Oct

2

The market news is buzzing at the moment with such things as the fact that the average October low over the last nine years has been seven percent below the close, (let us never exclude October 27th, 1997), and that the number of stocks in the Dow that are up is only ten of thirty over certain periods. Also the number of new highs is less than usual for this type of market at the moment, and we have gone an unprecedented number of days without a ten percent decline from peak to trough. Has anyone thought to test whether any of these things are guaranteed to happen with randomness?

It is also guaranteed that if the breadth is low, the Abelprecs will be bearish, because it shows that investors are choosy, which apparently is bad. But if the breadth is high, i.e. ninety percent of stocks are up, then Dr. Brett will not be listened to when he fires off a memo that he is truly impressed with the bull move, but instead Mr. Nelson or a old or savvy friend, or Bob Farrel will be trotted out to say that such blow off rises, such total abandon in positive sentiment, cannot be sustainable, and it is time to take the punch bull away before too many drunken investors do bad things.

One of the things that we always tend to forget during such times as these, when we have gone six years without a new high, is that bullish sentiment can be euphoric and hard to fight, as the bulls get more funds to buy more stocks at margin, and talk more of their friends into coming on board. I was often in the wrong situation vis a vis this at the palindromes weekend parties where everyone in the world was bullish on the Yen or some such, while I was short, and collectively there was a trillion dollars of wealth in the room, all of whom just made five percent on the previous Friday.

But of course one is reminded of Rumpole. "Why is it always s-x that's behind the murder". Yes, why is the real reason that stocks are going up and that you can get about a five and a half percent greater real return on them than bonds, i.e. a six percent estimated earnings price ratio with four percent growth versus four and a half percent on ten year bonds? Is it the pension funds, the asset allocaters, the endowments, or just Joe and Jane public that eventually decide during the end of the year that it is better to get ten percent on stocks, with earnings having increase double digits for sixteen quarters in a row than accept four and a half percent in bonds? Perhaps the Bishop who does not believe in God, or the stock commentator who does not believe in stocks will have the answer.


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