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sponsored by: The Speculator Beware the day after a comeback In the market or at the ol' ball game, comebacks are tiring, symmetry is beautiful and errors are deadly. Those are three lessons the Diamondbacks taught us in downing those damn Yankees. By Victor Niederhoffer and Laurel Kenner The World Series, the most important sporting event in America for the above-average Joe and Jane, always provides an abundance of lessons for life and markets. The Diamondbacks-Yankees matchup was a gold mine in this respect, with particularly interesting analogies to be drawn regarding comebacks, symmetry and errors. New stock picks from market professionals every day on CNBC. Let's start with the comebacks. The Yankees' come-from-behind victory in Game 4 was just the third time in World Series history that a team trailed by two or more runs in the ninth inning and went on to win; it last happened in 1929. The Yankees proceeded to do the same thing the next day. Games 4 and 5 also marked the very rare event of a team winning consecutive World Series games in the bottom of the ninth or later (Minnesota did it in 1991). In no other field are records kept up as well as in baseball, and Lesson No. 1 for market fans is that they should pay the same attention to numbers relating to markets as they do when devouring a good baseball game. But do such comebacks take so much out of you that they leave you more vulnerable to the normal vicissitudes of the next day? When Vic played squash, his greatest efforts went toward getting ahead at the beginning. "The first blow is half the battle," and all that. When trading, it's discouraging to start off with a bad loss. If the price snaps back, you'll be tempted to break even or accept a small loss rather than hold on for a gain. Lesson No. 1: Beware comebacks The market appears to be equally averse to comebacks. Take April 4, 2000, when S&P 500 futures fell as much as 6.2% and recovered to finish down just 0.57% on the day. Having exhausted itself and created complacency among its players, the market then slid a terrible 10% in the next week and a half. In another example, S&P futures began the first day of March 2001 with a 1.5% decline to 1 p.m., but recovered to close up 0.1% for the day. From the close that day to the last day of the month, they dropped 7%. The panorama of stock market moves is so rich that an example can be found to prove any point. What the player interested in the real order of things is more concerned with is whether there's a general tendency to exhaustion and overconfidence after a comeback. We ran tests on both comebacks and comedowns over the past six years and came up with the following results: Comebacks and comedowns S&P pt. change after market was down at 1 p.m. and ended up (717 days) S&P pt. change after market was up at 1 p.m. and ended down (792 days) Average move next day -2 2 Move on second day -1 1 # of observations 125 126 Our chart of the results shows that the market gets tired after one-day comebacks. When the market has been declining during the day and then ends up, the outlook for the next day is very bearish. Consider the days when the market was down by 1 point or more at 1 p.m. and came back to close with a gain. The effort spent to recover exhausted the energy of the bulls. Over the next two days, the market lost 3 points. Conversely, temporary comedowns are bullish. When the market rises within the day and then ends down, it tends to rise the next two days. Note that this result is quite the opposite of market folklore, which holds that it's a bullish "key reversal day" when the market is down early but ends higher. Quite the contrary; the pattern turns out to be very bearish. Thus, another speculative canard bites the dust. All it took was some counting. The situation reminds us of one of Vic's favorite wins in racket sports. During the 1977 National Racquetball Championships in Las Vegas, he was pitted against Marty Hogan, a 17-year-old who would go on to dominate the game for the next seven years. But first Marty had to beat Vic. Vic took an early lead in the first game. Marty made a fantastic comeback and trounced him 21-8. After each point he won, he'd shout out in a batlike shriek that reverberated inside the courts until it was amplified to at least 10 times its original level, "Hold him under 10!" He did hold Vic under 10 that game, but he used up so much energy that he was totally spent. Vic, meanwhile, husbanded his meager resources and took the final game 21-20, thus becoming the only one to hold a cumulative positive record over the greatest player in racquetball history. Marty doubtless would have won handily if he hadn't gotten off to a bad start, necessitating a comeback. Our results on market comebacks are highly unlikely to have occurred through chance variations alone, say 1 in 500. But they are at the borderline of usability for practical purposes, as a move of three points over a two-day period is just enough to handsomely cover commissions and bid-asked spreads. Dave Ciocca and Pat Boyle, who assist Vic and Laurel, are hard at work at this very moment researching whether the comeback principle applies to individual stocks. We will share the results with you if anything of value emerges. Until then, our readers might find it beneficial to consider whether similar hair's-breadth escapes made them overly jovial and complacent, and whether a more proper reaction would have been to get out. Lesson No. 2: Expect symmetry What was truly amazing about the outcome of this series was how symmetric the factors that contributed to the loss were to the victory. We had the pleasure of watching the deciding game of the Series with Larry Ritter, considered by many to have written the best baseball books ever, among them "The Glory of Their Times" and "The Story of Baseball". We watched as the Yankees moved from down one run at the top of the sixth to up one at the top of the eighth, when Larry spoke. "This game is far from over," he said. "Rivera is due for a loss." Vic jumped in with a prediction. "They lose 3-to-2 with the ‘Backs getting two in the ninth the exact same way they got 2 to tie in each of their wins," he said. "Symmetry!" Sure enough, Mariano Rivera, the greatest reliever ever, a pitcher who entered the game with the lowest earned run average in Major League Baseball history, disintegrated before our eyes. Such symmetry is familiar to the speculator who does his counting. Industries that perform worst one year tend to perform best in the next year. Low-priced stocks in particular and beaten-down stocks in general tend to reverse strongly in January of the next year. For example, in the Value Line universe of 1,700 stocks, the 300 lowest-priced stocks as of year-end tend to go up 11% in January. We may point to qualitative examples as well. The turning point that set off the vicious bear market in Nasdaq stocks we witnessed through Sept. 21 of this year came after the market closed on April 3, 2000, when Judge Thomas Penfield Jackson ruled that MSN Money parent Microsoft (MSFT, news, msgs) violated U.S. anti-monopoly laws. The reversal came Sept. 20, 2001, when the government signaled that it would settle the antitrust case. Lesson No. 3: Limit your errors These figures for the World Series tell an interesting story: Runs Hits Errors Yankees      14      41    7 Diamondbacks       37       64    3 True, everyone knows that the Diamondbacks outplayed the Yankees in every area and that the Yankees' ability to keep the Series tied until the last inning was an amazing feat under the circumstances. But the figures we would emphasize most are the errors. Bear in mind that the ‘Backs had led the National League in defense during the season with only 84 errors in the season, versus 109 errors for the Yankees. (Our Seattle-based editor points out that the Mariners led the major leagues in fielding with just 83 errors in 6,014 chances en route to tying the record for wins in a season.) Most championships are won by attending first to survival. A lack of errors is a prerequisite to everything. It indicates good coaching and good discipline in a team. It is no accident that an errant throw by Rivera in the ninth was the key factor in the Yankees' loss. Biding our time The market continues to rise as we write, setting a two-month high on Wednesday. The bond-to-stock ratio and the volatility index ($VIX.X) are bullish, and this would tend to counterbalance the excessive level of optimism. However, we are selling into the rise, because we prefer to buy after excessive weakness, at two-month lows rather than two-month highs. We are about 80% out of the low-priced portfolio we recommended Sept. 27, with a 17% gain -- good enough for us. Our biotech portfolio is up 9% since we bought it two weeks ago. We are holding onto it, as there are strong bullish seasonals looming for biotech. Meanwhile, we're not recommending any new trades, as we're biding our time for a moment when the bears' defense is much weaker. Readers at bat We both have enjoyed playing baseball, Vic in his long-ago youth and Laurel a few years ago when she was a teen. But to be blunt, our knowledge of baseball is meager. However, we are fortunate to have among our readers a nice cross-section of athletes, scholars, and philosophers whose knowledge far surpasses our own. You can view some of their cogent comments in the SuperModels Community, and we hope that you'll add your own. At the time of publication, neither Victor Niederhoffer nor Laurel Kenner owned any of the equities 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.