To print article, click Print on your browser's File menu. Go back Posted 7/7/2000 Kenner & Niederhoffer What's next for Wall Street	sponsored by: Extra! 8 new rules to help you ride the bull It's going to be a long summer for market roughriders, so hold on tight, follow the lessons of history and, in an emergency, don't be afraid to swing a cane. Plus: Keeping score in our contest with insider-trading expert Carr Bettis. By Laurel Kenner and Victor Niederhoffer Some scientific advertisers spend comparatively small sums in advertising. Yet they have made their products as well known as certain advertisers who spend far more. How do they do this? The answer is testing, testing, testing. -- "Tested Advertising Methods," by John Caples Every tested rule in the market held this week. The first week of the month was beautifully bullish, as is its wont. The S&P 500 rose 1.7%, the Nasdaq gained 1.4% and the Dow, 1.8%. Over the past six years, the entire 225% gain in the S&P 500 ($INX) index occurred during the first week of the month. The gains and losses in the other three weeks net to zero. Money Plus. Easy online tools and free Bill Pay, too. The week ended with an extraordinarily bullish employment report. The Nasdaq ($COMPX)rose 6% from Wednesday's close to Friday's close. Over the past two and a half years, the entire gain in the S&P 500 index occurred on employment report days. The round number of 1,500 was broken in the S&P futures, thereby upholding the rule that round numbers never hold. Nasdaq 100 futures only reached a high of 3,940, and without breaking our vow to forego forecasting, we may anticipate that 4,000 is in the cards. (However, perhaps not in the immediate future; see below.) Kenner & Niederhoffer Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In a special series of weekend columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community. Taking out the canes after panic declines was particularly appropriate. The 3% decline in the Nasdaq Composite on Wednesday brought fear and concern into everyone's heart, and there was much talk of the end of the world in the near future, not to mention much concern about earnings and interest rates. And nobody wanted to take a position before the Friday employment report. Buying after panic declines of this nature leads to substantial gains almost 80% of the time, with the average rise over the past six years coming to about 3% over the five days. The rule was first stated by Henry Clews 113 years ago, in "Twenty-Eight Years in Wall Street": In times of panic, old veterans of the Street hobble down to Wall Street on their canes "to buy good stocks to the extent of their bank balances, which have been permitted to accumulate for just such an emergency." When the panic is over, "these old fellows quickly deposit their profits with their bankers...and retire for another season to the quietude of their splendid homes." When to swing the canes The "take out the canes" rule has held, in spades, since that time except for one horrible period during the Depression. The Week Ahead Economy The calendar is loaded toward the end of next week, with the Labor Department's Initial Jobless Claims report scheduled for Thursday. Friday's lineup of releases includes Retail Sales, the Commerce Department's timely indicator of broad consumer spending patterns. The Labor Department gives us its Producer Price Index, which measures prices of goods at the wholesale level. Also Friday, the Federal Reserve releases Industrial Production numbers, its measure of physical output of factories, mines and utilities. Meantime, the National Governor's Association expects to hear Alan Greenspan's views on the global economy Tuesday at its annual meeting in State College, Pa. Economic calendar Companies The season is here and earnings are flooding in. On Monday's lineup: reports from AT&T, Donaldson, Lufkin & Jenrette and Time-Warner. Tuesday, look for numbers from Biogen and Yahoo! Motorola and Office Depot report Wednesday, and Schering-Plough meets with analysts the same day. Thursday brings earnings from PMC-Sierra and Redback Networks. On Friday, watch for numbers from Digital Lightwave. Events Calendar | Splits Calendar Life New York's three-week Lincoln Center Festival launches Tuesday with a parade of 108 performances of music, dance, opera and theater from around the world. Wednesday is the birth anniversary of author and philosopher Henry David Thoreau, born in 1817. Canada's Vancouver Folk Music Festival opens Friday. Sci-fi fans are zeroing in on Friday's movie premiere of "X-Men," starring Patrick Stewart, Sir Ian McKellen, Halle Berry and Anna Paquin in a tale of super-powered mutants living on society's fringes. Not to miss next weekend: Cow Appreciation Day in Woodstock, Vt. and the Twin-O-Rama in Cassville, Wis., celebrating multiple births. Buying stocks when bond yields are low paid off. The 30-year bond spent the entire week below 6% and closed near three-month lows. Buying stocks when the yield is below 6% has been good for consistent and immediate 5% returns over the last five years. Buying on dissonance and selling on consonance paid off. When Nasdaq 100 futures fell below 3,700 on Wednesday and Thursday, close enough to feel the lines of force emanating from the South Pole of 3,000, with blood flowing in the street, that was the time to buy. When S&P futures broke through the halcyon number of 1,500 late today, just 93 points from its all-time high on March 24, that was the time to sell. The contract promptly fell 0.5% in the next half hour. Going against the trend when stocks break through a round number is almost always good for a profit. The Down 35 stocks that broke from above $200 to below $100 have gone up 57% since we recommended them on May 26. Realizing that the mistress of markets is a mistress of deceit paid off. Things are seldom what they seem, and just when it looked like people had changed their grounding from bullish after Memorial Day to bearish after Independence Day, the market stood up and spit tobacco juice in the eyes of the bear. Going against the bearish, old-hearted men of the Establishment was particularly profitable this week. Over the weekend, an abundance of bearish missives were disseminated to the masses in the leading financial news weekly. The most dyspeptic of all was the most astonishing statement of the grumpy creed to date: "There is no such thing as the New Economy." The Morgan Stanley High Tech Index's 4,600% rise since its creation in January 1991, then, clearly has been smoke and mirrors. The market rallied as usual during beautiful weather. Regardless of the declines of the past three summers, spring and summer months over the last 130 years have typically shown an average rise of twice the cold months' gains. Most important of all, the "buy and hold" rule proved to be, as it usually does, the ideal strategy. Over the last 200 years, such a technique has profits of about 10 million percent per century. That's a hard nut to crack from the short side, as so many bodies in Boot Hill can attest. Bullish employment reports mean trouble The only cloud on the horizon as this magnificent week wound to a close was that another tested rule is highly bearish. Over the last several years, bullish employment reports have almost invariably been followed by serious declines. The odds for a decline over the next week are about 4-to-1, with the average move a drop of about 2%. The main difficulty with rules, though, is a lack of testing, and this is particularly true of the stock market. Investing is alone among modern disciplines in being almost entirely innocent of the scientific method. Such was the state of advertising in 1925, when John Caples, considered the greatest ad man ever, started out in the business. In his first week, Caples wrote in "Tested Advertising Methods," he heard many rules from more experienced hands. For example, an artist told him that pen-and-ink drawings are good in furniture ads, while a copywriter said headlines were not needed when short copy is used. "I believed these statements," he wrote. "I believed that these men had a real foundation for what they said. I tried to remember the rules they laid down." But when he went to work in mail order, where each ad was tested and results tabulated, "I quickly learned that much of the talking about advertising I had listened to and believed in was just talk. Too often the speakers were stating opinions they mistook for facts." If only stock market technicians and other rule-givers prone to exhorting without testing would take these words of Caples to heart, the stock market world would be a much gentler, kinder and more profitable place for the average investor, as has the advertising world for small businesses since he published his rules. Follow the insiders The general rules we've listed at the top of this column have been tested and counted with our own computers, our own programs and our own data -- and have been used in practice with varying degrees of success. They work. However, there are no panaceas, particularly in the selection of individual stocks. We are well aware of our own ignorance in that area, but if forced to put our chips on something, it would be this: an investor does better buying stocks that corporate insiders have been buying, and selling those that insiders have been selling. That rule that has been tested over 50 years, with consistent significant practical and statistical profitability, To this end, we first reported on May 5 a group of stocks that fit our tested rules for superior performance based on a combination of large declines and recent insider purchasing. On June 2, we updated our list and reported the wisdom of Carr Bettis, the world's leading expert, in our opinion, on insider trading, who has taken the art of forensic investigation of the subject to a level that is truly beautiful to behold. Bettis takes into account such factors as the absence of buying or selling in situations where one would expect it, the insider's position in the company, their record in purchasing and the intricacies of derivatives trading. We challenged Bettis to a contest: His picks against ours, priced as of June 2, with the contest to end on Dec. 2. The results follow, and we are pleased to report that both are beating the 0.1% gain in the S&P 500. Insider Infighting: Niederhoffer vs. Bettis Niederhoffer Insider Picks % Chg YTD Visx (VISX, news, msgs) 39.0 Ucar International (UCR, news, msgs) 22.9 Express Scripts (ESRX, news, msgs) 18.9 Carpenter Technology (CRS, news, msgs) 9.1 H.B.Fuller (FULL, news, msgs) 8.5 Dean Foods (DF, news, msgs) 8.4 Finova (FNV, news, msgs) 7.7 Standard Register (SR, news, msgs) 5.2 AK Steel (AKS, news, msgs) 0.0 Keystone Financial (KSTN, news, msgs) -0.8 Federal-Mogul (FMO, news, msgs) -1.3 Interstate Bakeries (IBC, news, msgs) -4.7 Storage Technology (STK, news, msgs) -6.7 Cambridge Technology (CATP, news, msgs) -8.2 Airgas (ARG, news, msgs) -9.7 Saks (SKS, news, msgs) -10.4 Dial (DL, news, msgs) -11.1 Modis Prof Services (MPS, news, msgs) -22.4 Natl Commerce Bancorp (NCBC, news, msgs) -23.2 Sykes Enterprises (SYKE, news, msgs) -34.1 Average 2.91 Bettis Insider Picks % Chg YTD American Annuity Group 11.0 Ditech Communications (DITC, news, msgs) 11.0 Cabot Oil & Gas (COG, news, msgs) 5.9 FirstFed Financial (FED, news, msgs) -0.9 Dawson Geophysical (DWSN, news, msgs) -1.9 El Paso Energy (EPG, news, msgs) -4.0 Amli Residential (AML, news, msgs) -5.2 Developers Diversified Realty (DDR, news, msgs) -7.7 Simpson Industries (SMPS, news, msgs) -9.7 Polaroid (PRD, news, msgs) -18.0 Average 1.95 S&P 500 0.10 Data since June 2, 2000 We're in the lead so far, 2.9% to 1.9%. He wishes to make six changes in his portfolio, removing all the shorts and one long. However, for the purposes of our contest (in which the loser will eat crow in December, raw, squawking and fully feathered) we are not accepting his changes, as it ain't cricket to change the rules mid-game.
Kenner & Niederhoffer Recent articles: • After six market months, a climactic equilibrium, 6/30/00 • Perfect storm leaves markets swamped , 6/23/00 • On baseball, strategy and the technology revolution, 6/16/00 more...	We have tested the eating of crow and it tastes much better roasted, with the feathers removed, in a little pear sauce. At the time of publication, Victor Niederhoffer maintained long and short positions in index futures and options. His position changes regularly from net long to net short as the market fluctuates in the short term, but remains highly bullish for all time periods forward. Laurel Kenner owns Dial, Finova, Carpenter, Modis, HB Fuller, Interstate Bakeries, National Commerce, StorageTek, Sykes and Ucar. Mail Laurel and Victor at lkvn@hotmail.com. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.