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The Chairman
Victor Niederhoffer



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Startling Behavior

A visit to the animal exhibit at Chicago's Field Museum of natural history, particularly the section on defenses, is helpful in putting the market's moves over the past week in perspective.

Animals use mimicry, chemicals, camouflage and signaling one another to avoid confrontation. When those measures fail, startling behavior serves as a backup. Moths change color and size, cats hiss, squirrels and birds mob, salamanders writhe and secrete toxic chemicals, the cones dart, lizards give up their tails, starfish give up their farms, butterflies bring out fake heads.

It's just so in the market. Note that the sum of the daily close-to-closes in the S&P futures last week was 62, versus a recent norm of 30. The sum of the high-low ranges (with two days of 25 or more) was 84, way out of the ball park, unprecedented since the terrible days of the first three years of the century, and 1998 and 1997.

Amid the havoc, this disruptive behavior was good for a cumulative decline of 0.5 %, in the S&P and a rise of 1.5% in the Nasdaq 100.

My former mentor from the gold exchanges remarked that when they want to keep you in, they move gradually, and when they want to get you out they move with great alacrity to scare the Hades out of you until the family members circle round and crowd you out. He liked to use the analogy of the frog jumping out of boiling water, but remaining placid if the water were gradually boiled. He referred to this as an example of "the law of least observable
differences," and the Collab and I have written about this often citing the works of the  gestalt psychologists as background for further understanding.

That leads of course to the seventh time that the S&P futures crossed from below to above and now below the round number of 1200 in the last year. Such changes of state are analogous to the energy transfers that occur when heat is added to evaporate a liquid , thereby cooling the liquid,, and the converse warming process that occurs when the gas is turned back into a liquid by condensation. The steam burned very heavily near the end of the week as the S&P moved from above to below the round on Thursday.

All this must be put in the perspective of the third week in a row that the S&P has declined, and the nice 1 1/4-point rise in bonds this week, with concomitant shifts down in the yield curve.

Under ordinary circumstances, I would have quantified the predictive significance of all this, suggested some statistical techniques to attack the problems and recommended one of the best references for further meals for a day. However, amid the memorial services and self-interested attempts to fool the prey into blundering into where the predator is hiding, perhaps I will be excused for tending to my own knitting to a little greater extent than usual.

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