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Posted
4/28/2000
Kenner &
Niederhoffer
What's next for
Wall
Street
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Extra!
April
losses clear the way for new growth
Negative sentiment swept
through Nasdaq stocks like a destructive virus this month. But the
ones that weren't killed probably only got stronger.
By Laurel
Kenner and Victor Niederhoffer
“Like a line of dominoes toppled by the
tipping of a single tile, the Serengeti fell into disarray. But
natural systems adapt to new conditions in an attempt to regain
balance.”
– Robert
DeSalle, “Epidemics!”
The
market began the week with one of the worst openings ever, scaring
all remaining weak longs out of their positions. By Friday, as is so
often the case, a calm, perhaps even an ebullience, had returned.
The Standard & Poor’s 500 Index ended the week
up 1.3%, while the Dow gave up 1% and the Nasdaq gained 6%. For the
month, the S&P 500 lost 3.1%, the Dow fell 1.7% and the Nasdaq
lost 16%, but at 3860, was still up 76% from its close at the end of
1998.
What a world of colossal
destruction and rebirth is concealed in those numbers. At its nadir
on April 14 the Nasdaq Composite had given back the entire 50% rise
from Nov. 18. Similarly, the Standard & Poor’s 500 Index had
suffered its worst percentage decline from peak to trough since
October 1987.
The market
landscape right now reminds us of the devastation of Tanzania’s
Serengeti Plain by a virus carried by cattle introduced by British
and Italian invaders around 1890. The disease wiped out the domestic
cattle raised by the Masai and Sukuma, reducing them to chewing on
the bark of trees. Wildebeests, buffalo, zebras and antelopes were
infected, so lions -- deprived of their natural prey -- turned their
considerable hunting abilities to humans. By 1910, the remaining
people had abandoned their villages and fled the area. The
destruction provides lessons on the sometimes fatal cost of
tampering with an ecosystem.
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 veteran markets
reporter. 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.
In the case of the NASDAQ, the
flesh-eating virus was negative sentiment introduced first by Alan
Greenspan’s repeated and wrong-headed warnings of irrational
exuberance, by comments from Warren Buffett that prices weren’t low
enough after the value of his own stock had dropped 47%, an off-hand
remark by President Clinton that the fruits of biotech companies’
research may not be patentable, and disingenuously dyspeptic
comments by strategists at Goldman Sachs and Merrill
Lynch.
The negative sentiments
spread like an epidemic. First those who were over-margined
suffered. Next came those who had correctly forecast the surge in
the NASDAQ and bought long ago, but could not bear to see their
profits evaporate. Finally, the contagion reached the sturdiest
lions atop the food chain, as witnessed by the announcement on
Friday that world-class trader Stanley Druckenmiller had resigned
from Soros Fund Management. Druckenmiller made many fortunes over
the past 12 years as head of the $8.5-billion Quantum Fund.
Soros told reporters that he
would cease not only to make large “macro” bets on currencies in the
future, but that he would shy away from big bets on NASDAQ stocks as
well. A check of his recent fund holdings shows that his fund was
heavily long Oracle (ORCL,
news,
msgs),
Sun Microsystems (SUNW,
news,
msgs),
Microsoft (MSFT,
news,
msgs),
Qualcomm (QCOM,
news,
msgs)
and Veritas (VRTS,
news,
msgs)
through Dec. 31.
This final
episode strikes us as bullish. We can be sure that Soros would not
have allowed the news on Druckenmiller out if Quantum were still
going to be liquidating Nasdaq stocks. If he is done selling
positions that included at least 8.3 million shares of Oracle,
perhaps the ecosystem can begin healing.
Soros all his life has had uncanny survival
instincts and he doubtless foresaw the negative impact news like
this would have. He would not allow the opportunity for others to
devour the carcass. We tip our hats to his pragmatism and are
confident he will soon resume his climb to new
highs.
M. Zaidi, a reader of
our column, had a suitably philosophical thought that we trust those
affected will take comfort and wisdom from: In an email this week,
he noted that whenever an eminence of stature leaves the field,
volatility ensues, weak longs are removed, and liquidity dries up --
setting the stage for an upside drive.
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of a Speculator
 
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Natural systems and markets truly have a
way of adapting to destruction. In our first column, we listed
stocks that had fallen from above $200 to below $100 in the
five-week rout that began in March. The Down 31, as we called them
then (we've since added four new names), showed an average advance
of 11% this week, compared with a 6% gain for the Nasdaq
100.
After all, these beaten
favorites once captured the attention of the great hedge fund
operators, technology mutual fund managers, dynamic day traders and
star analysts at the most au courant brokerages. Unfortunately, we
cannot take out the back of the envelope and count instances in the
past to see whether the Down 31 are superior investments relative to
other groups of equally volatile stocks. After sorting through more
than 1 million stock months of data, we could only find a handful
that met all the ugly criteria of a rapid descent from above $200 to
below $100.
But we can turn
to some Biblical wisdom for guidance. When we started trading almost
100 years ago, we often repaired to the Brooklyn Bridge for
consolation after market debacles. There we could always count on
being cheered by the flashing neon Jehovah's Witness sign from
Brooklyn Heights: "The Dead Will Rise." Unfortunately, the Witnesses
have given up forecasting and signaling. Now, the tower provides a
digital readout of the time. Nevertheless, we can report that below
the tower, the East River still flows out to the Atlantic as it has
since the beginning of stock-trading. Further, we can say that of
all the lessons we have learned since that time, we have never yet
found an augury with more value and staying power than that of the
Witnesses.
For the more
mathematically rather than biblically inclined, consider that this
Friday marked the last trading day of the month. Such events occur
in half of all months, and they are highly bullish. The market is
higher by the end of the next week on more than 70% of all
occasions, with the average moves being about +1.5%. The
expectations are particularly favorable after the kind of weakness
we witnessed at the end of this month. The differences are
significant from both a statistical and practical standpoint.
But there’s a large margin of
uncertainty attached to such forecasts. Vic’s father, a policeman,
had as one of his unfortunate jobs the duty of taking the bodies of
bums to the morgue. Their belongings often contained voluminous
workouts of market and horse racing data from the Morning Telegraph.
He often cautioned Vic that paying too much attention to past
performance data could lead a speculator to Skid Row. We try to keep
this admonition in mind at all times. But it must be balanced
against the equally wise advice of Tom Wiswell, our checkers
teacher, who often said, “Have some numbers behind your moves, even
if they’re bad numbers.”
Late
on Friday, two further late-breaking news events occurred that seem
highly bullish. Robert Shiller, author of “Irrational Exuberance,”
was quoted as saying that the market has further to fall. Also, the
government has let one of the final shoes drop on Microsoft. The
market abhors uncertainty like nature the plague, so real knowledge
of the government’s plan should bring some calm.
Finally, most important of
all, the devastation of the market in April has left it in much
stronger hands. Grasses, trees and stocks can flourish in such an
environment, now that the carnage has passed. The market and
individual stocks in its jungle can be anticipated, in our minds, to
return to their former power over the next few weeks and
months.
The Down
35
| Stock |
Pre-Crash High |
Crash Low |
% Decline |
% Chg April 20-27 |
| Avanex
(AVNX) |
$273.50 |
$47.38 |
83 |
121 |
| Aether
Systems (AETH) |
$345.00 |
$62.00 |
82 |
49 |
| Virata
(VRTA) |
$222.00 |
$57.13 |
74 |
42 |
| E-Tek
Dynamics (ETEK) |
$315.13 |
$121.00 |
62 |
31 |
| Rambus
(RMBS) |
$471.00 |
$133.00 |
72 |
26 |
| Powerwave
(PWAV) |
$205.00 |
$81.50 |
60 |
24 |
| Freemarkets (FMKT) |
$370.00 |
$39.50 |
89 |
23 |
| Qlogic
(QLGC) |
$203.25 |
$52.00 |
74 |
22 |
| Inktomi
(INKT) |
$241.50 |
$89.88 |
63 |
16 |
| Juniper
Networks (JNPR) |
$312.94 |
$151.50 |
52 |
12 |
| Infosys
(INFY) |
$681.00 |
$131.13 |
65 |
11 |
| I2
Technologies (ITWO) |
$223.50 |
$69.00 |
69 |
10 |
| Commerce
One (CMRC) |
$275.63 |
$58.00 |
79 |
9 |
| Phone.com
(PHCM) |
$208.00 |
$50.00 |
76 |
8 |
| Medarex
(MEDX) |
$206.00 |
$33.25 |
84 |
7 |
| VeriSign
(VRSN) |
$258.50 |
$91.00 |
65 |
7 |
| Webmethods
(WEBM) |
$336.25 |
$44.50 |
87 |
7 |
| Xcelera.com (XLA) |
$225.00 |
$50.06 |
78 |
7 |
| Network
Solutions (NSOL) |
$255.63 |
$96.94 |
62 |
6 |
| Affymetrix
(AFFX) |
$327.00 |
$84.63 |
74 |
5 |
| Terayon
(TERN) |
$285.25 |
$56.00 |
85 |
5 |
| Protein
Design Labs (PDLI) |
$338.00 |
$51.81 |
85 |
2 |
| Emulex
(EMLX) |
$225.00 |
$35.50 |
84 |
1 |
| Human
Genome Sciences (HGSI) |
$232.75 |
$50.00 |
79 |
1 |
| Genentech
(DNA0 |
$245.00 |
$97.00 |
60 |
-2 |
| Micromuse
(MUSE) |
$206.00 |
$50.06 |
68 |
-2 |
| MicroStrategy (MSTR) |
$333.00 |
$26.13 |
94 |
-3 |
| Abgenix
(ABGX) |
$206.50 |
$51.83 |
75 |
-4 |
| Akamai
Technologies (AKAM) |
$345.50 |
$56.63 |
84 |
-4 |
| E.piphany
(EPNY) |
$324.88 |
$43.00 |
87 |
-6 |
| Qualcomm
(QCOM) |
$200.00 |
$98.13 |
54 |
-6 |
| Incyte
Pharmaceuticals (INCY) |
$289.06 |
$57.00 |
80 |
-8 |
| Internet
Capital Group (ICGE) |
$200.94 |
$30.25 |
85 |
-8 |
| Ventro
(VNTR) |
$243.50 |
$21.75 |
91 |
-10 |
| Interwoven
(IWOV) |
$200.00 |
$41.63 |
79 |
-11 |
| Average |
|
|
|
11.09 |
| Nasdaq
Composite |
|
|
|
5.95% |
At the time of publication, Laurel Kenner was
long Commerce One and Human Genome Sciences. Vic Niederhoffer was
long index futures and options, and holds Emulex. Mail Laurel and
Victor at lkvn@hotmail.com.
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