The Chairman Victor Niederhoffer     ©2005 All content on site protected by copyright

24-March-2006
The Importance of Little Things, by Victor Niederhoffer

It's the little questions that you ask about the market that help make you a better speculative investor. At least that's the spirit that animates the day to day activities in my shop as we bounce around and test about 100 such queries and hypotheses during the day. I find the best questions I come up with come out of the day and fray and I thought I'd share a few that came up in the office on March 22nd that my colleagues and I are trying to answer.

How does the first quarter affect the whole year? Yes, if you look at the daily vol's, it's consistent with a 10% a year move. But, but, but there are so many big changes in the market. Here are some of the big ones above 20%:

	Big changes in the market
	Percent change	Percent change
Year	whole year	first quarter
1950	22	8
1954	45	8
1956	26	5
1958	38	5
1961	23	11
1967	20	12
1974	-30	-3
1975	31	25
1980	26	-5
1985	26	5
1988	31	8
1989	27	6
1991	26	13
1995	34	9
1996	20	5
1997	31	3
1998	27	13
1999	20	5
2002	-23	0
2003	26	-4

That's 4 in the 50's and 60's, 2 in the 70's, 4 in the 80's, 6 in the 90's, and 2 so far in the naughties. Are not these 40% of all years or so that have percentage changes above 20% completely inconsistent with say a daily standard deviation of 3/4% with a standard deviation of the deviation per day of 1/2%?

The market's up 3% so far in 2006. What's the best prediction for the year based thereon? What is the correlation between the market in the first quarter of the year and the last three quarters of the year? Is the correlation more significant than the spurious January Barometer that has been wrong so frequently in the past? Is there any reason to think that the correlation has changed. Are their too many runs in the back to back big yearly changes, like the run of 5 in the 1990's to be consistent with independence in the ensemble of daily percentage changes? Hint: the probability of 5 or more successes in a row in a binomial experiment with a success ratio of 1/3 and 50 tosses is .01.

We will have to leave the 100 other questions that arose as an exercise for the reader. Here's a brief list.

Given the announcement of a company being added to the S&P 500, what is its average performance from the close of the day before announcement and the opening the next day? Given that it opens up more than 8% the next day, does this change the relation? A certain holding in acertain stock inspired by the holdings of a former wife inspires this question.

As noted by Mr. Andrew Ravano below, every day brings another big merger announcements in Europe (Aviva-Prudential, Bayer Schering, BNP Paribas-Banca Nazionale et al.). Are such announcements responsible in part for the 6 year high in the DAX breaking thru the round number of 6,000 recently? Does the effect carry over to the U.S. markets as Trimtabs suggests, and is the relation due to a signaling or a liquidity effect?

What is the effect of relative weakness or strength of the NASDAQ on the subsequent performance of itself and the other averages as it's divergence from the other averages has increased substantially during recent days?

Have the inter-market relations between bonds and stocks and crude, stocks and the dollar changed dramatically lately and what does it portend?

What is the effect of an earnings warning on individual stocks during the Sarbanes Oxley era and is that old effect where the masses blindly sell the market when the one or two companies that have suffered misfortunes give a warning still an ideal time to buy?

The ten worst performing companies in the NASDAQ 100 headed into the close of the the first quarter are Amazon -24%, Sirius -23%, Expedia -22%, XM Satellite -22%, Intel -21%, Yahoo   -19%, Google -18%, Whole Foods -16%, Apple -16% and Patterson -15%. Will there be window dressing at the end of the quarter and does this provide an opportunity? (Why does the quote from Grandpa Martin Niederhoffer to Brooklyn College quote Lou Irons in his letter demanding that Artie Niederhoffer carry, kick or throw the ball on every play come into mind in conjunction with the answer to this question?)

Inquiring and naive minds at this and adjacent desks wish to know.

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