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26-Feb-2006
Abelson a No-Show, but Bears Still Rule at Barron's

Fresh from my weekly dose of nightmarish alchemy via the leading financial weekly, I have good news and bad news.

The bad news is that for the second week in a row, Alan Abelson has not written a column, leading faithful readers like me to fear that he is sick -- or, more calamitously for the market, that he has retired. (This is bad news because he day he retires might well be the end of the bull market that carried the Dow from 700 to 11,000 during his 40 years of bearishness).

The good news is M. Santolli wrote the lead editorial in Abelson's stead, and his place is headlined " Stocks Signal Lull, So Buckle Up," and The Trader column is headlined " Stocks...May Stay Rangebound."

You see, as Santoli says, "Still, at some point, when it reaches some size, financed by a certain threshold of foreign debt, the Chicken Littles who have been raising alarms since the deficit turned negative 30 years ago might have cause to < gloat,"

Yes. And let us hope if the market doesnt rise 20-fold, adjusted for dividends, the way it has in the last 30 years while the Chickens Little wait for the investment climate of our trading partners to become as hospitable as ours. And let us not decry the current account deficit we all have with our supermarket in the same eschatological terms.

One of the problems, according to Santoli, is that:

...last week, a Merrill Lynch gauge of expected bond-market volatility reached a record low, at a level last seen right before the Russian default and the Long-Term Capital Management implosion. The stock indexes could be characterized in much the same way as bond yields: Stretching toward the upper end of their established range and generally finding reasons not to pull back much. In stocks, as in bonds, there is a broad presumption that tomorrow will be as placid as today and yesterday. The long trading range has been lulling.... However, a smaller number of big stocks are trading at their highs than the bulls might wish....only five of the Dow's 30 components were at fresh peaks. Some leaders have fallen from grace, such as Google and Apple.

Yes!!!!! The market is bearish because all the stocks are not at new highs, and it's lulling us to a false sense of security, and the vol is low, and there is a current account trade deficit. One always finds it particularly humorous when a supposed authority like the Trader hauls out the whole deck of canards: the market is weak because x% -- in this case, 10% -- of a group of stocks are trading at 10% or more away from their 52-week highs. But of course, every company can't be at the high every week, and the chances that any one company will indeed be at a high when the market goes up 1/4% a week, with a standard deviation of 1/2% each week, is about 1 in 20. The random distribution of the number of stocks selling at x% away from their new high each week is a complicated statistical question that depends on the kind of declines and rises that occurred in the previous period. And with a rise like the current one that followed a move to 1170-ish and 1140-ish on the two big tax days in 2005, the number of companies selling well off their highs for the year would be particularly great.

The more serious question is whether there is any tested relation between how the ensemble of stocks is distributed relative to their highs for the year. It's too complicated to answer, because of the random factors relating to past moves that affect it, so it's much better to ask direct questions, like: What's the expectation for a market or individual stocks that is up 10% from its April month-end level in 10 months?

Who needs Alan Abelson or the four-year bearish cycle or the possibility of a halving in Google, with relief pitchers of this caliber?

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