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Posted 6/9/2000
Kenner & Niederhoffer
What's next for
Wall Street
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The calm between market storms
There's a violent beauty in the way so many stocks, like those in our Down 35 list, have symmetrically plunged and soared. But after a week of calm, batten down the hatches; there's another front of high volatility moving in.
By Laurel Kenner and Victor Niederhoffer
Symmetric balance has been considered synonymous with beauty, not just in art but in science as well.
-- Roger Newton, “What Makes Nature Tick?”
After the violent squalls and tornadoes of the previous two weeks, the market returned to harmonious equilibrium in the past five trading days. The Nasdaq 100 ($INDX.X) ended the week within five points of its close last Friday. For the first time since the last week of December, the S&P 500 ($INX) failed to show a single daily move of more than 1%; it ended down 1% for the week, with the Dow down about 2%.
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It was a page from Beethoven's "Pastoral" symphony, where a beautiful calm prevails in the second movement after the violent storm music. More precisely, perhaps, it was a page from the Crab Canon in Bach’s "Musical Offering," a two-part counterpoint palindrome in which both parts appear in mirror image.
Take, for example, the performance of the Down 35, our collection of stocks that peaked above $200 earlier this year and took an avalanche ride to below $100. The average decline was 75%, a terrible descent unprecedented in market history.
The down are up again
We brought this list of stocks to readers’ attention in our first column on April 21, and shared our hypothesis a week later that once the market began to rise from the grave, these stocks would show a vigorous rally. They did rise, but slid back with the market’s setbacks. Today, not only have they recovered that deficit, they’re up 60% from May 26, and 30% from the initial publication of the list; the Nasdaq Composite ($COMPX) is up 21% and 6.3%, respectively, in those periods.
Down 35
| Stock | % Chg Since 4/21 |
| Human Genome Sciences (HGSI, news, msgs) | 125.56 |
| Micromuse (MUSE, news, msgs) | 101.23 |
| Powerwave Technologies (PWAV, news, msgs) | 96.95 |
| Network Solutions (NSOL, news, msgs) | 84.79 |
| Affymetrix (AFFX, news, msgs) | 70.57 |
| VeriSign (VRSN, news, msgs) | 65.47 |
| webMethods (WEBM, news, msgs) | 65.4 |
| E-Tek Dynamics (ETEK, news, msgs) | 59.23 |
| Protein Design Labs (PDLI, news, msgs) | 57.14 |
| Phone.com (PHCM, news, msgs) | 57 |
| Abgenix (ABGX, news, msgs) | 47.27 |
| Ventro (VNTR, news, msgs) | 39.44 |
| E.piphany (EPNY, news, msgs) | 38.41 |
| Qualcomm (QCOM, news, msgs) | 36.75 |
| Aether Systems (AETH, news, msgs) | 31.11 |
| Genentech (DNA, news, msgs) | 21.79 |
| Emulex (EMLX, news, msgs) | 20.73 |
| MicroStrategy (MSTR, news, msgs) | 20.38 |
| Medarex (MEDX, news, msgs) | 12.98 |
| Akamai (AKAM, news, msgs) | 12.72 |
| Incyte Pharmaceuticals (INCY, news, msgs) | 11.52 |
| Virata (VRTA, news, msgs) | 9.68 |
| Xcelera.com (XLA, news, msgs) | 0.83 |
| Inktomi (INKT, news, msgs) | -0.87 |
| Commerce One (CMRC, news, msgs) | -2.16 |
| QLogic (QLGC, news, msgs) | -2.46 |
| Infosys Technologies (INFY, news, msgs) | -4.28 |
| Internet Capital Group (ICGE, news, msgs) | -10.14 |
| FreeMarkets (FMKT, news, msgs) | -16.82 |
| Terayon Communication (TERN, news, msgs) | -22.89 |
| Rambus (RMBS, news, msgs) | -27.8 |
| Avanex (AVNX, news, msgs) | -35.63 |
The performance of the Down 35 is a small illustration of the fantastic symmetry seen in the stock market’s decline in the month and a half before Memorial Day, and its recovery after the holiday. The S&P 500 went from 1,500 to 1,350 and back again from the second week of April to June. Similarly, the Nasdaq traveled from 4,000 to 3,000. The Dow Jones industrials and the European averages had similar downs and ups.
Scientists still can’t figure out why the structure of crystals is symmetric, so perhaps we should be pardoned if we don’t have an explanation as to why stocks that get beaten down from one big round number to another have a tendency to go back. Perhaps pockets of limit orders at the round numbers exert a magnetic effect. The market abhors a vacuum, and if there’s some way to create fear, it has a tendency to fill that potential.
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.
The Curie Principle of symmetry is that symmetric causes have symmetric effects. There appear to have been four principal triggers of the savage springtime decline: A parade of bearish Wall Street strategists such as Abby Joseph Cohen at Goldman, who panned the Nasdaq in March and recommended investors raise cash; buzz about irrational exuberance in the stock market, spawned by Prof. Robert Shiller, Warren Buffett and Dr. Greenspan; a joint statement by President Clinton and British Prime Minister Tony Blair declaring that human life belonged to humans, thereby protecting the stagnant British biotech industry and decimating U.S. biotech stocks; and government intervention to break up Microsoft (MSFT, news, msgs), the publisher of MSN MoneyCentral.
The magic of symmetry
And like a mirror image, each of the four causes were arrested fairly soon after Memorial Day, with the market spiking back up in stages.
First there was the pullback by the Federal Reserve. One Fed governor after another said that the economy wasn’t as strong as it seemed a few weeks ago when they raised the federal funds rate by 50 basis points. Stocks shot up about 10% on that one.
This was followed by favorable news on the biotechnology front. Immunex (IMNX, news, msgs), one of the biggest biotech firms, won approval this week for expanded use of its arthritis drug, Enbrel. Targeted Genetics (TGEN, news, msgs) said its cystic fibrosis drug showed promise in trials. The Nasdaq biotech index, left for dead back in March, is up 19% since Memorial Day.
Next came the actual decision by Judge Thomas Penfield Jackson that Microsoft couldn’t be trusted and should be divided up into two parts. As it does with most feared events, the market took the judge’s decision with aplomb, initially rallying a percentage point or two on the news.
Finally, several market strategists have allowed that the stock market’s decline had been overdone, thereby eliminating the last prop of the bearish theme that had the stock market in its grip, and creating almost a perfect symmetric move back to the second week of April.
In retrospect, it was guaranteed to happen exactly this way. But like the bilaterally symmetric image of the predator in the eyes of the prey, the poetry and harmony of it all is much greater to those who were not killed by it.
| The Week Ahead | |||
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Not all stocks will recover
The scientists among our readers note that not all stocks are destined to participate in this recovery. While the Newtonian laws of action and reaction rule large bodies -- like stock indexes and mutual funds -- the laws of probability take over at the particle level.
Physics also has another lesson on stock picking, says Mike Ott, a physics major. He theorizes that just as some orbits of electrons have more “directionality” than others, certain stocks, such as Cisco Systems (CSCO, news, msgs) and Microsoft, have more magnetic effect than others. Investors will want to watch for those.
Perhaps the most important insight that we have developed as 21st century writers is that knowledge about the markets and companies is dispersed widely throughout the populace, and that the specialized, ever-changing and ephemeral nature of tastes and know-hows enables the common man or woman to contribute much more to the knowledge of markets than the fixed experts at the established organizations.
Friedrich Hayek received a Nobel Prize for this concept, and used it to explain why collectivist societies are destined to end in chaos and poverty. We have used it to elicit responses from our readers that are much more insightful than we could ever come up with on our own. We feel privileged to share some of them with you.
Theories from our readers
Referring to our analogy of market as bucking bronco, reader Steve Horwitz writes: “You probably didn’t spend as much time at the rodeo as I did. If you had, you’d know that the bucking bronco and the bucking bull rides don’t end with a tamed beast. Instead, the champion rider just holds on longer than the rest, and knows when to get off rather than be thrown off.”
Ron Freeman writes: “I share your feelings regarding Professor Shiller and Mr. Greenspan. Hopefully the same analysts and economists who publicly stated weeks before the May Federal Open Market Committee meeting that ‘the Fed would be behind the inflation curve unless they raised the rates 50 or even 75 basis points’ now agree the Fed has gone too far. I believe every economic indicator between now and June 28 will indicate significant economic slowdown. I do not believe Greenspan will raise rates again and risk possible recession. By the way, Shiller is definitely a crackpot. Greenspan on the other hand is just another bureaucrat who couldn’t cut it in the private sector (or as an investor, for that matter).”
From Patrick Yengo: “I too have always been a true fan of Hemingway. Didn’t he once describe his talent and skill for writing as being analogous to the groove of the swing of a Major League baseball player? Even Major League baseball players go into slumps, some of them prolonged and devastating, but they get paid millions of dollars to fail more than seven out of 10 times while at the plate. Perhaps the stock market is both like Hemingway’s writing style and the groove of a Major League Baseball player’s swing.”
Baseball also inspired this remark from Paul Lewis: “Pete Rose once said that if a baseball team wins 60% of their games, they’re a dynasty. If a player succeeds at the plate once in three times over his entire career, he goes to the Hall of Fame. How would THAT ratio of success stack up on the Street?”
Kenner & Niederhoffer
Recent articles:
• Nasdaq takes big swing at rational exuberance, 6/2/00
• Time to confront (and capture) the worthy market, 5/26/00
• Adapt or die in this Darwinian market, 5/19/00
more...
And reader VICEAD has a good question: “Your column (on Greenspan) was a surprise, as you represent a very small minority opinion that Greenspan is wrong. My thought has been that he reinforces the old adage, ‘It’s better to be lucky than good.’ I believe he has received too much credit for the accomplishments of the American businessperson. Question: If the economy tanks, what happens to the government budget surpluses? If government starts borrowing again, is that inflationary?”
Reader K. Foster writes: “I liked your assessment about the only ones not winning last week were like myself, totally whipped by trying to catch the falling knife on the way down and bailing out at the bottom. I think I will wait for the next bus. The stock market is like a bus stop, another comes by in about two weeks.”
We’ll close with a word of warning: The mistress of markets is enraged by a week in which she can’t scare either the longs or shorts out of their positions with a volatile move. How can the wheels of commerce, the entire gigantic infrastructure of our industry, allow such complacency, she and her harpies are complaining at this very moment.
She’s sure to come back with some of that excessive volatility -- with a bias to the downside that will surely be reversed again before long. Hold onto your seat belts.
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 Akamai, Commerce One, Human Genome Sciences and 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.