WALL STREET GIBBERISH, 2001 SECOND QUARTER NEWSLETTER

This issue's example comes from our leading financial publication, The Wall Street Journal. However, they are far from the only ones to commit gibberish by trying to draw inferences from a small number (in this case just one) of instances of supposedly meaningful precedents.

In the April 23 issue, it was noted that the Nasdaq Composite had gained about 33% in the prior ten trading days. The fear was that the market had gained too much too soon and that a slower rate of gain would be a better omen for stock prices. The Nasdaq Composite dates back to 1971, and there had never been a ten-day period before during which it had gained even 25%. Even if there had been such a period or two, how reliable is an inference based on one or two data points?

Undaunted, they dug further back into history and found that one time, in August 1932, the Dow and S&P 500 did indeed rise by over 33% in a ten-day span. Wow! Now we have great insight into what the Nasdaq is likely to do. Forget that in 1932, which was almost seventy years ago, a) the country was in the midst of a horrendous economic depression, b) the stock market had been crashing for almost three years, and c) the structures of the economy and the financial markets were not at all like they are today. Also, don't bother to ask what is so special about ten days. Has the percent change over that period proved to have some predictive value in the past? That might take a lot of work and some thought about what is meaningful. No way! We have a single precedent and an article to write, so let's draw some conclusions about what the Nasdaq is going to do based on what happened after August 1932.

What did happen then? To quote the article, "after another month of gains, the indexes fell 37% during the next six months. Stocks then did rebound and hit a new high, only to plateau and go nowhere for more than a year, until 1935. The conclusion many investors are drawing is that, even if stocks ultimately are going to turn upward, they could turn down again first, so that people who wait would have another chance to buy at cheaper prices." Such nonsense is typical of what many pundits expound: stocks may be going higher, but they might go lower first. Sounds like whatever happens, the prognosticator will take credit for being right.

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