To print article, click
Print on your browser's File menu.
Go back
Go back
Posted 6/2/2000
Kenner & Niederhoffer
What's next for
Wall Street
|
Extra!
Nasdaq takes big swing at rational exuberance
A week of ebullience over a slowing economy leaves the index climbing toward 4,000 -- and next week could bring more of the same. Plus: Pitching duel over insider trading.
By Laurel Kenner and Victor Niederhoffer
The winner of a match is not always determined by who is right, but who is left.
-- Tom Wiswell, world checker champion
The best week in Nasdaq history ended today with rational exuberance in all markets on the heels of a weaker-than-expected employment report.
 Money Plus. Easy online tools and free Bill Pay, too. |
Not only did the Nasdaq take top honors with its 19% gain, but three of the daily point gains -- Tuesday's, Thursday's and Friday's -- were among the six largest in its 29-year history.
Not to be denigrated were the week's advances of 7% in the S&P 500 ($INX), 5% in the Dow ($INDU), 9% in the Wilshire 5000 ($WSX.X), and outside the United States, 5% in the Nikkei, 11% in Hong Kong and 11% in Brazil.
The Nasdaq's record reminds us of Christy Mathewson's feat in the 1905 World Series of pitching three shutouts, an achievement that has never been duplicated. It also brings to mind the famous moment in the 1932 World Series when Babe Ruth pointed to the center-field stands before knocking one out of the park.
Bonds break barrier
The main bullish event of the week occurred in the fixed-income market, as yields on the 30-year bond broke decisively below the magical 6% barrier. On the three occasions that has happened in the last five years, the S&P 500 has gone up at least 5% within five or six weeks. This time, it took just three days.
As we said in our article last Friday, the market was ready to rally after Memorial Day because the terrible declines of April and May had forced all but strong hands out of their positions. We also said that the North Pole of 5,000 in the Nasdaq was as much an attractor as the South Pole of 3,000, and since 3,000 had been breached and covered with lots of panic selling, North Pole would exert its influence.
They laughed when we said it, but now, with Nasdaq futures closing at 3,745, a mere 255 points from the weak magnetic pole of 4,000, there are beginning to be believers out there.
A few too many, for our money. As the week ended, the Chicago Board Option Exchange's volatility index, the VIX, had fallen all the way to 24, a level quite consistent with calm in the markets, and rather ominously quiet.
We are therefore taking a vow to avoid making any more forecasts.
We're disqualifying ourselves from making predictions partly because, after a rally of this magnitude, a little backing and filling would be normal before a sustained assault on the North Pole.
Greenspan's spirits rebound
Also, we're feeling depressed that Dr. Alan Greenspan has failed to heed our call to switch places with Knicks center Patrick Ewing. We asked them to switch suits because we think they're both playing an outdated game in their respective arenas, and in need of a change. So our spirits sank when, in Game Five of their NBA playoff series, the Big Fella trotted out instead of an elderly 5-foot-11-incher.
Meanwhile, Greenspan, rather than stepping down, trotted out one Fed official after another to issue Delphic pronouncements suggesting that the degree of imbalances in the economy may have been overestimated. The lineup started Tuesday with Edward Boehne, the retiring president of the Federal Reserve Bank of Philadelphia, who allowed there were some signs of a slowdown. On Thursday, it was the turn of Robert Parry of San Francisco, who suggested that a further quarter-point increase in the federal funds rate might not necessarily be in the cards.
| The Week Ahead | |||
|
We believe that it was inevitable that such optimism in Fedspeak would reassert itself. No way is William J. McDonough, a liberal Democrat and possible heir to Greenspan, going to permit an excessive increase in interest rates that would hurt the chances of the Democratic candidate in the way that President George Bush was supposedly done in by excessive tightening by the Fed during his 1992 campaign.
We like to say that such soothing appearances by Fed officials are, in the words of the late sportswriter Jimmy Cannon, "guaranteed to happen." We are always happy to receive similar events that are "guaranteed to happen" from our readers, and will send a cane to the three best submissions we receive.
Trade and move to the center
We have another reason for wanting to take a holiday from forecasting, at least until next Friday: We don't want to endanger our hard-won humility. Vic's checker teacher, Tom Wiswell, a world champion, often would stop after 15 minutes of a game, scratch his hat and mumble, "I'm in over my head. I better simplify."
Wiswell's solution at such times was to trade pieces and move to the center. He always favored the game of "Old Faithful," where he traded piece after piece in order to go for a draw. "Take care of the draws," he would say, "and the wins will take care of themselves."
The investor should pay heed. Wiswell was undefeated over a 25-year period. Other lessons from this master strategist's technique that can be applied to the market:
- Don't buy too heavily on the way up, thereby setting yourself up for the mistress of markets to shake you out of good positions on the way down.
New installment of the inside story
Many years ago, Vic noticed that insiders of companies showed unusual prescience in the timing of transactions in their stocks, and was able to quantify this in a study. On May 5, we noted that updated work by H. Nejat Seyhun on this "anomaly" showed that through judicious use of publicly available information, individuals might garner an extra return of a few percentage points a year.
We published a list of 20 S&P 500 Midcap Index stocks that had been beaten up severely in the first four months of the year, where insiders were courageous enough to step up to the plate and buy. We hypothesized that a portfolio of such stocks might be a good one for future performance.
The list appears below, with the results noted. Since the date of recommendation, the average performance of the group has been a gain of 6.8%, versus a rise of 3.4% for their peers in the S&P Midcap Index. (The S&P 500 rose 3.1% during that period, and the Nasdaq 100 gained 1.8%.)
| Stock | % Change |
| Keystone Financial (KSTN, news, msgs) | 47.11 |
| Express Scripts (ESRX, news, msgs) | 38.42 |
| Natl Commerce Bancorp (NCBC, news, msgs) | 19.48 |
| Modis Professional Svcs (MPS, news, msgs) | 16.78 |
| Dean Foods (DF, news, msgs) | 8.7 |
| Airgas (ARG, news, msgs) | 6.17 |
| Saks (SKS, news, msgs) | 6.08 |
| Dial (DL, news, msgs) | 5.41 |
| Interstate Bakeries (IBC, news, msgs) | 5.36 |
| Finova (FNV, news, msgs) | 4.02 |
| Visx (VISX, news, msgs) | 3.65 |
| Carpenter Technology (CRS, news, msgs) | 2.41 |
| Ucar Intl (UCR, news, msgs) | 1.9 |
| Sykes Enterprises (SYKE, news, msgs) | 0.3 |
| Standard Register (SR, news, msgs) | -3.64 |
| Storage Technology (STK, news, msgs) | -7.14 |
| H.B.Fuller (FULL, news, msgs) | -7.68 |
| AK Steel (AKS, news, msgs) | -12.43 |
| Cambridge Technology Partners (CATP, news, msgs) | -14.01 |
| Federal-Mogul (FMO, news, msgs) | -23.79 |
| Average % Change | 6.80% |
| S&P Midcap Index | 3.40% |
| S&P 500 | 3.10% |
| Nasdaq 100 | 1.80% |
Kenner & Niederhoffer
Recent articles:
• Time to confront (and capture) the worthy market, 5/26/00
• Adapt or die in this Darwinian market, 5/19/00
• 5 rules to ace the market game, 5/12/00
more...
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.
Since the time of Vic's work in this field there has been much progress in fine-tuning the tells that insider trades provide.
The key innovator in this field has been Carr Bettis, who runs Pinnacle Investment Advisors in Scottsdale, Arizona. Bettis, a resident of Adelaide, Australia, for his first 18 years, finds that some of his best ideas come to him each day on his daily 5 a.m. mountain-biking sessions, and amid the thrill of interacting with his 5-month-old and 2-year-old daughters.
He has developed the analysis of insider trading into a science, and he does it by using cutting-edge mathematical modeling.
He finds, for example, that the presence or absence of buying and selling is particularly significant. Before acquisitions, not surprisingly, insiders tend not to sell or buy. Some insider seers are particularly good at getting an edge, and Bettis monitors them. Also, many insiders resort to derivative transactions, possibly to make it harder for others to raise the eyebrows. Again, Bettis is on top of them.
Here's a list of 10 positions he's recommending now:
| Long Positions |
| Simpson Industries (SMPS, news, msgs) |
| Polaroid (PRD, news, msgs) |
| FirstFed Financial (FED, news, msgs) |
| American Annuity Group (AAG, news, msgs) |
| El Paso Energy (EPG, news, msgs) |
| Short Positions |
| Developers Diversified Realty (DDR, news, msgs) |
| Ditech Communications (DITC, news, msgs) |
| Dawson Geophysical (DWSN, news, msgs) |
| Amli Residential Properties (AML, news, msgs) |
| Cabot Oil & Gas (COG, news, msgs) |
Ordinarily, we follow the "if it's not invented here, it's no good" motif. But in this case, we are extraordinarily impressed by the numerous twists and intricacies that Bettis has come up with to ferret out that extra few percentage points a year of return.
Nevertheless, we are vainglorious enough to believe that the new entrants to our own portfolio of beaten favorites will outperform his. Insiders have to hold stocks six months or disgorge profits, so our contest will end half a year from today, on Dec. 2.
We will see which one of us eats crow, raw, squawking and fully feathered.
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 holds AK Steel, Airgas, Cambridge Technology Partners, Carpenter Technology, Dial, Federal-Mogul, Finova, H.B. Fuller, Modis, National Commerce Bancorp, Storage Technology, Sykes Enterprises 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.