Signs of the bottom
Stock Trends
By Laszlo Birinyi Jr.
Forbes
10.14.02, 12:00 AM ET
Indicators said to show the market's bottom are plain silly. Disregard talk of capitulations, advance-decline lines, chartists' forecasts. They don't work.
The stock market has hit bottom. That's my story, and I'm sticking to it. In late July we saw low points for the Dow at 7702 and the 500 at 797. Since then the indexes have wobbled up and back down near the July lows. The reason I think we've seen the worst is that the market has discounted the bad news that has occurred (terrorism, weak profits, Enron) or may occur (more terrorism, war, additional bad earnings). Of course, my conclusion is a leap of faith, based on experience.
This prediction has absolutely nothing to do with any signs the market has posted. Anyone who tells you that a bottom--or any other turning point in the market cycle--displays certain indicators is just babbling nonsense. Market signs are about as believable as signs in Mel Gibson's cornfield. In my firm's recently published 862-page study on the technical and fundamental characteristics of market cycles, I found nothing except inconsistencies in much-touted signs of market bottoms (and tops). They simply aren't dependable. Some of these alleged indicators were right once, some right but too late to be useful, some wrong.
You'll hear a lot of this poppycock about signs from technical analysts, also known as chartists. I criticized chartists in a previous column (July 22) for claiming to read the market when they really can't. Because their prophecies are turning up increasingly, let me add a couple more thoughts.
The chartists are warning of a further correction ahead. But their predictive record saps them of credibility. In 1990, following Iraq's invasion of Kuwait, for instance, the market dropped 21%, to a low at 2365. Almost to the day, an article took the pulse of the technical community: "Analysts Are Reading Their Charts--And Weeping" (Business Week, Oct. 8, 1990). Well, three months later the Dow hit 2600. In December 1991: 3100.
You'll also be hearing about the wonders of the advance/decline line, a favorite chartist tool to divine underlying investor sentiment. (It's a cumulative total of the number of stocks going up each day minus the number going down.) A rising line is supposedly a bullish sign; a declining one, a bearish sign. Right now the line isn't showing us much of anything, although surely someone soon will find some portent there. The trouble is that this measurement merely tracks the market; it doesn't get out in front of it. In seven of the last eight bear markets the advance/decline line bottomed on the same day as the market.
Then there's the capitulation theory, embraced by many investors far beyond the technical crowd. The theory holds that bear markets come to an end with a selling climax, which acts as a harbinger of new bull markets. Then sellers are exhausted, the reasoning goes, and only buyers are left standing.
These cataclysms, though, seldom occur; bear markets more often end with a whimper. A story in the New York Times of Aug. 15, 1982, reported the consensus of market savants: "The long bear market seems to be entering its final phase. The end could be violent." In fact, the market had already bottomed the previous Wednesday with little noise.
You want a real sign of market direction? Right now it's that the market commentators are wrong, just as they were in August 1982. Take what they say, as reflected in the press, and believe the opposite. Several big down days recently have received more media attention than similar up days. This reflects the viewpoint that the down days are the trend and the up days are the aberrations.
Although I think we have bottomed, I'm not optimistic that we're returning to the magical mystery tour of the late 1990s. Without a powerful bull market where everyone seems to win, you can still be scalped. I continue to be concerned about the market mechanisms. Rule changes--trading after hours and in decimals, particularly--are better for the professionals than for individual investors.
The newest innovation, Nasdaq's SuperMontage trading platform, is heralded as a boon for average investors, an option that gives them better advantages on pricing marketwide. Sure. Remember that whenever they change the rules in Las Vegas, the house always comes out ahead.
The market's behavior in the past six months, since its latest slide beginning in March, is instructive in one way, however. It shows me which stocks have held up well in adversity. Three have accomplished this feat well: Bank of America (nyse: BAC - news - people ), Dow Chemical (nyse: DOW - news - people ) and 3M (nyse: MMM - news - people ). On the risky side, take a flier on Yahoo (nasdaq: YHOO - news - people ). That internet concern has lost half its value since March. But Yahoo has the goods to prevail.
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Laszlo Birinyi Jr. is president of Birinyi Associates, a Westport, Conn.-based financial consulting firm. Visit his home page at www.forbes.com/birinyi.
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