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24-Jun-2006
Briefly Speaking: On Declines, by Victor Niederhoffer

There is considerable sturm und drang concerning the market. The tension rose when the S&P futures declined for a third week in a row, even while Europe and Asia recovered. Investors Intelligence reported a draw between bullish and bearish newsletters at 35.6% apiece, the lowest differential since October 2002 when the S&P was 800.6 and rallied 15% to 936 during the next two months. Just 34.4% of individual investors are bullish, vs. 41.6% bearish. This raging bearishness comes in conjunction with the most  long-lived of all gloomy columnists, whose absence at the front of the leading financial weekly has aroused much speculation in recent months, who has been continuously bearish since 1964, when the Dow was 900.

Never since the publication of Practical Speculation in February 2003 when the S&P was preparing for a sustained rally after a three-year nosedive have so many been so bearish with such scorn and hope for disaster for buy-and-holders such as myself. (NB: Laurel and I sent the final proofs of PracSpec to the publisher in October 2002, when the S&P was at a low of 800.6.

Many streaks of bearishness have blazed like comets against the iron-gray market sky, including runs of down opens, last half hours, down weeks in stocks, and runs without a rise in bonds. Under the circumstances, some proper counting of recent streaks seems in order.

Let's start with the recent spell as of June 23, 2006, of declines from 3:30 p.m. to close. Rumors that longs have been forced to liquidate apparently fueled the flames. It happens rarely enough, about twice a year when I am in a hand study mode, that I will request one of my colleagues to answer what it foretells for the next x days. One might start with five consecutive declines on the first day of the week, as follows:

  date     decline
5 22 06      -9
5 30 06     -23
6 05 06     -15
6 12 06     -16
6 19 06     -12

Before turning that over to my colleagues, I note that the last three Fridays before the Mondays have also been down bringing back many memories of my former partner Frank Cross, who jointly discovered the Friday down, Monday down relation with me, with a z of -10 or so, back to 1900 through 1975, with a cumulative loss of following it subsequently of thousands and thousands of times on your futures shorts. One also notes a run of exactly three declines in a week in the averages as follows:

                       Date of      Move next week      2d week      3rd week
4th wk                 10 21 05         1.3               1.8          1.3
 0.5                    3 20 05         0.2               0.5         -3.3
 1.1                    1 21 05         0.5               2.2          0.4
-0.4                    0 22 04         3.0               3.2          1.2
-0.1                    7 23 04        -0.5               1.4         -3.2
 1.1                    5 21 04         2.4               0.3          1.2
-0.2                    3 26 04         3.1              -0.2         -0.5
 0.5                    2 07 03        -2.7               0.8          1.1
 0.7                    9 13 02        -5.3              -1.9          -2.3
-3.9                    6 07 02        -1.8              -1.7          -0.2
-7.2                    4 23 02        -1.1               1.3          -5.0
 0.1                    2 16 01        -4.2              -1.0          -4.2
-0.1                   11 24 01        -1.8               1.2          -2.2
 0.1                    9 22 01        -1.0              -1.0          -1.7
-2.7                    5 19 01        -2.2               6.3          -1.0
 0.2                    2 25 00         4.9               0.7           4.6
 4.1                    9 24 99         0.3               3.6          -5.9
 3.5                    8 06 99         1.7               0.5           0.7
 0.7                    5 28 99         2.2              -2.2           3.2
-1.8                    8 07 98        -2.4               1.9          -4.2
-4.3                   12 26 97         3.2              -4.4           3.3
 0.3                   10 31 97         0.6               0.1           3.1
-1.1                    3 28 97        -1.2              -2.3           3.1
 0.1                    7 19 96        -0.6              -0.3           3.0
-0.4                    6 24 94         0.6               0.4           0.6
-0.1                    1 08 93         0.9               0.0           0.2
 1.4                   10 09 92         1.0               0.4           0.5
-0.1                    6 19 92        -0.0               1.1           0.4
-0.1                    9 22 90         2.2              -3.6           3.2
-1.9                    8 17 90        -4.0               2.6           0.3
-2.1                 totals              0                 11            0
-12

What can you say with a study like this except that there was a period of eight consecutive times that the next week was a decline, and the rest of the period was reversal-prone?

Other interesting counting questions are the run of seven days in a row without a rise in the bond futures, and the run of three consecutive down opens in stocsk.

Perhaps such counting will be of interest to those who wish to build a foundation for meals for a lifetime.

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