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Pastimes : Richard Ney and the Wall Street Gang -- Ignore unavailable to you. Want to Upgrade?

To: Dani who wrote (185)	2/23/1998 11:56:00 AM
From: Robert Graham	Respond to of 492

I will try to share with you my thoughts on market corrections. This is an area that I do not have down to a science yet. Actually it is more based on experience and the following of market and stock price action. This is not easy to describe and not possible to describe in its entirety. Many people do blame what they see but do not understand on market manipulation, particularly when they find out that there is manipulation in the markets. I do agree that manipulation exists, but I think it exists more with NASDAQ than the listed exchanges that use the open outcry method, and manipulation is to be found more with the illiquid issues of stocks. For a very illiquid issues like many preferred stocks, manipulation even on the listed exchange like the NYSE becomes very obvious. Some of the signs I look for is that stocks that I follow start to behave in uncharacteristic ways. For instance, they do not follow through in price when I expect them to due to for instance the market or news events or even their normal day-to-day price behavior. I am not talking about a single stock here, but a group of stocks, and even groups of stocks by industry. I am talking a form of breadth here. You have the industry leader type of stocks that are leading the rally in their respective industries, and you have the industries that have been leading the recent market rally. You even have individual stocks that lead the market which the smart money looks to as a barometer. You then have the secondary stocks that are pulled up in the wake of the leadership stocks. The first signs of distribution will be seen in these secondary stocks, which then will show up in the leadership stocks. When the market turns in a strong move up, the stock under distribution will tend to not follow up as much as it did in the past or even make no gain at all. When the market breaks, this stock will tend to show much more of a drop in price than it has in the past. This part can be deceiving because some stocks are able to hold their value better when the market breaks, but then later show more obvious signs of distribution. This is looking at distribution in terms of relative strength of the stock compared to the market. Sometimes I find that the only promising sign of relative strength using strictly the price of the stock is by seeing the price move up in value as the market breaks. But a better way would be to look at the volume of the stock and how it behaves in relation to price. It is when these signs of distribution is evident not in just one stock or one industry, but across multiple industries that a market participant should be looking carefully at the market situation for further signs of a correction that may be taking place. Is this distribution occuring in key industries that have lead the recent bull leg of the market up? Every bull leg has its leaders, and when the leadership does poorly, so goes the rest of the market. Market sentiment is an important factor. A contrary measure is seeing what the market players do when this distribution becomes more obvious where key stocks that are very visible to the market are retracing or the market itself has an unusual number of down days. Is sentiment indicating the market participants are in denial, that the sun will continue to shine on them despite the clouds that are in a more obvious way forming in the background? This is an indication that there is worse to come because of the accompanying wide sentiment shift that can happen along with the panic it can help facilitate when these exuberant market players turn bearish and run to get their money out while the market continues to drop. This type of sentiment that leads to a pervasive denial by the market players as a group can come on the heels of reports of the public in record breaking numbers are participating in the market. This is where you also get reports by the "professionals" and economists alike that the market and the economy cannot be any better than it is, that everything is wonderful and will stay that way. Market analysts are saying 10,000 in one year with some giving even a higher number, economists in the news are saying inflation and recessions are dead and a thing of the past. We had this happen last year. Group psychology is fascinating and it is very helpful for those who participate in the market to learn about this facet of human behavior in the way it reveals itself in the stock market. After an initial market retrace, what are the institutions doing? If they are starting to pull their money out into bonds and money markets, this is not a good sign. The institutional money as a group by far represents most of the money in the marketplace. When that money leaves, it is certain that the market will go through a correction by continuing to retrace. What has been interesting this time around is the record breaking inflows of money into funds and the competative approach that funds are now having toward the market. They now tend to take much more risk than they did in the past in competition with other funds for the public's money. They as a group appear now to stay in later and move back into the market earlier as far as the cycles of the market go. This is just a personal observation of mine that I have been developing. The hard part can be determining the difference between natural profit taking from an overextended market that has been showing unusual recent signs of strength and a full-blown market correction. Some of the difference is the breadth in the relative strength of stocks and other indications of distribution, and the uncharacteristic behavior of key stocks and stocks as a group that you were following which were exhibiting strength along with the market in the recent past. This uncharacteristic behavior is more evident for stocks that you have been following closely since each stock tends to have characteristics in the way it behaves in its normal day-to-day price action, how it behaves with respect to news events and also the rest of the market. Relative strength of stocks to industries and the market which is evidence of supply and demand, market sentiment in relationship to changing market prices, and institutional money are key in providing clues to what is unfolding in the marketplace. This can always first be observed in the stocks that you closely follow, and this evidence of wide distribution will show up long before the actual correction. Any comments? Bob Graham