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23-March-2006
Forward and Back, by Victor Niederhoffer

One of the commonest themes in the market and life is the forward and back, jump and slide behavior needed to gain a goal. The average stock during the day reminds one of the proverbial frog caught at the bottom of a well jumping 2 feet forward every 30 seconds and then sliding back 1 1/2 feet. How long will it take the frog to get to the top of a 1,300 foot well? The problem is a bit more difficult if it's random after each jump whether it moves up or down, especially if there's an absorption barrier of some kind after it hits the bottom of the well, and also if the amount gained or lost on each jump varies as a function of how high or how much vertical movement up has been gained in the last several jumps. Yet, this problem is relatively close to what we see in the market as the S&P tried to surmount 1,300 and as the Dow tried to surmount 11,000.

First there were all the jumps right up to the top where the market frog just hit it intraday and then slipped back. Next there were all the articles in the media talking about how long it had been for the frog in previous tries to go past or stay at the top in previous times caught at the bottom. Then there were the slips where the futures went past the level but the index failed and now falls back below the top, back and forth as the index goes first above 1,300 after 5 years as of 7 days ago, stays above for 5 days, and then falls below, and then climbs back thru the top at 1305.04 as of the March 22 close.

Such behavior backing and filling, forward and back is like a Latin Dance or a tug of war or the thrust and pull of flight or the moves in individual stocks. Fortunately, we learn how to deal with such frog type games as kids with such games as Chutes & Ladders or checkers; especially Russian checkers, where the pieces appropriately can jump forward and back at will. I propose that a frog index be made of the movements of individual stocks. Consider starting with how long it takes the stock to advance each 15% on its way to a 2 bagger, before a 10% fall the other way. Or consider the hyper-geometric distribution of the number of jumps up that the random frog above would make before slipping back if such jumps were really random or best yet some extensions of a jump and slide problem of your own.

The hundred days and daughters problem...

An interesting aspect of the solution is that if you have 100 daughters to judge from as a spouse and you wait and pass on 37 of the daughters and then pick the dowry that is bigger than the previous high, you have a startlingly high probability of 37% of picking the one daughter with the highest dowry of all. For those not eligible to choose from 100 eligibles in the romance market, they might find choosing with similar judiciousness in the dowries provided by the daily closes that the sultaness of markets proffers.

A lamentable absence...

It has now been 5 weeks since the last Heard on the Street Column by Abelson appeared. At first they referred to him as being out and now for the last two weeks, they have referred to his status as "on leave." It seems cruel and unreasonable that after 40 years, the paper would send him out to pasture without a fond goodbye, so one must regretfully suspect that the late 70 something, chronically perpetually bearish author is sick. We send him our condolences and will refrain from making fun of him until we are apprised of his health or otherwise.

A Nockian Analysis...

Like night follows the day, a million articles are now appearing saying that the Bush ownership society has failed because "the benchmark for American equities is down 2.8% since Bush took office five years and two months ago. That's the worst performance during the same stage of any two term administration in the past half century except that of Richard Nixon." A current example is the recent Bloomberg article, "Stock Performance Undercuts Bush's Vision of Ownership Society" By Brendan Murray.

Talk about the use of propaganda with card stacking here to pick just the worst starting and ending dates, as stocks flirt with a 5 year and all time high. And yet the professors at Yale, Harvard, and MIT, are already in ecstasy about the problems of the economy and the card stacking of the stock market performance of other two term administrations during the past half century, and the failure of his privatization of Social Security plan. And yet, such a reading of the tea leaves amidst the great prosperity of the last 5 years should create a nice back and forth between the parties during the next 29 months leading up to the 2008 elections. Whenever the market gets too high, the out party will be trying their highest to keep it low, forming a bandwagon behind such forthcoming books as "The Great Risk Shift" by Jacob Hacker (their own man) and attributing the decline to the failed policies of Karl Rove (or the shooting accident of Dick Cheney) and whenever it gets too low, the incumbents can be expected to hold the line on keeping the economy strong by refusing to take away the main thing that has sparked our growth the last 5 years; the reduction in capital gains rates, the increase in international trade and immigration, and the increased pace of technological improvement and reduced cost of search fostered by the Internet. Such back and forth would have amused Albert Jay Nock, who noted in Memoirs of a Superfluous Man that the most important job in the United States is Secretary of the Interior (a position even more important today than when Nock wrote the memoris in 1943, since the job of managing one-third of the country's land includes the supervision of an operating brothel). And such observer from the grandstand might take comfort in the knowledge that the push and pull, back and forth of such ideas and political salvoes, the natural equilibrium between the two forces, the overriding desire within the grand scheme of each faction to never veer too greatly from their main activity of plucking the geese with the least amount of hissing, should be very good for keeping vols in the teens.

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