A Sign That the Stock Market Is Near Its Bottom?
This piece of spam from thestreet.com might well qualify as a signal that the bottom is near: when the attention-grabbing headline is not "9 stocks that will double in value" but "17 big-name stocks you MUST SELL now," bear-market psychology must be near its maximum possible value...
Posted by DeLong at July 18, 2002 12:32 PM | TrackBack=================================
Date: Wed, 17 Jul 2002 15:58:54 -0400
From: thestreet@offers2.mail-thestreet.com
To: delong@econ.Berkeley.EDU
Subject: 17 Big-Name Stocks You MUST SELL now...
Dear Investor,
Everything's hunky-dory, right?
Alan Greenspan says the economy is "in recovery;" all the corporate big-wigs are rushing to claim, "There's nothing wrong with OUR books;" and many market pundits are once again urging you to buy "before the next run-up".
Don't do it. Don't get suckered this time around. We're not headed back to the glory days again just quite yet.
And if you buy the market...load up on big-name tech stocks just because they're cheap...or take Wall Street's word at face value, be prepared to get CLOBBERED.
"XYZ company beat earnings estimates," the financial press will announce. And everyone will get excited and tout the stock. What a great buying opportunity, right?
WRONG! Thatís when I get really steamed by investment "gurus" who convince individual investors to put their money into stocks that are GOING NOWHERE FAST at best, and may actually be dangerously overpriced.
Most stocks are down 30%, 50%, 70% or more from their highs. WHY? SIMPLE...their profits have sunk like rocks in the middle of the ocean. And thereís no sign these companiesí profits are coming back soon.
Thatís why Iíve prepared a new special report "17 Big-Name Stocks You Must Sell Now"...
This is a phony. Probably has nothing at all to do with "the street."
Posted by: JD on July 18, 2002 12:46 PMIf historical P/E ratios relative to cyclical profit peaks are a useful guide, don't we have a lot of room to fall before bottom? Especially as the "E" gets restated downward?
Posted by: Jeff Hauser on July 18, 2002 03:50 PMYep. P/E ratios are still very high by historical standards.
Brad DeLong
Posted by: Brad DeLong on July 18, 2002 08:22 PMIf only 'twere so ... I think you might need a few more courses at Day Trader University before giving up the day job and becoming a full time technical analyst ...
(Although the following disquisition on the theory of technical analysis is meant to be a destruction of Brad's market call, no implicit bear call of my own should be inferred ...)
The "magazine cover indicator", on which this is presumably a riff, is more usually used to pick tops rather than bottoms. The idea is that stock markets follow a cycle of:
1) "accumulation" (strong hands acquire stock),
2) "public participation" (strong hands have soaked up the available supply; new buyers are attracted into the developing trend but have to bid up the price),
3) "distribution" (strong hands supply the increased public demand from their accumulated holdings)
4) "liquidation" (no buyers remain, as strong hands have departed and all the weak hands are loaded up to the limit of their margin; the normal run of sales to cover liquidity needs begins to bid the price down)
The idea is that you can tell that the market has moved into the late stages of this cycle because stock market related stories start appearing on magazine covers. This is a sign that the early run of public participation is at an end, and the only way that the trend can continue is by attracting the weakest of weak hands; small-time speculators drawn from the general public. You occasionally get a final "melt-up" stage as the public goes into a buying frenzy, but it is not considered prudent for professional speculators to participate in this phase, as it can be hard to tell when the market has run out of buyers, and the ensuing liquidation is usually sharp (the NASDAQ chart from Nov 2000 to April 2001 refers). The more general-interest the magazine, the stronger the signal from its cover story; so, Forbes magazine is hardly a signal at all, Time is a stronger one and the Reader's Digest is a flashing red light.
The reason that the magazine cover indicator picks tops rather than bottoms is that the cycle is not symmetrical; strong hands have already departed the market at a top, but a bottom cannot form until they come back in, whether or not the public have finished selling. If the general public know to be bearish and are out of the market, all that means is that liquidation is at an end; if the strong hands are not yet convinced that stocks are cheap, you will just have a directionless bear market like those of the 1970s. This is a corollary of the law of stock market gravity; buyers can always wait another day to buy stocks, but a considerable percentage of sellers *have* to sell, *right now* (Brad may recognise this as the liquidity trading motive; I have always thought it quite a bad assumption that noise traders' errors are not biased downward in the economic literature). To put it a third way, markets can fall because of lack of buyers, but they do not generally rise for lack of sellers, because liquidity trading ensures that there are always sellers.
Hence, the critique of this stock market call is the following:
1) The fact that thestreet.com is still in business and sending out spam emails at all is an indication that public participation in the market is still pretty high.
2) Thestreet.com is a specialised daytrader website, and thus does not give a particularly strong magazine cover signal. The vast plurality of the popular media are, if I read them correctly, still paying lip-service to the idea that stocks in general go up, and that equity market investments should be held for the long term -- there is no capitulation here.
3) Even if the entire thestreet.com posse have liquidated their stocks, that is not enough to create a market bottom in the absence of evidence that anyone is willing to start accumulating.
dd
PS: The magazine cover theory was developed for the market of the 1930s, in which "strong hands" were rich individuals and pools rather than mutual funds and pension funds. I do not know how well it carries over to a market in which the dominant investors are institutions of this kind, and I do not know whether small speculators are as heavily, more heavily or less heavily margined than they were in the 1930s, so I don't really know how valid the magazine cover indicator is these days. I suspect, not very valid.
Posted by: Daniel Davies on July 19, 2002 07:35 AMIsn't this the same thestreet.com (of J J Cramer fame) that said the following in January 2001
Quote
You know I have been adamant that this is a new bull market. You know that I went on record blasting those Nasdaq 1500 sirens. But there are still persistent emails from people asking me if this is just one more big bear spike.
Unquote
I guess he is pretty steamed at himself right now!
Posted by: on July 19, 2002 09:45 AMI think Daniel Davies is right--but this "sell RIGHT NOW!" spam is the first bullish signal I have seen yet.
It is hard to believe that anyone who is out of the market and waiting for stocks to become undervalued could be confident that they are yet.
Brad DeLong
Posted by: Brad DeLong on July 19, 2002 12:38 PM'becoming a full time technical analyst'
If technical analysis works so well, how come none of the practitioners can consistently beat the S&P 500?
Posted by: Jason McCullough on July 19, 2002 01:45 PM'becoming a full time technical analyst'
If technical analysis works so well, how come none of the practitioners can consistently beat the S&P 500?
Posted by: Jason McCullough on July 19, 2002 01:45 PMOddly, technical analysis has been working pretty well lately. Maybe that's no surprise -- lots of investors start trading technically when they can't figure out what the fundamentals are (exactly what is the E these days?). Or maybe the market is just super psychological right now.
But you shouldn't pay attention to a word I say: I used to be a reporter for TheStreet.com.
Posted by: Justin Lahart on July 19, 2002 06:11 PMJason: I'm aware of several technical analysts who have beat their local market indices comprehensively over the last ten years. I'd be interested in where you're coming from on this assertion, which sounds rather like the sort of thing that MBA profs assert to their classes without much basis for doing so.
Posted by: Daniel Davies on July 21, 2002 11:23 PMThere needs to be different words for "technical analysis based on predicting market psychology" and "technical analysis based on fundamentals." When I hear words like "accumulation" and "support levels" I think of the latter; obviously the former works wonders.
Posted by: Jason McCullough on July 22, 2002 01:39 PMNah, accumulation and support levels only works as a theory because they are a crude way of guessing where the psychologically important "anchors" of Kanneman and Tversky's prospect theory. If you can identify a feature on a chart which is likely to mark the point at which a big player built a position, chances are that if the price gets down there, he'll buy some more -- hence, support. If the price gets up to a level where a big player can sell out without realising a loss, then if he displays loss-aversion, he'll sell -- resistance. And so on, and so on.
Posted by: dsquared on July 22, 2002 05:26 PMThis doesn't really jive with the "It's a perfect duck's head! Buy!" caricature Michael Lewis mentioned in Liar's Poker. So real-world technical analysis is based on reverse-engineering the acceptable range for large movers? There's stocks out there this works on? It sounds like only the kind of thing major insiders could pull off successfully.
Not that I'm going to be changing my investment patterns or anything, I'm an index-fund kind of guy.
Oh, I tried to email you Daniel, but it bounced.
Posted by: Jason McCullough on July 24, 2002 07:24 PMstrange ... I will check, but that is a genuine email address.
Yeh. Michael Lewis, to put it brutally, doesn't know as much as he thinks it does. Technical analysis does work but the people who can make it work are usually *hellishly* disciplined; done properly, it's at least as much work as fundamental analysis . Really seasoned tape-readers can identify individual traders by their characteristic methods of attempting to build a position without moving the price too much. That's why I am always sceptical of anyone who tries to make a comment on a chart he's just seen (though very few of them can resist trying).
Then there is the whole school of mass psychology; my mate actually makes good money from a very simple moving average system, with a couple of filters. But he does work in a well-capitalised context, and can afford the drawdowns statistically associated with a system that works slightly better than average, on average.
I dunno. I'm an inveterate sports punter too, so I'm the worst person to ask ...
Posted by: Daniel Davies on July 25, 2002 01:22 AM