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02-Oct-2006
Guaranteed to Happen, from Victor Niederhoffer

The market news is buzzing at the moment with such things as the fact that the average October low over the last nine years has been seven percent below the close, (let us never exclude October 27th, 1997), and that the number of stocks in the Dow that are up is only ten of thirty over certain periods. Also the number of new highs is less than usual for this type of market at the moment, and we have gone an unprecedented number of days without a ten percent decline from peak to trough. Has anyone thought to test whether any of these things are guaranteed to happen with randomness?

It is also guaranteed that if the breadth is low, the Abelprecs will be bearish, because it shows that investors are choosy, which apparently is bad. But if the breadth is high, i.e. ninety percent of stocks are up, then Dr. Brett will not be listened to when he fires off a memo that he is truly impressed with the bull move, but instead Mr. Nelson or a old or savvy friend, or Bob Farrel will be trotted out to say that such blow off rises, such total abandon in positive sentiment, cannot be sustainable, and it is time to take the punch bull away before too many drunken investors do bad things.

One of the things that we always tend to forget during such times as these, when we have gone six years without a new high, is that bullish sentiment can be euphoric and hard to fight, as the bulls get more funds to buy more stocks at margin, and talk more of their friends into coming on board. I was often in the wrong situation vis a vis this at the palindromes weekend parties where everyone in the world was bullish on the Yen or some such, while I was short, and collectively there was a trillion dollars of wealth in the room, all of whom just made five percent on the previous Friday.

But of course one is reminded of Rumpole. "Why is it always s-x that's behind the murder". Yes, why is the real reason that stocks are going up and that you can get about a five and a half percent greater real return on them than bonds, i.e. a six percent estimated earnings price ratio with four percent growth versus four and a half percent on ten year bonds? Is it the pension funds, the asset allocaters, the endowments, or just Joe and Jane public that eventually decide during the end of the year that it is better to get ten percent on stocks, with earnings having increase double digits for sixteen quarters in a row than accept four and a half percent in bonds? Perhaps the Bishop who does not believe in God, or the stock commentator who does not believe in stocks will have the answer.

02-Oct-2006
Briefly Speaking, from Victor Niederhoffer

One of the virtues of a market near its all time highs is that one can read Heard on the Street again to see why the always negative columnist is bearish again this time. It seems that investors are being choosy (breadth is not above ninety percent, and many stocks are below their high), the housing market is down (and it is not at the bottom yet), the Democrats might make gains, earnings comparisons could be down, and there is a general feeling of unease. He could only find two gimlet and acerbic observers, to quote from who share his bearish views.

While all of his reasons for bearishness, if tested, would probably be quite bullish, (there is a negative predictive correlation between real estate stock prices and general market prices three months later), and there is no correlation between earnings changes and coterminous stock price moves, but a high one between interest rate changes and stock price moves, I am admittedly quite uncertain also.

The market is near new highs, having beat the highs, intra-day but failed to close above twice. I believe that double tops and triple tops are bullish in the small and the large but have found this difficult to test. The funny thing is that the market is more bullish when canes are appropriate than when it is most fun to ridicule Alan Abelson and wonder when the last short selling fund is going under. And buying after new highs is not a overly winning proposition. But somehow the market does go up its inexorable ten percent a year, and it has to do this with new highs. Last October was down, and that is bullish, and the fourth quarter is bullish, especially with this degree of divergence between interest rates and earnings. A totally trepidatious time, when the probabilities are near 0.5 but the expectations are old faithfulesque.

I have been reading both Price Theory by Steven Landsburg, a technical book with analytical principles and ways of thinking that illuminate the structure of competition and industry, and The Illustrated Guide to Ecology by Stephen Case. Both books are a constant source of new ideas and better foundations for me in thinking about the markets. I will elaborate further on both soon

In my Quixotic quest to find empirical regularities that relate to The Little Book of Scientific Principles, Theories and Things, I have been considering the Pythagorean theorem and its market insightful regularities. I have been thinking of the relations between numbers, like 3,4,5, and 5,12,13, and also thinking about the simple proofs that divide up the horizontal lines into two overlapping triangles and its applicability. Finally, to the squares of variances as they relate to the variances of other markets. I am open to testable suggestions.