Thom Calandra, CBS MarketWatch
Last Update: 3:12 PM ET Sept. 24, 2001
SAN FRANCISCO (CBS.MW) - How smart is the smart money?
Over the years, market strategists have
devised many ways of sizing up Wall
Street smarts. Let's call it ticker-tape
reading. Larry Williams, a legendary
stocks trader, may or may not have had
his tongue in his cheek when he said,
"Trend is begun by an explosion in
price. The resulting new trend stays in
effect until there is a new explosion in
the opposite direction."
The idea of momentum and trend
continuation has propelled dozens of
market strategists. Some of them, like
William J. O'Neil of Investor's Business
Daily, have fanatic followings. Others
are not as well known but still deserve a
look, especially now that Monday's
rising stock market threatens to lure
vulnerable investors into what looks like a classic-sucker's rally, marked by frantic short-covering.
Laszlo Birinyi's analysis of money-flow indicators, which show block-trade moves into and out
of individual stocks and equity indexes, are well regarded for their ability to forecast
overbought and oversold securities. The thinking, especially on days like Monday when
indexes are surging, is that block trades of 10,000 or more shares point to institutions like
mutual and pension funds, and that institutions are smart. Whether "smart" professional fund
managers are responsible for Monday's suspicious rally remains to be seen.
Put-call ratios on options contracts are seen as one of many sentiment indicators that take
the pulse of individuals as they make investment decisions. So are insider-trading gauges, like
the ones that research director Lon Gerber at Thomson Financial puts together each month. In
August, before the Sept. 11 terrorist attacks, insider selling as measured by the dollar value of
shares sold came to $3.1 billion for Gerber's select group of executives. That was up about 40
percent from July's $2.2 billion and shows clearly that insiders are not putting their personal
money where their companies are.
Gerber tracks several hundred thousand executives whom he regards as reliable indicators for insider
trading at publicly traded companies. He says his favorite macro-level sentiment indicator is the
dollar-value sell/buy ratio, which looks at how many dollars are being sold by insiders for every dollar
being bought. It's "in bearish territory," he says, even after improving to $22.74 in August from $28.19
in July. The ratio's monthly average for the past five years is $13.03.
One of the more significant sales in August was for R.H. Donnelley (RHD: news, chart, profile). CEO
Frank R. Noonan's sale of 137,794 shares at about $31 a share was the largest ever by a Donnelley
executive, Gerber says from his Arizona office. Donnelley sells Yellow Pages advertising. The stock's
highest price ever was $32.52 in July, before the sale by Noonan. Donnelley shares now sell for
about $25.50 each.
Technicians swear by moving-average envelopes comprised of three or even more averages -
let's say a 21-day, a 50-day and a 100-day. The squiggly lines are supposed to tell us whether
a price trend in a security is up, down or sideways. Right now, even with the effect of the
Monday rally, all of the major U.S. equity indexes are still ominously below those squiggly
moving-day averages.
On company balance and income sheets, value buffs look at all sorts of metrics, including the
cash on a company's books, return on capital and the so-called PEG ratio that divides a
company's price-earnings ratio by its earnings growth rate. A company whose price-earnings
ratio is 20 will have a PEG of 1 if its earnings are growing 20 percent a year. Corporate
fundamentals are not really ticker-tape tools, but they get looked at in Wall Street trading
rooms before a buy or sell button is pressed.
Other methods are all over the map and involve price volume, advance-decline ratios, implied
and historic volatility and at a very basic level, stock dividends, which can serve as a sign of
how cheap or expensive a market or a company is.
Largely, though, it is the chart trends - the careful reading of the tape -- that capture the attention of
individual and professional traders, both during the bull market of the 1990s and the continuing bear
market of the current decade. O Neil's patient market strategy of chart-reading for individual stocks
and the overall market has influenced hundreds, if not thousands, of professional investors, including
Greg Kuhn of Kuhn Asset Management and David Ryan of Ryan Capital Management.
O'Neil, whose book "24 Essential Lessons for Investment Success" includes the need to look at
fundamentals such as profit growth, is quick to reject income-statement investing in favor of the ticker
tape.
"During bear markets you should be sitting in cash, researching new stocks, doing an analysis of
your old trades and studying the daily market averages," he said last week, when asked about
"value" investing in the wake of this month's stock-market decline. (See the comments.) "There is no
reason to look for other strategies such as value investing, or buying stocks with low P-E ratios.
These methods will just create bad habits and are not the proper way to invest."
History, of course, may be the best tape for investors,
especially for the millions of American households whose
retirement accounts and active accounts have been ravaged
by 18 months of falling stock prices.
Jesse Webb, a registered representative of MEMBERS
Financial Services in Utah, points out brightly that last
week's stock market sell-off, the worst for the Dow Jones
Industrial Average since 1933, could present an enormous
profit opportunity.
If investors had bought the Dow in July 1933, during that "worst week" in the market's history, they
would have gained 14.9 percent by year's end, 29.6 percent by 1935 and 115 percent by 1937.
"Smart money will be buying," Webb says about the current stock market.
Let's hope the average American investor takes heart in that reading of history. Monday's explosive
stock market rally boosted the so-called Spiders, or S&P depositary receipts that represent a large
swath of the U.S. market (SPY: news, chart, profile), by 3.8 percent. Some individual stocks, like
hard-hit General Electric (GE: news, chart, profile), a member of the Dow, were up more than 12
percent in moves that had all the signs of short-position covering.
Monday's gains will counter just a fraction of the losses that American households are nursing in
their monthly mutual fund and brokerage statements.
Every stock market rally of the past year-and-a-half has withered. A bear-market bottom, as O'Neil
and his followers often point out, is a process, not a one-day event. The smart money will be waiting
for the real ticker-tape parade, which may not materialize for many, many months.
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