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Posted 6/23/2000
Kenner & Niederhoffer
What's next for
Wall Street
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Perfect storm leaves markets swamped
Volatile market winds tossed about the Nasdaq and Dow this week. But when the skies cleared, our list of recommended buys -- especially Rambus -- were still steaming forward.
By Laurel Kenner and Victor Niederhoffer
The market opened the week with nice spring breezes and ended with furious gusts and black clouds.
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After four consecutive declines, the S&P 500 ($INX) was lucky to get away with a 2% loss. The only thing that saved it was a 1% rally on Monday. Declines in the Nasdaq 100 of 4% on Thursday and 3% on Friday left the index down 3% on the week. Bear in mind that even after the decline, the Nasdaq 100 ($NDX.X) is still 14% above its close before Memorial Day.
The Dow and Nasdaq both recorded milestones. The Nasdaq 100 ventured 58 points past the North Pole of 4,000 on Tuesday, four weeks after roller-coastering below 3,000. On the darker side, two days later it suffered one of those horrific 4% declines, plummeting to 3,855 -- leaving it unchanged for the year.
The Dow crossed its own milestone on Thursday, falling to 10,376, the lowest level since May 26. That left the average vulnerable to being inexorably drawn and absorbed down by the magic level of 10,000.
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.
Another unhappy milestone was reached when the yield on the 30-year bond bounced above 6% to close the week at 6.03%. Recall that the entire 33% rally in the Nasdaq from 3,000 to 4,000 came about when the long-bond yield moved below 6% from above, shortly around Memorial Day.
A fourth displeasing milestone, except for those in the oil production business, was the rise in crude oil. The July contract closed at $33.40 on its last day of trading, the highest level since March. The last time prices were so high was August 1990, when Iraq invaded Kuwait and the stock market went on to suffer a 20% decline. The collective unconscious of the market remembers all such miserable periods, and oil price rises are not good for confidence, romance and other life-enhancing feelings.
Former President George Bush is said to be very fond of Alan Greenspan, but he still attributes his defeat to the straitened economic conditions engineered by the Fed chairman at the time of his 1992 campaign. We do not expect presidential hopefuls or members of Congress of either party riding into voters' farms and factories to be any more enthusiastic about doing so in the face of seriously weakened stock prices. Somehow, we believe, interest rates will not be driven up excessively (past 6% on the long bond yield, let's say), due to all the negative vibes that would create.
Some scintillating divergences
Meanwhile, the fact that the Nasdaq has changed very little this year conceals some scintillating divergences beneath the surface. For example, 10 of the Nasdaq 100 are up 81% or more. Ciena (CIEN, news, msgs), up about 170%, heads the list. The worst 10 are down 53% or more, with Legato Systems (LGTO, news, msgs) the worst performer with a 79% loss.
Nasdaq 100 in 2000
| Top 10 | % Chg YTD |
| Ciena (CIEN, news, msgs) | 170 |
| SDL (SDLI, news, msgs) | 151 |
| PMC-Sierra (PMCS, news, msgs) | 138 |
| ADC Telecommunications (ADCT, news, msgs) | 114 |
| Altera (ALTR, news, msgs) | 114 |
| Xilinx (XLNX, news, msgs) | 100 |
| Network Appliance (NTAP, news, msgs) | 98 |
| Linear Technology (LLTC, news, msgs) | 87 |
| Siebel Systems (SEBL, news, msgs) | 80 |
| Adobe Systems (ADBE, news, msgs) | 80 |
| Bottom 10 | % Chg YTD |
| Legato Systems (LGTO, news, msgs) | -80 |
| Novell (NOVL, news, msgs) | -77 |
| Compuware (CPWR, news, msgs) | -70 |
| Citrix Systems (CTXS, news, msgs) | -68 |
| CMGI (CMGI, news, msgs) | -64 |
| Parametric Technology (PMTC, news, msgs) | -62 |
| Adaptec (ADPT, news, msgs) | -61 |
| Qualcomm (QCOM, news, msgs) | -60 |
| Excite@Home (ATHM, news, msgs) | -54 |
The natural question arises: Which are the ones to buy and which to avoid for the next six months? To answer this question, we took out a pencil, found an envelope with nothing written on the back and turned on a few computers. The results show that, historically, the best performers at the year's halfway point performed significantly better than the worst in the next six months. In 1997, the average rise for the early winners was 29% greater than that of the losers. In 1998, the early winners did almost three times as well, and in 1999, they did 82% better.
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The difference is certainly of practical significance. Furthermore, they border on the 1-in-20 level of statistical significance typically used to settle questions like this in the social sciences.
We would caution that making the Top 10 list in the first part of the year doesn't ensure a place in the firmament, or even a gain, during the second half. None of the winners managed to stay on top in 1997; in 1998, three stayed but two fell; and in 1999, five of the early winners declined in the second half. There are many biases in a study like this, however, since it covers a period in which the Nasdaq returned 198%.
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No more chairlifts to the top
Instead, we prefer to put our chips on the Down 35 -- which we first brought to your attention April 21 in our first column for MoneyCentral, just after one of the most severe market crashes in history. These stocks had taken the black-diamond run down from above $200 to below $100, with an average loss of 75%.
In subsequent columns on April 28 and May 26, we recommended the Down 35 as buys.
The chairlifts to the top of the mountain have temporarily stopped operating, and none of them has regained their former heights. Since our second recommendation, however, the list has gained 56% -- significantly better than the Nasdaq's 21% gain and eclipsing even the Amex Biotech Index's 50% surge.
The Down 35's gains since April 28 were considerably augmented by the 181% surge in Rambus (RMBS, news, msgs) since Toshiba agreed on June 15 to pay license fees based on Rambus's patented designs. Hitachi followed suit today, sending the shares up 18%. Maybe we can implant a couple of its pricey RDRAMs in our own central-processing units to help us remember to buy the stock into its next decline.
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The main reason we like the Down 35 is that ideas permeate the economy and go into and out of season. Even the most frightful losses tend eventually to "evaporate like hoarfrost before the morning sun," as W. Somerset Maugham put it in his book changing tastes in the perception of beauty, titled "The Summing Up." A good working hypothesis is that many of these stocks will rise to the sunny levels of $200 again.
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 is long Qualcomm. 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.