Why has the market been bearish, and why is it about to be bullish? Magic

Peter Brimelow October 17 1977

Why has the market been bearish, and why is it about to be bullish? Magic

Peter Brimelow October 17 1977

Why has the market been bearish, and why is it about to be bullish? Magic

Peter Brimelow

There are no atheists in foxholes and there are very few thoroughgoing rationalists among the dedicated aficionados of the stock market. The reason is the same in both cases. War and the market reveal too plainly the terrifying and implacable unpredictability of life, a truth that much human action is designed to obscure. No theoretical system has yet been devised to predict the stock market accurately. And the evidence of failure is too brutally apparent to be glossed over.

This explains why the market is not popular among academic economists or with intellectuals generally. (Lord Keynes was a successful speculator, but he was also a totally intuitive personality, whose academic work consisted essentially of justifying his prejudices.) It also explains why readers of Richard Russell’s Dow Theory Letters, published out of La Jolla, California, don’t crack up when he tells them that his study of the Fibonacci series suggests the market will start going up in October. They aren’t worried that Fibonacci was a, medieval Italian mathematician who claimed to discern a mystical significance in the relationship of the dimensions of the Great Pyramid. They know that Russell has been brilliantly prescient, getting them into the market in late 1974, when everyone else was despairing, and out again some 450 points higher on the Dow Jones Industrial Average, earlier this year. And they don’t care if he does it with the entrails of a sheep.

“The year 1977 has been like a Chinese

water torture,” says Neil Lovatt, one of Canada’s leading market analysts, with Toronto stockbrokers R. A. Daly & Co. Ltd. Like a collapsing hot air balloon, the Dow has subsided steadily from a high of 1014 last September to a recent low of 834. “It’s one of the longest declines we’ve ever had without at least a 5% correction,” says Ian McAvity, publisher of the Torontobased Deliberations market letter. Canadian markets, as recorded by the Toronto Stock Exchange 300 composite index, did try a fierce rally in June. But subsequently the slow downward trek has been rejoined, made the more harrowing by death rattles from New York, where a commission rate system has severed the economic jugular of much of the brokerage industry.

Both McAvity and Lovatt were expecting an upsurge in the market this year, to correspond to the traditional “third phase” of a long-term bull market which they believe started late in 1974. Both have strong nerves and still expect it. Stocks outside the narrow range used to compute the Dow have indeed been acting more strongly. And the Dow is now selling below the book value of its component stocks—currently about 850—which it has only done at times of climactic distress in 1932.1942and 1974. However, Russell, who tends to think aloud and produce a blend of positive and negative opinion, believes the market is ac-

tually saying that the international financial crisis caused by the OPEC price rises still hasn’t been solved. The Arabs may well be forced to drop prices to prevent the whole system from collapsing, he says, which may be what the market is waiting for.

While waiting, there is a way to make money in the market. (There always is.) All you have to do is pick the right stock. Some have performed remarkably, despite the overall averages. Investors in Twentieth Century-Fox Film Corporation, for example, have doubled their money, following the box office triumph of Star Wars— and other movie stocks have also done well. In Canada, there’s been a growth eruption among oil producing companies such as Norcen Energy Resources Limited and Amalgamated Bonanza Petroleum Ltd., partly stimulated by rumors of finds in the foothills region of Alberta. The third phase of a bull market is always an active time for oil and gas stocks. Of course, this strategy is useless for professional money managers, who can’t manoeuvre their ponderous portfolios as adroitly as small investors. But the very fact that brokers are telling each other about rich pickings among the junior stocks (not surprisingly, since these were bombed utterly out of sight in the crash of 1974) contrasts sharply with the recent fashionable plaint that it was impossible to beat the market averages. It’s a faint whiff of the go-go years of the 1960s again, evidence that Lovatt and McAvity may be right in expecting One More Heave.