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A Few More Systems
To continue this review of technical schemes would soon
generate rapidly diminishing returns. Probably few people
seriously believe that the sunspot theory of stock-market
movements can make money for them. But do you believe
that by following the ratio of advancing to declining stocks on
the New York Stock Exchange you can find a reliable leading
indicator of general stock-market peaks? A careful computer
study says no. Do you think that a rise in short interest (the
number of shares of a stock sold short) is a bullish signal
(because eventually the stock will be repurchased by the
short seller to cover his or her position)? Exhaustive testing
indicates no relationship either for the stock market as a
whole or for individual issues. Do you think that a moving-
average system as espoused by some of the financial
television networks (for example, buy a stock if its price or
its fifty-day average price goes higher than its average price
over the past 200 days and sell it if it goes below the average)
can lead you to extraordinary stock-market profits? Not if
you have to pay transactions charges—to buy and sell!
Technical Market Gurus
Technicians may not make accurate predictions, but they
certainly are colorful. During the 1980s, for example, the
most influential market guru was a young man named Robert
Prechter. Prechter became interested in the parallels between
social psychology and the stock market while a Yale
undergraduate. After college, Prechter spent four years
playing drums in a rock band, after which he joined Merrill
Lynch as a junior technical analyst. There Prechter stumbled
on the work of an obscure accountant, R. N. Elliott, who had
devised an arcane theory which he modestly entitled the
Elliott wave theory. Elliott’s premise was that there were
predictable waves of investor psychology and that they
steered the market with natural ebbs and flows. By watching
them, Elliott believed, one could call major shifts in the
market. Prechter was so excited about this discovery that he
quit Merrill Lynch in 1979 to write an investor newsletter
from the unlikely location of Gainesville, Georgia.
Prechter’s initial predictions were uncannily accurate.
Early in the 1980s, he predicted a major bull market with the
Dow expected to rise to the 3,600 level after an interim stop
at 2,700. Prechter was the golden knight of the day by
keeping his followers fully invested through October 1987.
Tarnish set in after October 1987. To Prechter’s credit, he
did say that there was “a 50/50 risk of a 10% decline” in the
market on October 5, 1987, when the Dow was still selling
above the 2,600 level, and he advised traders and investors
with a short-term outlook to sell. Institutional investors were
advised, however, to hang on for the ultimate target of 3,686
in the Dow. After the crash, with the Dow near 2,000,
Prechter turned bearish for the long term and recommended
holding Treasury bills. He predicted that “the great bull
market is probably over” and that by the early 1990s the
Dow Jones Industrial Average would plunge below 400. By
not advising repurchase, Prechter missed out on the entire
bull market of the 1990s. This was a mortal wound for a
golden guru. Prechter remained a consistent bear, however,
and did gain some renewed following during the market’s
meltdown of the early 2000s. This only proves that if one
keeps predicting a market decline (or rise) one is bound to be
correct at some time.
Prechter was succeeded by Elaine Garzarelli, then an
executive vice president of the investment firm of Lehman
Brothers. Garzarelli was not a one-indicator woman. She
plunged into the ocean of financial data and used thirteen
different indicators to predict the course of the market.
Garzarelli always liked to study vital details. As a child, she
would get animal organs from the local butcher and dissect
them.
Garzarelli was the Roger Babson of the 1987 crash.
Turning bearish in August, she was recommending by
September 1 that her clients get out of the stock market. By
October 11, she was confident that a crash was imminent.
Two days later, in a forecast almost frighteningly prescient,
she told
USA Today
that a drop of more than 500 points in
the Dow was coming. Within a week, her predictions were
realized.
But the crash was Garzarelli’s last hurrah. Just as the
media were coronating her as the “Guru of Black Monday”
and adulatory articles appeared in magazines ranging from
Cosmopolitan
to
Fortune
, she drowned in her prescience—or
her notoriety. After the crash, she said she wouldn’t touch
the market and predicted that the Dow would fall another 200
to 400 points. Thus, Garzarelli missed the bounce-back in the
market. Moreover, those who put money in her hands were
sadly disappointed. In explaining her lack of consistency, she
gave the time-honored explanation of technicians: “I failed to
believe my own charts.” Later in 1994, Garzarelli and Lehman
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