lean to bring stock returns back in line with average, or normal, long-term results. ''They'd ask, 'But what about the new economy, and what about this and that?' '' Lin recalls. Their view was that the world had changed and historical results did not matter. Now, Lin says, there's an audience for projections about a return to the norm. ''Even the younger ones tend to be attentive now,'' he says. In light of the performance of the market this year, it is no wonder. The Dow is down 7% year-to-date. The Standard & Poor's 500 index is down 1%. The Nasdaq is down 4%, after suffering a 37% plunge from its record high in March. Wednesday alone challenged the confidence of the past with the Dow down midday by more than 200 points. It closed down 101 points at 10,688. The concerns that high oil prices and the fallen euro are hurting business in a range of industries are legitimate. They won't be put aside by the unveiling of a new computer chip, Internet protocol or productivity-enhancing business-to-business Web site. But what about the pain of getting back to normal? What would it take? Clients and Lin's boss, veteran market analyst Alan Shaw, wanted details. The answers depend first on your definition of normal. You could make up any annual percentage gain, say 5% or 18%, and call it normal. But Lin wanted some basis in historical fact. He worked up answers for different rates of gain drawn from annualized price changes (excluding returns from dividends) in the Dow over the 10-, 20-, 50- and 100-year periods through 1999. Take your pick. If you believe prolonged bear markets became extinct when the Federal Reserve began crushing inflation 20 years ago, use the 20-year norm of 14.0%. If you believe there will be another bust on the scale of the Great Depression, use the 100-year norm of 5.3%. If you believe the future will be something in between, use the 50-year norm of 8.4%. If 14.0% annual gains are normal, getting the Dow back to that trend after five years of 24.6% gains would be painful. To get there in one year, the Dow would have to fall 26.9%. To get there with the Dow holding steady at its year-end level would mean waiting more than three years with no gains. Or, the Dow might follow a combination of those two scenarios. ''That should bring expectations down to Earth a bit,'' Lin says. (See chart, below, for other scenarios.) One bear, hedge fund manager Bill Fleckenstein, is personally gratified by the renewed interest in reversion-to-the-mean scenarios. He named his small hedge fund after the term, RTM Fund. Unfortunately, that was in 1996 as the market was just getting revved up to soar with gains far higher than normal. He became extremely bearish in 1998 as the bulls took over the market. Fleckenstein was left shaking his head and writing a contrarian rant on the Web site SiliconInvestor. The name of his fund became an anachronism. ''You couldn't say those words,'' Fleckenstein recalls. Now, he says, he is getting compliments from readers who admit they used to think he was ridiculous. ''Now people aren't sure that what they believed about the new era is true,'' he says. The big question is whether they will become as pessimistic as they were optimistic. Rather than set the market back to normal, they might knock stocks far below reasonable prices. ''Markets never spend much time at the mean,'' Fleckenstein says. ''They only touch the mean on the way between two extremes.''