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Strategies & Market Trends : The Art of Investing -- Ignore unavailable to you. Want to Upgrade?

To: Michael Sphar who wrote (540)	3/9/1999 4:37:00 PM
From: Sun Tzu	Read Replies (1) \| Respond to of 10623

Right now I am predicting a bear correction. But a bear correction will not give life to the Russell 2000 stocks (which by the way are not so small anymore). A bear correction will be essentially a repeat of what we've been seeing in the up and downs of past 2 years. The hallmark of this Bull Market (it deserves capital letters <G>) has been sector rotation. We may be running out of sectors to rotate into. Eventually we will meet the Mr. Bear that you are talking about, if the current froth in the market continues and the breadth continues to deteriorate. At the moment I don't know when we'll meet Him. The similarities between now and 1968 or 1929 (or at least 1987) are striking, but the catalyst is missing. Without the catalyst the baby boomers will continue to pour money into the stock market in the belief that it is the best investment vehicle (I can explain why it may not be so if you wish). The usual suspects will not burst the bubble. The Fed and the government officials on both sides of the Atlantic have learned the lessons of the past and will not make the same mistakes (such as waging a trade war). The catalyst will be, IMO, an utter destruction of wealth that will cause a liquidity crunch beyond the system's capacity. This will be a consequence of (a) excessive speculation (in either the equities or derivatives) (b) an economic crisis in Euroland (c) a US recession due to excess capacity and pricing pressures. (notice that I don't consider a currency crisis in China, Japan, or LatAm a big possibility). The extent of the long term fall out will be a factor of the magnitude of the financial bubble and the magnitude of the shock. There is also a "Nirvana" solution to the world problems. But at the moment it seems like critical balancing act where if any of the forces in action are not just perfect, the system will collapse. BTW if you really want to read a scary book, read Soros' latest book. But be warned, it may keep up at nights <g>. Sun Tzu

To: Michael Sphar who wrote (540)	3/10/1999 4:14:00 PM
From: Sun Tzu	Read Replies (1) \| Respond to of 10623

Here is a little model I thought of last night to explain the present day stock market. Suppose there is only one stock in the market and the stocks "fair" value is, say $25, but not everyone knows this. So the stock trades around a 20% band to its fair value (i.e 20~30). Less and less people buy the stock until it hits 30, then they decide that it is not a good investment (or trade) anymore. More sellers than buyers puts pressure on the stock and it slowly moves down to 20. At that point people who were familiar with the stock and did not buy at 30, decide it is a good buy now and pile on and the stock resumes its upward move. The idealized price pattern is a sinuousoidal chart (slow moves at either end and then strong trend). The volume chart should be 1/4 out of phase. As this pattern repeats itself, more and more people become aware of it. Barring any fundamental change, people will decide to buy the stock at 20 and sell at 30. The increase in this awareness increases the volatility (i.e a sharp rise to 30 followed by a sharp drop). As well, everyone will try to second guess the rest of the market (i.e 29 is good enough, I don't have to wait like everyone else to sell at 30). Run this model in your head through a few iterations and see how it behaves. This is why a mature bull market is so volatile; too many people think they "know" their stocks. It also demonstrates the effect of widely held expectations on the market. (remember when the momentum stocks were in vogue and missing the earnings by a penny meant a 50% drop because everyone knew other momentum players would dump the stock as well). BTW, has anyone checked to see what happend to most of the momentum stocks? Here is a partial list off the top of my head, PSFT, RMDY, CLFY, IOM, ZOLT, PRST, MANU, TTEC,... a three year graph will be eye opening for most. Today almost everyone knows that (a) only the big caps the internuts go up, (b) if you buy a fund it should be an index fund (mostly SPX) and (c) in the long run stocks beat all other investment vehicles. This knowledge is what will destroy the market. I assure you that any time a belief is held so strongly by so many people in the market, it will be proven wrong. True contrarianism is the only sure methodology I know of that works all the time. Everyone is welcome to experiment with this thought experiment by adding more stocks to the model or by applying a sudden change to the fair value of the stock due to a fundamental shift. I'd love to hear what you'll find. Sun Tzu