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Posted 4/21/2000
Kenner & Niederhoffer
What's next for
Wall Street
For the short term, there’s no reason to be particularly bearish or bullish.
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Extra!
Shakeout left the market in stronger hands
April's scares have proven the market can be a harsh mistress, and the near-term prospects are neutral. But the long-term trend is still up for those with the patience to hold great young growth stocks to maturity.
By Laurel Kenner and Victor Niederhoffer
As market participants caught their breath and prepared for a three-day holiday, there was an air of relief Thursday that a repeat of the 1987 crash had been averted, at least for now. Market averages recouped between one-third and two-thirds of the devastating losses of the previous week, in one of the most dramatic rebounds of all time.
The week began on Sunday night with a terrible, romance-ending decline of 2% in Standard & Poor’s 500 Index futures, and it ended with relative calm as April options expired. The turning point came Monday at 2 p.m., just as the Nasdaq ($COMPX) threatened to crater for a sixth consecutive day.
Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a veteran markets reporter. In a special series of weekend columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community.
The market was saved by some strong hands who came in to buy at the bottom. By Tuesday’s close, the Nasdaq had finished its most powerful two-day rally in history; for the Standard & Poor’s 500 Index ($INX), it was the second-greatest rally ever.
For the short term, there’s no reason to be particularly bearish or bullish. In 40 years of trading stocks, bonds, commodities and currencies, Vic has always strived to measure market phenomena. The scientific method is all about experiment, observation and the discovery of repeated sequences. It’s also about grouping repeated phenomena into generalizations and assessing the reliability of those generalizations. It’s beautiful. It works. “Always count,” advised the great Francis Galton, inventor of multivariate analysis, and we have tried to be true to his dicta.
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In this case, in trying to find a rudder, we noted all the weeks over the last two years when the market rallied after a big decline the previous week. Ten such occasions captured the spirit of the V-shaped decline and rise of the past two weeks. On nine of those 10 occasions, the market was slightly lower by the following Wednesday’s close. The usual path was a small rally in the first part of the week that gave way to a 1% decline over the three-day period. Nothing extremely significant, but worth a note of caution.
From a psychological perspective, the signs are neutral. The main reason the market declined in the first place, beginning last month, was complacency. And people quickly went back to feeling too easy after the miraculous rebound on April 4, when the S&P 500 dropped 7% and the Nasdaq 15% from high to low -- and then went all the way back to unchanged.
The market is a harsh mistress when it is taken for granted. It likes in those situations to go right back to the old levels, look the offender in the eye and then fall to prices that were too inconceivably bleak to even be considered the previous time.
The swing of 8% in the S&P 500 and 19% in the Nasdaq this week may have created a similar degree of smugness. And thus the cycle can repeat. On the positive side, the decline was severe enough to shake out many weak longs, leaving the market in stronger hands.
Right now, we think we’re still only midway through the symphony. We still hear the despair theme knocking, in those complacent notes.
Another of the ways we seek to comprehend the market in all its depth and complexity is to listen to it as music. Many of our trader friends do the same; “wrong notes” or changes in tempo, alert them that change is ahead.
We’re Beethoven fans, and it seems to us that traders who want to understand the current drama in the market couldn’t do better than to listen to the Fifth Symphony. The music almost dies in the first movement, just as the market seemed to do on Friday, April 14, until only a heartbeat is heard. The wind section saves the day, but the end-of-the-world theme returns again and again to interrupt the piece’s lyrical moments, until the orchestra seizes control and turns it into the basis of a long, triumphant finale – the equivalent of a powerful rally in the stock market, sustained over weeks and months.
Right now, we think we’re still only midway through the symphony. We still hear the despair theme knocking, in those complacent notes.
We don’t know when the rally might resume on a strong footing. But keep in mind that the average return from holding stocks has been more than 12% per year for the past 50 years, and there's no reason to suppose anything has changed. (The benefit of holding certain great growth stocks over just the past 25 years is perhaps more instructive: Wal-Mart (WMT), for instance, is up 229,042% since the spring of 1975 -- a rate that would have turned a $10,000 investment into $22.9 million for anyone with the patience to ride out every decline.)
In the face of those long-term returns, the terrible April 2000 decline is no more significant than the sinking of a small ship. Any small ripples from the debacle in days to come should be seen as good buying opportunities. Odds are, the market is likely to be substantially higher a year from now.
The Education
of a Speculator
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Noble.While it’s true that indexes remain well below their records of earlier this year, we see the rally in the early part of the past week as a victory for those who are young at heart over those who are old. Like all establishments, those who achieved their power in traditional ways tend to resent the upstarts who are pushing them aside.
Those who are old of heart have been sounding the warning bell since Dow 2000. They complain that price-to-earnings ratios are considerably higher than they were in the days of Benjamin Graham (who retired from trading some 50 years ago when he couldn’t find any below 5). And they think that all the recently empowered youngsters who are making money with small accounts at new brokerages should be punished for their desire to achieve considerably greater wealth.
But the old-timers are missing something. The old-line steel distributors, regional department stores and candy and appliance retailers that are available for “reasonable” multiples are inferior as investments to companies that are actually growing rather than striving mightily just to keep up with inflation. The so-called “untouchable” stocks, those that have historically achieved superior returns because of brand and distribution, are no longer untouchable. They can actually fall in price as research and innovation lead young Turks to the fore.
That said, one of the horrible things about the decline that ended Friday the 14th was the terrifying carnage among the dynamic new stocks. The following list, which we call the Down 31, after the better-known Dow 30, is made up of stocks that traded above $200 earlier in the year and had sunk below $100 by last Friday.
Down 31
We included three honorary members that didn’t quite make it below $100 but had been trading above $300, and in one case, $400. Prices are intraday.
| Stock | YTD High | April Low |
| Abgenix (ABGX, news, msgs) | 206 ½ (March 8) | 51 53/64 |
| Affymetrix (AFFX, news, msgs) | 327 (Feb. 25) | 84 5/8 |
| Akamai Technologies (AKAM, news, msgs) | 345 ½ (Jan. 3) | 56 5/8 |
| Commerce One (CMRC, news, msgs) | 275 5/8 (Mar. 10) | 58 |
| Emulex (EMLX, news, msgs) | 225 ½ (Feb. 25) | 35 1/2 |
| E.piphany (EPNY, news, msgs) | 324 7/8 (Mar. 10) | 43 |
| E-Tek Dynamics (ETEK, news, msgs) | 315 1/8 (Mar. 6) | 121 |
| Freemarkets (FMKT, news, msgs) | 370 (Jan. 3) | 39 1/2 |
| Human Genome Sciences (HGSI, news, msgs) | 232 3/4 (Mar. 1) | 50 |
| I2 Technologies (ITWO, news, msgs) | 223 1/2 (Mar. 10) | 69 |
| Incyte Pharmaceuticals (INCY, news, msgs) | 289 1/16 (Feb. 25) | 57 |
| Inktomi (INKT, news, msgs) | 241 1/2 (Mar. 20) | 89 7/8 |
| Internet Capital Group (ICGE, news, msgs) | 200 15/16 (Jan. 3) | 30 1/4 |
| Interwoven (IWOV, news, msgs) | 200 (Mar. 14) | 41 5/8 |
| Juniper Networks (JNPR, news, msgs) | 312 15/16 (Mar. 29) | 151 1/2 |
| Medarex (MEDX, news, msgs) | 206 (Mar. 3) | 33 1/4 |
| MicroStrategy (MSTR, news, msgs) | 333 (Mar. 10) | 26 1/8 |
| Micromuse (MUSE, news, msgs) | 206 (Mar. 8) | 50 1/16 |
| Network Solutions (NSOL, news, msgs) | 255 5/8 (Mar. 13) | 96 15/16 |
| Phone.com (PHCM, news, msgs) | 208 (Mar. 10) | 50 |
| Protein Design Labs (PDLI, news, msgs) | 338 (Mar. 7) | 51 13/16 |
| Qualcomm (QCOM, news, msgs) | 200 (Jan. 3) | 98 1/8 |
| QLogic (QLGC, news, msgs) | 203 1/4 (Mar. 7) | 52 |
| Rambus (RMBS, news, msgs) | 471 (Mar. 14) | 133 |
| Silknet Software* | 285 (Mar. 9) | 42 7/16 |
| Terayon (TERN, news, msgs) | 285 1/4 (Mar. 9) | 56 |
| Ventro (VNTR, news, msgs) | 243 1/4 (Feb. 24) | 21 3/4 |
| VeriSign (VRSN, news, msgs) | 258 1/2 (Feb. 25) | 91 |
| Virata (VRTA, news, msgs) | 222 (Mar. 6) | 57 1/8 |
| webMethods (WEBM, news, msgs) | 336 1/4 (Feb. 29) | 44 1/2 |
| Xcelera.com (XLA, news, msgs) | 225 (Mar. 22) | 50 1/16 |
This week, we saw many stocks climbing back above the $100 mark, albeit briefly in some cases. In the Down 31, that included Affymetrix, Akamai, Commerce One, iTechnologies, Inktomi, Micromuse, Network Solutions, Qualcomm and Versign.
We’re still investigating whether these hundred-dollar breakthroughs are bullish or bearish for these stocks in the short term, and will report back to you soon.
Over the long term, the market will continue rolling higher, as it has since stocks began trading 300 years ago.
Mail Laurel and Victor at lkvn@hotmail.com.
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