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Editorials, Wednesday, 09/20/2000

The Contrary View
By Jarred Coopersmith

"In a market like this, every story is a positive one. Any news is good news. It's pretty much taken for granted now that the market is going to go up." This looks like something the Wall Street Journal could have printed earlier this year. In fact, they printed it on August 26, 1987 and buried it on page forty-one.

Eight weeks later, everyone else got buried.

It's a time of unbelievable prosperity. The stock markets have gone through the roof. It seems the United States has found the formula for limitless prosperity, except the economy is slowing down, margin buying is increasing and volatility is increasing. Oh yeah, and October is coming.

Before anyone gets excited, I'm not preaching a stock market crash. I'm not clairvoyant enough to do that. However, I do know that we are experiencing record volatility. There is also record margin debt. Moreover, the NASDAQ's swings this year, were greater than in the 1987 crash, and the 1973-1974 recession.

Over the past four years, the Nasdaq has increased nearly 500 percent, giving it a P/E ratio over 100. Even the Dow Jones Industrial Average and the S&P 500 are trading about double their normal historical average P/E ratios. Oh yeah, we are also on our way to October.

I was looking through my stock trader's almanac and found something to consider. The market has seen drops of over 10% in October 1966, 1974, 1978, 1979, 1990 and 1997. Does this constitute a pattern? Maybe not, but the fact remains that history tends to favor October for stock crashes.

One reason that October is so cruel to stocks is that mutual fund managers are cleaning house. Because the market, in the last part of the year, is notorious for doing nothing or going down, mutual fund managers will sell their highflying stocks in order to protect their gains and lock in a respectable return.

With this being an election year, people are also uneasy about what is going to shake out with the Presidential race. Therefore, they sell. Finally, there is the ever-looming Federal Reserve, and worries about interest rate hikes.

I'm not predicting a stock market crash anything like 1987 or 1929. Chicken Little was hit in the head with a shingle and convinced the other barnyard animals that the sky was falling. Things were made worse by exaggeration and panic and these are two things that are ever present in the stock markets. I've simply found some patterns. Chicken Little never did the research.

So I'll temper my concerns. If the sky is going to fall, there's a chance it could happen in October. After all, the greatest trick history has ever pulled, is convincing us, "it's different this time."

Comments, questions, etc, about this commentary, send them to Jarred Coopersmith at:



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