The Chart du Jour

Behaving Like Pavlov's Dog

March 17, 2000

No sooner had the Bloomberg headline hit the screens Thursday "Nasdaq down 10% from its highs," than a bell seemed to go off with Wall Street investors. All 10% dips in the "new economy" are supposed to be bought. A 3% loss suddenly turned into a 3% gain. There was a mad stampede to buy everything -- excepting a few stocks like Gateway and Microsoft that mysteriously didn't seem interested to participate. The combination of Pavlov-dog-like investors and the expiry of March futures and futures options clearly made for a rarified "panic cycle" day -- albeit in a different direction than we had anticipated.

Overall, we must admit to being very much surprised by the magnitude of the advance witnessed Thursday in both the Dow Jones and the S&P. It seems Wall Street has turned into something of a magnifying glass, turning the most trivial of news events, bullish or bearish, into a stampede. But the volatility that we have seen these past few days is not a healthy sign for this market. It is remicent and certainly not dissimilar on a percentage basis from the type of movement we saw both in August-September 1929 and in August-September 1987. It causes people's heads to spin, and even the fund managers such as Janus and Fidelity who are overly concentrated in high-tech names must be a bit confused. Indeed, the movement Wednesday and Thursday out of high tech back into basic material stocks smells like someone big may have already done a bit of rebalancing in their allocations. A pause by everyone to assess what just happened seems likely.

On a standalone basis, it is certainly possible that Thursday's price action represents the beginning of a wave 3 of V advance, but all of our prior work (see Earlier Articles) suggests otherwise. The Fibonacci rhythm of the DJIA nicely completed in January; the DJIA achieved a near picture perfect Lindsay "Three Peaks and a Domed House" pattern; and Nasdaq charts such as Cisco and Intel, while not quite complete, look far closer to finishing their advances toward 146-148 and 127-129 respectively -- levels where the Fibonacci rhythm of their entire post 1994 blastoff will likely conclude. Amazon meanwhile just looks plain sick, and stocks like GE and Microsoft already appear fully baked.

No, we cannot logically conclude that this market can carry on its advance with any long term sustainability. What we can conclude is that investing in equities -- long or short -- is becoming an exceedingly dangerous proposition, and hence our love of such diversified and non-equity correlated investing detailed in our working paper on alternative investment management.

We can also point to the region depicted on the chart below as the most likely one for the recent DJIA advance to fail. If we start getting sustainable closes above the 100 and 200-day moving averages on this chart, then we will be concerned that our interpretation of this market is incorrect. Until such point, however, the likely fall-out of the recent volatile turns is not likely to end well.

Chart produced using Advanced GET End of Day

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