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Victor Niederhoffer



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A Letter from Victor Niederhoffer to Barron's Columnist Michael Santoli

It was a welcome refreshment to see your column and it must have helped to cure Mr. Abelson to see that you actually had some testable propositions in your column and that he should come back to preclude that, as well as the curative impact of a market decline which he has been predicting continuously since 1966.

However, while Mr. Abelson is partial to the continuous against-the-wind prediction of a decline that may have caused more trillions of lost wealth to individuals than anything else in history, you are subject to the seemingly sententious statement that is either incapable of falsification or likely to be true by randomness in 99% of the cases. Such for example is your remark that "the indexes donít seem poised to stretch to new index highs". Yes, they are some 3% to 4% below highs of two weeks ago, and with the volatility that is consistent with the empirical record, it's about 1 in 50 that in the next two weeks they would go above a high.

You talk about proximity to 200-day moving averages, and moves relating to 13 weeks of gain, and levels of the beginning of the year, and unmentioned distance traveled back from 2000-2002 lows. All of these statements could be tested as to their validity, and numerous of a quantitative mode are consistently doing so, taking account of the law of ever-changing cycles, but regrettably the gist of these tests is that following moving averages in stock market trading does consistently lead to above average losses as does trend following.

You talk about qualitative markers of the end of a decline, and certainly that's an interesting subject but I would lean more to the influence of Father Bernanke and his predilection for pretty women, and his promise not to repeat his misstep with Maria, as more symbolic. And more important of all, the symbol of the 5% rate on the 10-year note. Many talk about slingshot moves after they take place as you do, and doubtless if Mr. Abelson were here, he would describe it as a dead cat bounce, but the problem is that right before such bounce, the pundits were as strongly insistent that we were in a new bear market, with pivots and moving averages confirming as you are retrospectively with your 5,000 trading desks with 5,000 buy programs. Regrettably for each such buy trading program there is a sell program among traders and chart watchers that "the bounce is worth selling into."

You talk about stealth weakness in the averages, but is this unusual, consistent with randomness, or bullish or bearish? You seem to have a most undeveloped sense of whether market conventional wisdom from this or that group of traders or chart watchers, with or without an axe to grind is worth following or fading. That's why the pencil and paper is very important. Aside from Mr. Abelson turning a new leaf and your colleague testing the proposition that a decline in the dollar is bearish for stocks, and the refraining from feathering the nest of those old codgers who are consistently bearish and have missed the 10,000-fold return of stocks in the 20th century, that would be the best way in my opinion for you to improve until the date that when stock market does "stretch to new index highs," you are called back into service again, either by general revulsion among your readers or the relapse that such a rise will likely, but hopefully not induce in your venerable colleague.




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