To print article, click
Print on your browser's File menu.
Go back
Go back
Posted 5/31/2001
Related Resources
Keep track of Victor Niederhoffer and Laurel Kenner's picks on their Recommendations page.
Also follow their HighVolatility and Dow Reversals portfolios.
Details
|
| Price | 45 2/10 |
| Change | +0.120 |
| Price | 18 1/2 |
| Change | -0.030 |
| Price | 18.930 |
| Change | +0.130 |
|
The Speculator
A long, hard summer ahead for investors
The rhythm of the market tells us there'll be no turnaround until after Labor Day, but a nice rally will arrive in the fall. We expect technology to lead that advance.
By Victor Niederhoffer and Laurel Kenner
Life loves loops.
-- Mahlon Hoagland and Bert Dodson, "The Way Life Works"
A series of beautiful, statistically significant symmetries leads us to speculate that summer, last year's bright spot, is likely to be bleak this year -- and that a post-Labor Day rally could last through December.
 Money Plus. Easy online tools and free Bill Pay, too. |
Nature is full of symmetry. We see it in the spheres of stars and raindrops, the spirals of shells and galaxies, the hexagons of snowflakes and honeycombs, the waves in oceans and dunes, the tiger's stripes, in oscillations, orbits, the rhythmic beating of the heart.
The market, too, likes symmetry. Research we published in a column on Dec. 28, 2000 ("Down 78%? We call that stock a buy") shows that the best-performing stocks and industry groups of one year tend to turn up on the loser's list the following year, and vice versa. The markets regularly switch course around holidays, new years and new months.
In building our hypothesis, we follow in the footsteps of author-lecturer Bata LoBagola, who in 1930 published observations of the propensity of African elephants to go on periodic romps, destroying villages and everything else in their way, before suddenly turning back to trod along the same path. Villagers profited from knowing the pattern by setting traps and capturing the returning elephants for their tusks.
We smell a pattern here
The instinctive reaction of every scientist confronted with an unexplained regularity is to hypothesize an underlying symmetry relation as the cause. Such an explanation would seem to carry the day for the market's moves from August through May over the past two years.
With the assistance of our research partner David Ciocca, we studied several aspects of the moves. Start with the Nasdaq 100 Index ($NDX.X) and its returns over two critical periods. Reading this table from left to right, you'll see a neat reversal of fortune:
Nasdaq 100: key periodic reversals
| Period | 1999-2000 % Chg. | 2000-2001 % Chg. |
| September-March | 83 | -61 |
| April-May | -22 | 27 |
We found similar symmetry in the year-over-year monthly performance over the same period:
Nasdaq 100: monthly reversals year over year
| Month | % Chg. | Month | % Chg. |
| Sept. '99 | 0.0 | Sept. '00 | -15.2 |
| Oct. '99 | 9.7 | Oct. '00 | -5.1 |
| Nov. '99 | 16.6 | Nov. '00 | -24.0 |
| Dec. '99 | 23.7 | Dec. '00 | -6.6 |
| Jan. '00 | -7.0 | Jan. '01 | 26.2 |
| Feb. '00 | 12.9 | Feb. '01 | -24.5 |
| March '00 | 3.1 | March '01 | -20.0 |
| April '00 | -14.2 | April '01 | 29.4 |
| May '00 | -5.9 | May '01 | *-2.3 |
To measure the closeness of a positive or negative relation between two variables, statisticians use a fraction between -1 and 1 called the correlation coefficient. Simply put, if the variables' moves are unrelated, the coefficient is zero. The greater the tendency to move in the same direction, the closer the number is to 1. The greater the tendency to move in the opposite direction, the closer to -1.
In the above table of year-over-year monthly performance for the Nasdaq 100, the correlation coefficient is a high -0.73, indicating the months' sharply oppositional relationship.
Ian Stewart observed in "Nature's Numbers," published in 1997: "Nature's symmetries can be found on every scale, from the structure of subatomic particles to that of the entire universe." We also found symmetries in the moves of market components. The 11 S&P industry groups had a strong negative correlation of --0.67 the end of August through the end of May for the past two years. (Mail us here for the chart.)
Patterns turned up in individual stocks, too. The correlation for the 30 Dow stocks during the two periods was -0.50.
5 worst Dow stocks Aug. '99 to May '01
| Company | 8/31/99 to 5/25/00 % Return | 8/31/00 to 5/25/01 % Return |
| Procter & Gamble (PG, news, msgs) | -33 | 4.3 |
| Caterpillar (CAT, news, msgs) | -29 | 52.0 |
| Microsoft (MSFT, news, msgs) | -29 | 2.7 |
| Intl.Paper (IP, news, msgs) | -23 | 21.4 |
| AT&T (T, news, msgs) | -22 | -32.4 |
5 best Dow stocks Aug. '99 to May '01
| Company | 8/31/99 to 5/25/00 % Return | 8/31/00 to 5/25/01 % Return |
| Walt Disney (DIS, news, msgs) | 43.1 | -15.6 |
| Intel (INTC, news, msgs) | 42.9 | -61.0 |
| General Electric (GE, news, msgs) | 36.7 | -14.0 |
| Citigroup (C, news, msgs) | 39.2 | -10.4 |
| Wal-Mart Stores (WMT, news, msgs) | 28.7 | 7.9 |
Symmetry was also present among individual Nasdaq 100 stocks, with a correlation of -0.38. We will send the Nasdaq table to any reader who requests it by mailing us here.
As to why such symmetries exist, we have a couple of ideas. Dr. Brett Steenbarger, a specialist in behavioral finance, notes: "If the market systematically rewards risk assumption, it will tend to act contrary to the expectations of market participants."
The other reason has to do with the economy and Fed policy. Consider:
| Month | 2000 | 2001 |
| January | Fed in process of raising rates; stocks fall. | Fed in process of cutting rates; stocks rise. |
| April | Stocks tumble as Fed is expected to keep raising rates. Microsoft down 23% for month on disappointing revenue. | Stocks soar on optimism for a rebound in profits as Fed cuts rates. Microsoft up 21.4% for the month. |
The question is whether the symmetries will continue, and our best hypothesis is that they will. Just as the market was strong from the end of May into Labor Day and then crashed in the final three months of 2000, we expect weakness going into Labor Day, giving way to a strong rally through year-end.
| Index | % Chg May 29-Labor Day 2000 | % Chg Labor Day-Dec. 31 2000 |
| S&P 500 Futures | 7.1 | -12.4 |
| Nasdaq 100 Futures | 24.0 | -42.3 |
| Dow Jones Industrials | 6.8 | -4.0 |
As technology stocks plunged in the last three months of 2000, we predict they will lead the rise in 2001.
We don't have individual stock recommendations today. As our readers know, we like to go against the grain -- and right now we don't see a grain to go against. But we will suggest a pairs trade: We hypothesize that the 15 best Dow stocks from the end of May through Labor Day last year will do worst this year, and that the 15 worst will do best. We've created a Recommendations portfolio to track the longs only, which is accessible here.
| DJIA Stocks to Short | % Chg.
May 31 to Sept. 1, 2000 |
| Boeing (BA, news, msgs) | 41.0 |
| Hewlett-Packard (HWP, news, msgs) | 31.1 |
| IBM (IBM, news, msgs) | 24.6 |
| Citigroup (C, news, msgs)) | 23.6 |
| Intel (INTC, news, msgs) | 18.6 |
| J.P.Morgan Chase (JPM, news, msgs) | 14.0 |
| Philip Morris (MO, news, msgs) | 14.0 |
| Alcoa (AA, news, msgs) | 14.0 |
| Microsoft (MSFT, news, msgs) | 12.1 |
| General Electric (GE, news, msgs) | 11.0 |
| Minnesota Mining & Mfg (MMM, news, msgs) | 8.5 |
| American Express (AXP, news, msgs) | 8.3 |
| Eastman Kodak (EK, news, msgs) | 5.7 |
| General Motors (GM, news, msgs) | 4.4 |
| Johnson & Johnson (JNJ, news, msgs) | 3.8 |
| DJIA Stocks to Buy | % Chg
May 31 to Sept. 1, 2000 |
| United Technologies (UTX, news, msgs) | 2.9 |
| Coca-Cola (KO, news, msgs) | 2.0 |
| Exxon Mobil (XOM, news, msgs) | -0.4 |
| Home Depot (HD, news, msgs) | -0.7 |
| SBC Communications (SBC, news, msgs) | -1.1 |
| Caterpillar (CAT, news, msgs) | -1.6 |
| Merck (MRK, news, msgs) | -6.5 |
| DuPont (DD, news, msgs) | -6.6 |
| Procter & Gamble (PG, news, msgs) | -7.1 |
| Walt Disney (DIS, news, msgs) | -7.7 |
| International Paper (IP, news, msgs) | -7.7 |
| AT & T (T, news, msgs) | -8.1 |
| Wal-Mart Stores (WMT, news, msgs) | -15.3 |
| McDonald's (MCD, news, msgs) | -17.4 |
| Honeywell (HON, news, msgs) | -27.5 |
Recent Articles
• An investing tool you can do without, 5/24/01
• How the Fed's moves shake markets, 5/17/01
• Last year's casualties are this year's prospects, 5/10/01
more...
End Note
We received dozens of positive letters and requests for more information about our articles on the Volatility Index ($VIX.X) ("Make volatility and uncertainty your friend"), stock-bond ratio ("How the Fed's moves shake markets") and the Arms Index ($TRIN) ("An investing tool you can do without"), along with the following message from a caustic correspondent:
Interestingly, I had thought after reading your article on the ARMS index that you were typical financial news writers with little practical knowledge on the markets. In Ms. Kenner's case, this may in fact be the case. However, after reading Mr. Niederhoffer's history, I can see that not only does he have experience in the markets, but his seasoning includes personally losing sums surely approaching monumental proportions based on poor trading decisions and a definitive lack of technical analysis skills.
As an attendee at the Market Technicians Association annual conference this past weekend, it is clear that the professionals in the market, that is, people recognized as leaders in the field of technical analysis, see value, as you do not in the ARMS indices. Possibly you should educate yourselves further in the field of technical analysis before offering up content that is not only misleading, but that also portrays you as complete idiots. Maybe guys like John Murphy, John Bollinger, Bill Meehan, Ralph Block and Martin Pring are just offering up propaganda when they use these indices in their work. Then again, it is entirely possible you are brainless. I'll stick with the experts. Oh, if I haven't made myself clear, this group does not include you.
Derek E. Baltimore
ING Groepe
We are following Mr. Baltimore's directive and refraining from predictions for the foreseeable future. From now on, like the greats, we'll stick to non-falsifiable, malleable, fuzzy forecasts. The market will be range-bound next week somewhere between Dow 8,000 to 12,000. (We hope our pairs recommendation above will be forgiven.)
At the time of publication, neither Vic Niederhoffer nor Laurel Kenner owned any stocks mentioned in this column.
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.