Here is how I dealt with this danger in 2003. First, stock market sentiment had been very bearish for eight months. Indeed, in March 2003 the weekly survey of investors conducted by the American a.s.sociation of Individual Investors showed historically high levels of bearish sentiment. The bear market had carried the S&P down by nearly 50 percent and the NASDAQ down by 80 percent. It had lasted more than 30 months and thus exceeded the historical norm in duration and extent. With this as background, the fact that the market made a closing low in March 2003 at 801, visibly above the level of its October low at 777 and in a situation when war was imminent, made me suspect that better times were ahead. So I decided to defer selling my increased stock market allocation long enough to see if the S&P could trade above its 933 high of November 21. If it did, then I would take that as preliminary evidence that a new bull market had begun and switch to a bull market strategy.
In the event, the S&P rallied strongly as the Iraq war began and moved above the 933 high on May 6. On May 2 the S&P closed at 930, more than 5 percent above its 200-day moving average. At that point every contrarian trader would have hard evidence that a new bull market had begun.
CHAPTER 14.
The Postbubble Bull Market of 2002-2007 Bears at the 2002-2003 low points * * the conservative contrarian increases his stock market exposure the conservative contrarian increases his stock market exposure * * 30 months later he reverts to a normal stock market exposure 30 months later he reverts to a normal stock market exposure * * looking for a bullish information cascade looking for a bullish information cascade * * Google"s IPO Google"s IPO * * the housing bubble the housing bubble * * the aggressive contrarian during the bull market the aggressive contrarian during the bull market * * avoid below-normal stock market allocations during a bull market avoid below-normal stock market allocations during a bull market * * May 2004 buying opportunity May 2004 buying opportunity * * March 2005 buying opportunity March 2005 buying opportunity * * trading during 2006 and 2007 trading during 2006 and 2007 ESCAPING THE BEAR"S CLAW Like all bull markets, the big advance that began from the October 2002 low started amidst conditions of fear and loss of confidence in the U.S. economy. The stock market spent nearly eight months trading sideways near the low points of the 2000-2002 bear market. The S&P 500 traded as low as 771 in July 2002, then as low as 768 in October 2002, and finally as low as 789 in March 2003.
During that eight-month period, the bearish stock market crowd that had formed during the bearish information cascade of May-October 2002 remained strong. Indeed, some polls of investor sentiment showed the maximum bearish sentiment at the March 2003 low point which occurred at a higher price level in both the Dow Jones Industrial Average and the S&P 500 index than the October 2002 lows. For example, the weekly sentiment poll conducted by the American a.s.sociation of Individual Investors showed nearly 60 percent of respondents bearish during the week of the March 2003 low point. This was a greater bearish percentage than was seen at any time during the 2000-2002 bear market. This fact convinced me then that the bearish crowd was on the verge of disintegration.
By 2007 the Dow and S&P 500 would double from their 2002 lows at 7,181 and 768 respectively. How would the conservative contrarian trader have positioned his portfolio to take advantage of this advance? In Chapter 13 we saw that on January 2, 2001, the 200-day moving average of the S&P had dropped 1 percent from its bull market high. That day the S&P closed at 1,283 and the Contrarian Rebalancing strategy called for a reduction of stock market exposure to below-normal levels, this because all the signs of a bubble were evident near the 2000 top.
During a bear market that follows a bubble, the conservative contrarian maintains a below-normal stock market exposure. He expects to see a drop in the S&P 500 of at least 30 percent. Once such a drop has developed, he looks for a bearish information cascade to occur near a potential bear market low point. If one develops and if the 200-day moving average of the S&P subsequently advances 1 percent from a low point, the conservative contrarian has his signal to increase his stock market allocation to above-normal levels.
By October 2002 the S&P had fallen nearly 50 percent. The May-October bearish information cascade had built the bear market crowd until its views dominated in the media. Then on June 13, 2003, the 200-day moving average of the S&P turned up by 1 percent. That day the S&P 500 closed at 988. This upward turn in the 200-day moving average was the first to occur during the entire 2001-2003 period. On that day the conservative contrarian would have increased his stock market exposure to above-normal levels.
The Contrarian Rebalancing strategy calls for a reduction of stock market exposure to normal levels once the bull market has continued for 20 to 24 months and the S&P has advanced 65 percent from its low point. The low close for the S&P was 777 on October 9, 2002. A 65 percent advance on that low would carry the index to 1,282. On January 6, 2006, the S&P closed at 1,285, its first close at or above 1,282, and had advanced for more than three years. At that juncture the conservative contrarian trader would have reduced his portfolio allocation to the stock market to normal levels.
WHAT BULL? LOOKING FOR SIGNS OF A BULLISH INFORMATION CASCADE.
As I have already pointed out, the 2002-2007 postbubble bull market nearly doubled both the Dow and the S&P and lasted five years. One normally would expect to find an enthusiastic bull market crowd form in such circ.u.mstances. But the trauma of the previous bear market, which had sent the S&P 50 percent lower and lasted nearly three years, apparently had very long-lasting effects on investors. Perhaps this was because the bubble stocks that led the market to its top in 2000 suffered even more than the average stock in the S&P. The bubble stocks for the most part were traded on the NASDAQ. The NASDAQ Composite average dropped 80 percent during the 2000-2002 bear market!
For whatever reason, the signs of a bull market crowd and a bullish information cascade never appeared in my media diary during the 2002-2007 bull market. Let"s recall the signs.
First of all, magazine covers that favorably (even heroically) depict corporate leaders of prosperous industries generally appear during a bullish information cascade. During this bull market I noticed only one such cover story, which appeared in the October 24, 2005, issue of Time Time magazine. The cover was a photograph of Apple Computer"s founder and CEO, Steve Jobs, and was captioned: "The Man Who Always Seems to Know What"s Next." magazine. The cover was a photograph of Apple Computer"s founder and CEO, Steve Jobs, and was captioned: "The Man Who Always Seems to Know What"s Next."
Another kind of bullish cover story conspicuous by its absence was one discussing the "new" role of money and wealth in our culture and economic environment. Typically these tell the story of the newly rich entrepreneurs who have become wealthy by riding the tide of rising stock market prices and spectacular initial public offerings (IPOs).
A second sign of a bullish information cascade is a series of well-publicized and very profitable (for the corporate insiders at least) initial public offerings. These were very prominent during the 1994-2000 bubble bull market but almost entirely absent during the 2002-2007 bull market. The single exception was Google"s IPO, which I will discuss shortly.
A third sign of a bullish information cascade is the emergence of one or more pied pipers-financial commentators, market strategists, or industrial leaders who are thought to have predicted the bull market and are constantly being quoted in the press and other media cheerleading for rising prices and predicting more to come. Many such gurus became prominent during the 1996-2000 period, which saw the inflation of the prices of many bubble stocks. None were featured in the media during the 2002-2007 bull market.
A fourth sign indicating the presence of a big bullish stock market crowd is a general sense of well-being and optimism on the part of the public. This generally shows up in opinion polls of various kinds, in measures of consumer sentiment, and in discussions found in the media and in ordinary, everyday sorts of conversations about economic and stock market prospects. Far from showing any signs of such optimism, public opinion during the 2002-2007 bull market was generally pessimistic about the economy and the prospects for the United States. This may have been due in large part to the prosecution of the Iraq war and the general concerns about terrorism, but opinions are what they are whatever their genesis.
A final sign of a bullish information cascade is the very well publicized bullish performance of one or more innovative business sectors and their common stocks. During the 1994-2000 bubble bull market these were the computer, communications technology, and Internet-related sectors. During the 2002-2007 bull market, the best-performing stock market sectors were related to housing and finance, but these sectors did not attract nearly the public attention that the dot-com stocks had done during the preceding bubble bull market. Indeed, it is likely that the only significant bullish investment crowd of 2002-2007 occurred not in the stock market but in the housing market. The great advance in home prices during the 1995-2005 period certainly created the belief that investment in owner-occupied housing was a sure road to wealth. It would turn out that the collapse of this housing market investment crowd would have serious consequences in the stock market in 2008, but the crowd itself was not a stock market crowd. I"ll have more say about the investment crowd in the housing market later.
Since no bullish stock market crowd developed during the 2002-2007 advance, the conservative contrarian trader should have maintained his normal stock market allocation even after the averages started to decline from their October 2007 high points. In the event (see Chapter 15), this involved suffering through a drop in the S&P of more than 50 percent during the panic of 2008. However, there is good reason for adopting such a strategy, even when it can expose the trader to such risks. The long-run investment odds in the United States favor owning common stocks. The Contrarian Rebalancing strategy takes these odds into account by being very careful before adopting a below-average allocation to the stock market.
The most damaging mistake a contrarian trader can make is to maintain a below-average allocation to the stock market during an extended period when the stock market averages are advancing. This would guarantee portfolio returns inferior to those generated by the buy-and-hold strategy. Therefore, the Contrarian Rebalancing strategy demands a reduction of stock market exposure to below-normal levels only if the contrarian trader sees convincing, affirmative indications of a bullish stock market crowd in his media diary.
THE STORY OF GOOGLE"S IPO On August 18, 2004, the search engine company Google conducted an initial public offering (IPO) of its common stock. This offering was unusual in two respects: It was conducted by Google itself via an unusual Dutch or reverse auction, and this auction was conducted online. Google had hoped to sell 25.7 million shares in a range of $108 to $135, but in fact was able to sell only 19.6 million shares at $85. At the time, Wall Street gloated at the apparent disappointing outcome of the auction. Of course it was the Street"s investment bankers whose ox was gored by Google"s decision to conduct the IPO itself instead of giving the Street"s underwriters a substantial piece of the pie.
But it was Main Street"s reaction to the prospect of this IPO and to the event itself that I found more interesting and significant. Investors had been burned so badly by the collapse of the dot-com bubble that they seemed to actually hope hope that Google"s IPO would fail. They wanted the price of Google"s newly issued common stock to drop following the offering. Such hopes about a widely antic.i.p.ated IPO are highly unusual. As a rule, there is a bullish antic.i.p.ation of the IPO of any company in the technology or computer sector, especially one as successful as Google had been in dominating the online search market. Investors hope to make some quick profits on the IPO as it is oversubscribed. But bullish sentiment toward Google"s IPO was nowhere to be found. that Google"s IPO would fail. They wanted the price of Google"s newly issued common stock to drop following the offering. Such hopes about a widely antic.i.p.ated IPO are highly unusual. As a rule, there is a bullish antic.i.p.ation of the IPO of any company in the technology or computer sector, especially one as successful as Google had been in dominating the online search market. Investors hope to make some quick profits on the IPO as it is oversubscribed. But bullish sentiment toward Google"s IPO was nowhere to be found.
Instead the public"s att.i.tude seemed to be that investors who bought Google"s IPO deserved to lose money. After all, hadn"t everybody been hurt by the big drop in the prices of the bubble stocks during the 2000-2002 bear market? The same thing would happen again, and would justify these investors" sour att.i.tude toward the stocks of all tech and communication companies and toward the stock market in general.
In August 2004 I found this public att.i.tude toward the upcoming Google IPO astounding. It seemed that the bull market that had started from the 2002 lows had not yet entered a zone of overvaluation, and neither had a bullish stock market crowd been evident from the material I preserved in my media diary. Google was the leading company in its field. The bull market was still going strong, and it would tend to lift the price of Google"s stock along with the general market. Add these considerations to the evidence of the public"s highly unusual bearish hopes and expectations about Google"s offering, and you have a cla.s.sic opportunity to fade this bearish stock market crowd that formed around expectations for Google"s stock performance.
I told my friends and clients at the time that for these reasons Google was a buy at its IPO. After the stock advanced from $85 to $200 I went out on a limb and predicted a move to the $500 level before the bull market ended. Events proved me too conservative, for by the end of October 2007 Google had risen to $747. The 2008 bear market dropped Google to a low price of $247, but this was still nearly three times its IPO price of $85.
The day after Google"s IPO the public"s att.i.tude could be seen reflected in the New York Times New York Times and the and the Wall Street Journal Wall Street Journal.
On page 1 of the Times Times"s August 19 edition there was a story headlined: "Weak Demand Leads Google to Lower Its Sights." The story was accompanied by a color photo of the news ticker in Times Square, which read: "Google Slashes Price Range." The story"s lead sentence read: "Google, conceding that demand for its long-awaited public stock offering had fallen far short of the company"s hopes, slashed the number of shares yesterday and concluded its unorthodox online auction by accepting a price well below its original target."
The August 19 edition of the Wall Street Journal Wall Street Journal had two Google stories. The first was headlined: "Is Now the Time to Buy Google?" Its subhead: "Though Price Is Now Lower, History Suggests Waiting Six Months to Grab an IPO." (Six months later Google"s stock was trading at $190.) A second story in that day"s had two Google stories. The first was headlined: "Is Now the Time to Buy Google?" Its subhead: "Though Price Is Now Lower, History Suggests Waiting Six Months to Grab an IPO." (Six months later Google"s stock was trading at $190.) A second story in that day"s Wall Street Journal Wall Street Journal said even more about the public"s att.i.tude. The story"s headline was: "How Miscalculations and Hubris Hobbled Celebrated Google IPO," and its subhead read: "Euphoria Ebbed, Tech Stocks Sagged, Till Firm Cut Size; Priced at a Low $85 a Share, Blow to Dutch-Auction Method." said even more about the public"s att.i.tude. The story"s headline was: "How Miscalculations and Hubris Hobbled Celebrated Google IPO," and its subhead read: "Euphoria Ebbed, Tech Stocks Sagged, Till Firm Cut Size; Priced at a Low $85 a Share, Blow to Dutch-Auction Method."
A few days later the Wall Street Journal Wall Street Journal published a column about the outlook for IPOs in general. Its headline read: "Gloomy IPO Market Wonders About Life After Google"s Entry." The theme of the article was the difficulty of selling stock offerings to the public in the current market environment. This was another solid piece of evidence that no bullish stock market crowd had formed yet. published a column about the outlook for IPOs in general. Its headline read: "Gloomy IPO Market Wonders About Life After Google"s Entry." The theme of the article was the difficulty of selling stock offerings to the public in the current market environment. This was another solid piece of evidence that no bullish stock market crowd had formed yet.
The public att.i.tude toward Google"s stock was nicely reflected in a Newsweek Newsweek column by Allan Sloan that appeared in the October 11, 2004, edition. When Sloan wrote his story, Google was selling near $130. A week earlier five a.n.a.lysts had come out with their initial opinions of Google"s prospects. Sloan wrote: column by Allan Sloan that appeared in the October 11, 2004, edition. When Sloan wrote his story, Google was selling near $130. A week earlier five a.n.a.lysts had come out with their initial opinions of Google"s prospects. Sloan wrote: Surprise! All five gave Google high ratings, even though it was a far more expensive stock than at the IPO just six weeks earlier, having risen almost 40%. Why investors took these opinions seriously is a mystery to me.
Later in that story Sloan said: At this point, Google"s stock is going up because it"s going up-not because its fundamentals are 60% better than when it sold its initial offering in mid-August. ... At some point, reality will seep in ... and investors will begin wondering whether Google can earn enough to justify its $40 billion market value.
The story of Google"s IPO in 2004 and of the public att.i.tudes toward it and toward the entire IPO market then offers an important lesson for the contrarian trader. In August 2004 the market averages had not yet entered zones of potential overvaluation, according to my historical tabulations. There was no indication of a bullish stock market crowd in my media diary. These two indications were strongly reinforced by the public reactions to the Google IPO and att.i.tudes toward the IPO market in general at the time. The conservative contrarian trader would have found it easy to sit with an above-normal stock market allocation during this time because public att.i.tudes toward the stock market were skeptical if not outright bearish. Even better, here was an opportunity to fade a bearish crowd focused on a single company in the context of a bull market in the averages. The aggressive contrarian trader has to be on the lookout for these kinds of opportunities, because they will offer chances to enhance his performance relative to what is possible using only exchange-traded funds (ETFs), which follow the broad market.
THE HOUSING BUBBLE.
The U.S. stock market indexes all reached their bubble high points during the first quarter of 2000 and then dropped to low points in October 2002. Remarkably, the market for owner-occupied housing actually strengthened during the 2000-2002 bear market and the a.s.sociated economic weakness. In fact, housing prices accelerated their upward trend during that time. The Case-Shiller index of U.S. home prices rose nearly 90 percent between the first quarter of 2000 and the second quarter of 2006. This should be compared with a rise of 30 percent during the six-year period prior to 2000. The interesting thing about the housing bubble is that it was widely recognized as a bubble by many commentators at the time it was inflating, but as with all bubbles this offered no clue about how high home prices would rise and how long the bubble would inflate.
This is a lesson for contrarian traders. Bubbles are always always recognized as such by wise observers at the time the bubble is inflating. Sadly, this is no help to the investor; it doesn"t tell you when the bubble is about to pop. Bubbles as a rule inflate far beyond any reasonable expectation. This is why we call them bubbles. The most stunning example of this phenomenon in recent memory was the j.a.panese stock market and real estate bubble of 1980-1990. recognized as such by wise observers at the time the bubble is inflating. Sadly, this is no help to the investor; it doesn"t tell you when the bubble is about to pop. Bubbles as a rule inflate far beyond any reasonable expectation. This is why we call them bubbles. The most stunning example of this phenomenon in recent memory was the j.a.panese stock market and real estate bubble of 1980-1990.
j.a.pan"s Nikkei stock market index had risen nearly 350 percent during the 1970s. As the market rose even higher during the 1980s one could read frequent commentary on j.a.pan"s stock market bubble and predictions of its imminent demise. Yes, the bubble did pop in 1990, but not before the Nikkei had advanced another 490 percent during the 1980s. This ended a two-decade bull market, which had sent the Nikkei up an astounding 1,850 percent! If you studied the j.a.panese market in mid-1985 when the Nikkei reached the 13,000 level, it having doubled in the previous five years, you would have been tempted by market commentators and by the historically very high level of prices to think the bubble was about to pop. But you would have had to wait another five years and watch the market advance another 200 percent before you actually heard the popping sound!
The contrarian trader would have gotten some early warnings that the U.S. housing bubble was in its terminal phases. The clues came to him via cover stories in weekly and monthly newsmagazines.
The first housing market cover I have in my media file was the Fortune Fortune magazine cover of its September 20, 2004, issue. It shows a cartoon of a man sweating and saying: "They said prices would go up forever!! magazine cover of its September 20, 2004, issue. It shows a cartoon of a man sweating and saying: "They said prices would go up forever!! ... ... and we believed it!!" The cover headline asked: "Is the Housing Boom Over?" and we believed it!!" The cover headline asked: "Is the Housing Boom Over?"
This cover expresses skepticism about the housing boom. Sometimes a bearish cover like this does does come near the end of a bubble. This in fact happened in April 2000 for the stock market bubble. As explained in Chapter 13, come near the end of a bubble. This in fact happened in April 2000 for the stock market bubble. As explained in Chapter 13, Newsweek Newsweek published a cover story then asking if the bull market in stocks was over! In general, however, a bearish cover in the midst of a bubble is something that coveys little information to the contrarian trader. If anything, it means that the bubble is not yet ready to pop. published a cover story then asking if the bull market in stocks was over! In general, however, a bearish cover in the midst of a bubble is something that coveys little information to the contrarian trader. If anything, it means that the bubble is not yet ready to pop.
The next two covers in my files tell quite a different story. The May 30, 2005, issue of Fortune Fortune is headlined: "Real Estate Gold Rush." It shows photographs of individuals and couples who have apparently made a lot of money in the real estate market. The subhead reads: "Inside the Hot-Money World of Housing Speculators, Condo Flippers, and Get-Rich-Quick Schemers (Is It Too Late to Get In?)." Two weeks later, in its June 13 issue, is headlined: "Real Estate Gold Rush." It shows photographs of individuals and couples who have apparently made a lot of money in the real estate market. The subhead reads: "Inside the Hot-Money World of Housing Speculators, Condo Flippers, and Get-Rich-Quick Schemers (Is It Too Late to Get In?)." Two weeks later, in its June 13 issue, Time Time magazine published a cover story showing an ill.u.s.tration of a man hugging his home. The headline read: "Home $weet Home-Why We"re Going Gaga Over Real Estate." magazine published a cover story showing an ill.u.s.tration of a man hugging his home. The headline read: "Home $weet Home-Why We"re Going Gaga Over Real Estate."
At the time these two covers appeared, in the second quarter of 2005, the Case-Shiller housing price index stood at 176.70, up 76 percent from its level of 100.00 in the first quarter of 2000. By the second quarter of 2006 the index reached its high point at 189.93. During the subsequent two years the index fell 20 percent to the 140 level.
While these two cover stories gave fair warning of the end of the housing boom, they appeared a full year before the actual peak in home prices. This is quite a common phenomenon. Market tops tend to lag bullish magazine covers by anywhere from four to 12 months, while market lows tend to lag bearish covers by only a month or so, if that.
These covers timed the top of the housing sector of the stock market much more exactly than they did the price of housing. The housing stock price indexes maintained by Standard & Poor"s and by the Philadelphia Stock Exchange reached their housing bubble tops in July 2005, barely a month after the magazine cover stories appeared. By July 2008 these indexes had fallen 85 percent and 70 percent respectively from their 2005 high points.
The contrarian trader should always be on the lookout for media clues indicating a mature bullish or bearish crowd. These can arise in unexpected places. The housing bubble is a case in point. The year 2005 saw the debut of two television series devoted to real estate speculation. "Flip That House" on the Learning Channel and "Flip This House" on the Arts & Entertainment network drew growing and enthusiastic audiences. Interestingly enough, both shows continued to air through the housing downturn as the flippers whose activities they recorded began losing money. Apparently misery loves company.
AGGRESSIVE CONTRARIAN TRADING DURING THE 2002-2007 BULL MARKET.
Unlike his conservative cousin, the aggressive contrarian trader expects to make adjustments to his stock market allocation at least a couple of times each year during both bull and bear markets. His goal is to use his media diary and his market tabulations to take advantage of the short-term market swings that develop within the context of any longer-term, multiyear trend. In a bull market, for example, a typical short-term upswing might carry the averages upward by 15 to 25 percent and last four to nine months or even longer. A typical short-term downswing might last anywhere from one to three months (and in extreme cases as much as six months) and carry the averages downward by 5 to 15 percent. In a bear market the extent and duration of short-term upswings is similar to that of short-term downswings in a bull market. A similar reversal of parameters applies to short-term downswings in a bear market.
Ideally, the aggressive contrarian trader will have an above-normal portfolio allocation to the stock market near the low points of short-term downswings and a normal or below-normal allocation to the stock market near the high points of short-term upswings.
At this juncture let me say that below-normal stock market allocations can be dangerous. I don"t think any contrarian trader should have a below-normal exposure to the stock market during a bull market. Remember that having a below-normal stock market allocation during an extended upswing in prices is a recipe for ensuring that your portfolio"s performance will be inferior to that of the buy-and-hold benchmark policy. I urge all aggressive contrarian traders to allow their bull market stock market allocations to fluctuate between normal and above-normal levels only. The aggressive contrarian would move to a below-normal allocation only after he sees the S&P drop 5 percent below its 200-day moving average. A below-normal stock market allocation is justified only in a situation where a stock market bubble has likely formed and is probably about to pop. In all other situations, leave below-normal stock market allocations to expert contrarian traders.
Let"s see what tactics an aggressive contrarian trader might have used in pursuit of this objective during the 2002-2007 bull market. The S&P 500 index began its bull market from a low at 768 (intraday) on October 10, 2002. The aggressive contrarian trader would have had very strong evidence that a new bull market was about to begin. Certainly media evidence that appeared during the summer of 2002 revealed a ma.s.sive, bearish information cascade, one that was stronger than those evident at the March 2001 and September 2001 low points. By October 2002 the bear market in the S&P had lasted 31 months and carried the average down nearly 50 percent, thus making it bigger than any other bear markets of the preceding 50 years. I think the conjunction of these two facts made it reasonable for the aggressive contrarian trader to act on the a.s.sumption that a new bull market was about to begin.
The most important thing to remember about the early stages of a bull market is that the first short-term swing upward is generally the biggest one of the bull market in percentage terms. It is also often the longest in duration. It is doubly important for the aggressive contrarian trader to maintain his above-average stock market allocation during this upswing, because this is an opportunity to improve substantially his portfolio"s performance relative to the buy-and-hold strategy.
How may this important objective be achieved? As a rule you cannot expect much help from your media diary in identifying the end of this first short-term upswing of the bull market. Even though the bearish stock market crowd that existed at the start of the bull market is disintegrating rapidly, no bullish crowd is likely to be evident yet and no bullish information cascade is likely to be visible in your media diary.
To solve this problem I suggested in Chapter 11 a rule based on my market tabulations coupled with the use of the 50-day moving average of the S&P 500 index. My market tabulations suggest that one should wait for the averages to rise at least 25 percent from the preceding bear market low in an upswing that lasts at least six months. Once this has happened, start watching the 50-day moving average. (This is just the sum of the preceding 50 daily closes divided by 50.) Look for a new bull market high in this moving average that occurs after the six-month advance of at least 25 percent. Once the moving average turns downward by at least 0.5 percent of that high, you have a signal to cut back your stock market allocation to normal levels.
I want to emphasize that this rule, like every other one you find in this book, is not some magical formula to be applied slavishly by every reader. There is lots of room for creative thought-for modifications of the basic idea that these rules embody. Every trader has skills, knowledge, and experience that are unique. It would be silly not to take advantage of your own knowledge to improve or modify the rules I suggest so that they fit better with your own style and market knowledge.
Let"s apply my rule to the initial upswing of the 2002-2007 bull market. The low was at 777 on October 9, 2002. The aggressive contrarian trader waits for the average to advance 25 percent and for a period of six months after this low. This requires an advance to the 971 level, which achieves a new high for the upswing after April 10, 2003. These two conditions were jointly met on June 3, 2003, when the S&P closed at 972. That same day the 50-day moving average established a new high for the move up from its bear market low of 846 established on April 4, 2003. The aggressive contrarian trader is now watching for a drop of 0.5 percent in the 50-day moving average as a signal to return to a normal allocation to stocks. On April 28, 2004, with the S&P closing at 1,128 this event occurred.
Once the aggressive contrarian trader has reduced his stock market exposure to normal levels near the top of a short-term upswing, he starts looking to his media diary for evidence that a short-lived bearish crowd is developing near the low of a short-term downswing. His hope is that his media diary will help him to identify a short-lived bearish information cascade developing near the low point of the short-term downswing. For this purpose he is looking for page 1 stock market headlines in major newspapers, or several page 1 stories that may not be major headlines. Even better would be a magazine cover taking bearish note of the short-term downswing in the stock market.
He may not get this opportunity right away and the averages may continue higher for a while. No matter. His allocation is normal and his performance will match that of the buy-and-hold investor while he waits for a short-lived bearish crowd to develop.
In May 2004 the only page 1 story I put into my media diary was from the Chicago Tribune Chicago Tribune"s May 18 edition. The story appeared above the fold but was not a headline: "Investors Shaken by War Woes." It was accompanied by a table headed "Dow in Decline." This table recorded the extent of the previous three weekly drops in the Dow Jones Industrial Average. The preceding day, May 17, the S&P closed at 1,084 and had dropped as low as 1,079 during that day. These levels should be compared with those that ended the preceding short-term upswing: an intraday high of 1,163 with a close at 1,157 on March 5. The drop subsequent to that high lasted more than two months and carried the average down 7 percent by May 17, a short-term downswing well within normal expectations within a bull market context. At the May 17 close the S&P 500 was not quite 1 percent below its 200-day moving average and was also below its 50-day moving average. Such a combination in a bull market should alert the aggressive contrarian trader to a potential opportunity for increasing his stock market exposure. At the time I was very bullish, partly because of the Tribune Tribune"s story but mainly because of generally gloomy, nonheadline commentary in the press.
Another factor in my bullishness was a dramatic rise in bearish sentiment that was apparent in the weekly poll of individual investors conducted by the American a.s.sociation of Individual Investors. This was consistent with a rise in put option buying (by investors betting on further market declines) in the options markets, which also became evident at the time.
But let"s suppose you didn"t act on this information because you were looking for stock market headlines in the New York Times New York Times. None appeared, so you maintained your normal allocation to stocks. You would stick with this allocation until a short-term drop in the S&P was accompanied by a bearish information cascade. As it happened, this opportunity would take almost another year to develop. But this is not a bad thing since during this waiting period the aggressive contrarian trader would have matched the performance of the buy-and-hold policy.
To make sure we cover all the bases, let"s consider how an aggressive contrarian trader who did did increase his stock market allocation to above normal in May would have acted during the next upswing. The short-term downswing ended in the S&P at the 1,063 level on August 12. At what point during the subsequent short-term upswing should he move his stock market allocation back down to normal levels? increase his stock market allocation to above normal in May would have acted during the next upswing. The short-term downswing ended in the S&P at the 1,063 level on August 12. At what point during the subsequent short-term upswing should he move his stock market allocation back down to normal levels?
Here is the way I answer this question. Before I consider moving my stock market allocation back to normal levels, I want to see the S&P advance 15 percent from its short-term low and make a new high for the bull market. The 15 percent number is not a magic one. I generally adjust it as the bull market ages, generally in a downward direction. You may want to modify this policy by incorporating other contrarian information or technical indicators you are skilled in using.
The aggressive contrarian who is following the strategy outlined in Chapter 11 might time his reduction of stock market exposure to normal levels in a different way by using the 50-day moving average of the S&P.
For the short-term upswing that developed from the August 2004 low at 1,063, a 15 percent advance would take the S&P to 1,222, which was also a new high for the bull market. On March 4, 2005, the S&P closed at 1,222 and the aggressive contrarian trader would revert back to a normal stock market allocation if he had been so fortunate as to maintain an above-normal allocation during the upswing.
APRIL 2005-A BUYING OPPORTUNITY At this juncture the aggressive contrarian trader may have been sitting with a normal stock market allocation since April 28, 2004, when the S&P closed at 1,128. If he was very skilled he may have gone back to an above-normal allocation on May 18 at the S&P 1,084 level and then reverted to a normal allocation on March 4, 2005, with the S&P at 1,222.
Traders would now be looking for a short-run bearish information cascade to indicate the presence of a bearish crowd near the lows of a normal short-term downswing within the ongoing bull market. This generally requires one or more page 1 stock market stories recounting the drop in the averages or at least one newspaper headline doing so. Even better would be one or more magazine covers expressing bearish att.i.tudes about the stock market.
On April 16, 2005, the front page of the New York Times New York Times featured a stock market story that wasn"t a headline story but did appear above the fold at the top left accompanied by a chart of the falling Dow Industrials. The story"s headline read: "Stocks Plunge to Lowest Point Since Election." The positioning of this story and the headline"s use of the word featured a stock market story that wasn"t a headline story but did appear above the fold at the top left accompanied by a chart of the falling Dow Industrials. The story"s headline read: "Stocks Plunge to Lowest Point Since Election." The positioning of this story and the headline"s use of the word plunge plunge and the phrase and the phrase lowest point lowest point all added significance and weight as indicators of a bearish information cascade. On April 18 the all added significance and weight as indicators of a bearish information cascade. On April 18 the New York Times New York Times page 1 headline read: "As Stocks Slide Investors Focus on Earnings Data." And then in the April 21 edition of the page 1 headline read: "As Stocks Slide Investors Focus on Earnings Data." And then in the April 21 edition of the New York Times New York Times we find an above-the-fold story headlined: "Inflation Fears Pummel Stocks; New Lows for "05." Any of these three stories would have sufficed to move the aggressive contrarian trader to an above-normal stock market allocation. On April 15 (a Friday) the S&P closed at 1,143 and on April 20 it closed at 1,138. The drop from the March high at 1,225 had lasted more than a month and carried the average down more than 6 percent, well within normal parameters for short-term drops in a bull market. Moreover, on April 15 and for a few days afterward the S&P was trading not quite 1 percent below its 200-day moving average and also below its 50-day moving average. we find an above-the-fold story headlined: "Inflation Fears Pummel Stocks; New Lows for "05." Any of these three stories would have sufficed to move the aggressive contrarian trader to an above-normal stock market allocation. On April 15 (a Friday) the S&P closed at 1,143 and on April 20 it closed at 1,138. The drop from the March high at 1,225 had lasted more than a month and carried the average down more than 6 percent, well within normal parameters for short-term drops in a bull market. Moreover, on April 15 and for a few days afterward the S&P was trading not quite 1 percent below its 200-day moving average and also below its 50-day moving average.
Having established an above-normal stock market allocation, the aggressive contrarian trader would wait for an advance carrying the market up 15 percent from its 1,138 low established on April 20, 2005. This happened on April 6, 2006, with the S&P closing at 1,311. At that time the aggressive contrarian trader would move back to a normal stock market allocation. He then would await evidence from his media diary that another short-run bearish information cascade was under way.
JUNE 2006-ANOTHER BUYING OPPORTUNITY The S&P established a short-term swing high on May 8, 2006, at the 1,327 level. The subsequent short-term drop ended at an intraday low of 1,219 on June 14. This was a drop lasting a little more than a month and carrying the S&P down about 8 percent, a perfectly normal short-term downswing in a bull market. The evidence for a short-run bearish information cascade during this short-term downswing was not as neat as during the March-April 2005 downswing, but it was clearly there to see.
The single most significant piece of evidence was a magazine cover story. The May 27 issue of the Economist Economist had a cover showing a photograph of a brown bear standing on its hind legs and peering out from behind a tree. The cover caption read: "Which Way Is Wall Street?" By the time this issue appeared on May 26 the S&P had already dropped as low as 1,245 on May 24. This was a 6 percent drop from its May 8 high over a two-week period-all in all a bit brief for a normal short-term downswing. Even so, the S&P 500 was again trading a little below its 200-day moving average and below its 50-day moving average. The aggressive contrarian trader could have justified increasing his stock allocation to above normal as soon as the S&P returned to or fell below its May 24 low. This happened on June 8 when the average dropped as low as 1,235 intraday and closed at 1,258. had a cover showing a photograph of a brown bear standing on its hind legs and peering out from behind a tree. The cover caption read: "Which Way Is Wall Street?" By the time this issue appeared on May 26 the S&P had already dropped as low as 1,245 on May 24. This was a 6 percent drop from its May 8 high over a two-week period-all in all a bit brief for a normal short-term downswing. Even so, the S&P 500 was again trading a little below its 200-day moving average and below its 50-day moving average. The aggressive contrarian trader could have justified increasing his stock allocation to above normal as soon as the S&P returned to or fell below its May 24 low. This happened on June 8 when the average dropped as low as 1,235 intraday and closed at 1,258.
More evidence for a short-run bearish stock market crowd was to follow. The June 11 Sunday edition of the New York Times Magazine New York Times Magazine had on its cover a cartoon of a hairy, red bogeyman labeled "debt" and crowds of people running from him in terror. The caption read: "America"s Scariest Addiction Is Getting Even Scarier." While this cover didn"t deal with the stock market directly, I felt at the time that it reflected fairly the tenor of public att.i.tudes toward the stock market and the economy and so interpreted it as part of a short-run bearish information cascade. had on its cover a cartoon of a hairy, red bogeyman labeled "debt" and crowds of people running from him in terror. The caption read: "America"s Scariest Addiction Is Getting Even Scarier." While this cover didn"t deal with the stock market directly, I felt at the time that it reflected fairly the tenor of public att.i.tudes toward the stock market and the economy and so interpreted it as part of a short-run bearish information cascade.
The final piece of evidence was also delivered by the New York Times New York Times. In its June 16 edition there appeared on page 1, below the fold, a graph of the Dow Jones Industrial Average that emphasized the big decline from its May 10 high. Its caption read: "Relief, at Least for Now." The explanation below the caption ended with the sentence: "But the increased volatility in the markets suggested that their troubles may not be over their troubles may not be over" (my emphasis). The low for this short-term downswing in the S&P had occurred two days earlier.
We see then that an aggressive contrarian trader would have had good reason to move his stock market allocation up to above normal somewhere below the 1,260 level in the S&P. The low close was 1,224 on June 13. Adding 15 percent to this yields 1,408. The S&P reached this level on December 4, 2006. At that time the aggressive contrarian trader would have cut back his stock market allocation to normal levels.
AGGRESSIVE CONTRARIAN TRADING IN EARLY 2007.
The next opportunity for the aggressive contrarian occurred during February-March 2007. The February 28, 2007, edition of the Chicago Tribune Chicago Tribune was headlined: "China Market Plunges, Dow Follows. Now What?" The headline was spread across the entire front page of the paper in bold lettering and was accompanied by a line chart that recorded the progress of the steep, 416-point drop in the Dow Industrials the previous day. It was subheadlined as the worst day since 9/11 (the date of the 2001 attack on New York"s World Trade Center). The stock market drop was also headlined that day by the was headlined: "China Market Plunges, Dow Follows. Now What?" The headline was spread across the entire front page of the paper in bold lettering and was accompanied by a line chart that recorded the progress of the steep, 416-point drop in the Dow Industrials the previous day. It was subheadlined as the worst day since 9/11 (the date of the 2001 attack on New York"s World Trade Center). The stock market drop was also headlined that day by the New York Times New York Times: "Slide on Wall St. Adds to Worries About Economy ... ... Fears of Recession Grow." This headline was not nearly so dramatic as the Fears of Recession Grow." This headline was not nearly so dramatic as the Tribune Tribune"s; it appeared only over the first column in normal headline type. It was, however, accompanied by a chart depicting drops in the world"s stock markets that spread across most of the top part of the front page.
Media interest in the stock market break fell off after February 27, but did not disappear entirely. The March 11 edition of the New York Times New York Times printed a "News a.n.a.lysis" by Gretchen Morgenson on page 1, above the fold and right next to that day"s headline story. The a.n.a.lysis was headlined: "Crisis Looms in Mortgages." It detailed the financial tribulations of mortgage lenders, in this case New Century Financial, which had specialized in the subprime segment of the mortgage market. On March 14, the day of the market low, the printed a "News a.n.a.lysis" by Gretchen Morgenson on page 1, above the fold and right next to that day"s headline story. The a.n.a.lysis was headlined: "Crisis Looms in Mortgages." It detailed the financial tribulations of mortgage lenders, in this case New Century Financial, which had specialized in the subprime segment of the mortgage market. On March 14, the day of the market low, the Wall Street Journal Wall Street Journal headlined: "Subprime Fears Spread, Sending Dow Down 1.97%." These two stories are among several in my diary a.s.sociating the February-March stock market drop with a subprime mortgage crisis. They ill.u.s.trate the fact that there is a cascadelike aspect to even very brief bearish stock market episodes. One news story feed inspires the next as journalists race to comment and explain the latest developments. headlined: "Subprime Fears Spread, Sending Dow Down 1.97%." These two stories are among several in my diary a.s.sociating the February-March stock market drop with a subprime mortgage crisis. They ill.u.s.trate the fact that there is a cascadelike aspect to even very brief bearish stock market episodes. One news story feed inspires the next as journalists race to comment and explain the latest developments.
Sometimes important contrarian clues are more ephemeral than the ones I have just mentioned. On February 27 and again on March 2 I noted in my media diary that Jay Leno had made the stock market drop part of his opening monologue on the Tonight Show Tonight Show. On February 27 he opened by observing that people didn"t have any money anymore because the stock market just dropped 500 points because the stock market just dropped 500 points (his emphasis). Even a comedian"s jokes can tell you something about the temper of the crowd! (his emphasis). Even a comedian"s jokes can tell you something about the temper of the crowd!
The 7 percent drop in the stock market averages that ended at the March 14 low lasted barely three weeks. It was mild and brief in any historical context. But much to my surprise at the time there were three weekly newsmagazine covers that either mentioned or focused on this stock market drop.
The first was the March 3, 2007, issue of the Economist Economist. Its cover was headlined "A Walk Down Wall Street." The semiotic interpretation of this cover was easy. First, it was in black and white, a depressing combination for any cover story. Second, it depicted the feet of a person walking a tightrope, a very dangerous, potentially deadly activity. Finally, the headline itself used the word down down. All in all, this was a cover with a clear bearish bias. However, I think that among all bearish cover stories I have seen this one was only mildly so.
The second cover mentioning the stock market was that of the March 12 issue of Time Time magazine. The cover itself was devoted to food, but in smaller green print against a white background at the top of the cover was the question "Is the Stock Market Getting Too Risky?" Here I note the use of the negative word magazine. The cover itself was devoted to food, but in smaller green print against a white background at the top of the cover was the question "Is the Stock Market Getting Too Risky?" Here I note the use of the negative word risky risky. This was evidence of something we already knew from newspaper headlines and from the Economist Economist"s cover a week earlier-the stock market drop had investors worried. Even so, the fact that Time Time magazine noted the drop on its cover was a modest bullish clue for the aggressive contrarian trader. magazine noted the drop on its cover was a modest bullish clue for the aggressive contrarian trader.
The March 12 issue of BusinessWeek BusinessWeek also had a stock market cover. But the cover had little emotional content, and it is the emotional content of a magazine cover that reveals information about and conveys information to investment crowds. This cover was headed "What the Market Is Telling Us." But you had to open the magazine to find the answer, making this particular cover insignificant from a contrarian trader"s perspective. also had a stock market cover. But the cover had little emotional content, and it is the emotional content of a magazine cover that reveals information about and conveys information to investment crowds. This cover was headed "What the Market Is Telling Us." But you had to open the magazine to find the answer, making this particular cover insignificant from a contrarian trader"s perspective.
An aggressive contrarian trader would have found a trading opportunity in these headlines and cover stories. The S&P had established a new high for the bull market at the 1,460 level on February 20. It is certainly true that a week is never enough time for an honest bearish crowd to develop via an information cascade, even amidst an ongoing bull market. But by mid-March, after a three-week, 7 percent decline, the situation had changed. A bearish information cascade was under way, although it was a relatively mild one. And the S&P had dropped enough to pique my interest in increasing my stock market allocation.
I noticed in my tabulation of reactions within the 2002-2007 bull market that the median drop during the bull market thus far had been about 100 S&P points and that the minimum duration of such drops was about three weeks. (Note that these numbers are specific to the 2002-2007 bull market and will be different in other contexts.) The S&P 500 had reached the 1,462 level intraday on February 22 and dropped to 1,389 on February 27. This was a 73-point drop in only five days. At the time I believed that while it was likely the market was close to its low, there was probably more to come on the downside. Indeed, the actual intraday low occurred on March 14 at 1,364, 18 days after and 98 points below the February 22 top. From the moving average perspective, the closest the S&P got to its 200-day moving average was at the March 13 low close of 1,378, where it was 2.16 percent above the moving average. At the same time it was below its 50-day moving average. I believed then that this combination of circ.u.mstances justified going to an above-average stock market allocation.
The aggressive contrarian who a.s.sumed an above-average stock market allocation in March 2007 would expect to reduce this allocation to normal levels after a 15 percent advance from the closing low of the reaction. In this case that level was 1,584 and was never reached before a new bear market began. Had the aggressive contrarian chosen to adopt the 1,364 intraday low intraday low as the starting point for his measurement, he would have reverted to a normal stock market allocation on October 11 when the S&P reached an intraday high of 1,576. But let"s suppose he decided to act only on closing prices instead. What might the aggressive contrarian have done then? as the starting point for his measurement, he would have reverted to a normal stock market allocation on October 11 when the S&P reached an intraday high of 1,576. But let"s suppose he decided to act only on closing prices instead. What might the aggressive contrarian have done then?
Of course the simplest thing to do would be to follow the strategy described in Chapter 11 exactly. Thus the aggressive contrarian would resolve to cut his stock market allocation to normal after a 15 percent advance on the low reaction close or to below normal if the S&P should drop 5 percent below its 200-day moving average. In the event, it was the latter condition that first obtained, and the aggressive contrarian would have reduced his stock market exposure to below-normal levels on November 26, 2007, when the S&P closed at 1,407, more than 5 percent below its 200-day moving average.
A more sophisticated approach to this kind of situation would rely on bull market tabulations. In this case, by mid-2007 the bull market had lasted nearly five years and had not seen any reaction of as much as 10 percent. This was an extraordinary run of positive returns, one that was unlikely to last much longer. I think in view of these circ.u.mstances it would have been perfectly logical for the aggressive contrarian to adopt a more conservative profit-taking tactic and to reduce stock market exposure to normal levels as soon as the S&P rallied only 10 percent or so (instead of waiting for a full 15 percent) to a new high for the 2002-2007 bull market. This event occurred on May 15, 2007, with the S&P at 1,514.
Before leaving the events of February-March 2007 I want to mention another aspect of this bearish information cascade that impressed me. I was surprised to find three stock market covers generated by a relatively modest drop in stock prices. Normally one needs a much more long-lasting and extensive decline before newsweeklies put it on their covers. I interpreted this as further evidence that there was no significant bullish stock market crowd in existence at the time. Not only was there no bullish theme evident, but there was a decided media tendency to print bearish stories at the drop of a hat. People were willing to express pessimism and negative emotions on the slightest market pretext. This reaffirmed my view at the time that there was no bullish stock market information cascade in operation.
JULY-OCTOBER 2007.
On July 17, 2007, the S&P closed at 1,553. It was about to drop some 10 percent during the subsequent month, a bigger short-term downswing than any during the preceding four years. This decline presented the aggressive contrarian trader with another opportunity similar to the one he exploited in March.
The progression of page 1 stories during this July-August decline is instructive. The New York Times New York Times printed stock market stories on page 1 at the top left on both July 27 and July 28. Both noted the stock market drop, which by then had lasted for about 10 days and dropped the averages about 4.5 percent, not enough to attract the interest of an aggressive contrarian. The drop was explained by the reemergence of credit market fears. printed stock market stories on page 1 at the top left on both July 27 and July 28. Both noted the stock market drop, which by then had lasted for about 10 days and dropped the averages about 4.5 percent, not enough to attract the interest of an aggressive contrarian. The drop was explained by the reemergence of credit market fears.
The first headline story appeared in the August 4 edition of the New York Times New York Times. The headline read: "Markets Tumble As Lender Woes Keep Mounting." As headline stories go this was a mild one. The language used was conservative-the markets "tumbled"; they didn"t "plunge" or "crash." The print size was normal, and the headline appeared over only a single column.
The previous day (Friday) the S&P closed at 1,433, about 8 percent below its high close. The decline had lasted 16 days, still shy of the three-week tabulation standard and even shy of the duration of the February- March 2007 break. Still, the S&P was trading about 1 percent below its 200-day moving average and below its 50-day moving average at the time. I think an aggressive contrarian trader would be justified in increasing his stock market allocation at this juncture, and this could have been done early Monday morning at a level close to Friday"s close.
The drop in stock prices from the July top ended on August 16 at the S&P"s 1,371 level. There was one more headline story before the low, this one in the August 10 issue of the New York Times New York Times. The headline read: "Mortgage Losses Echo in Europe and on Wall St." The previous day the S&P closed at 1,453, a level above that which preceded the August 4 headline. So the aggressive contrarian trader would have gained nothing by waiting past August 6 to increase his stock market allocation.
The end of this drop in stock prices on August 16 can clearly be a.s.sociated with a crystallizing event that had occurred a few days earlier. This was a ma.s.sive credit market intervention by the Federal Reserve and other central banks that took place on August 10 and was recorded in newspaper headlines on Sat.u.r.day, August 11. That day the New York Times New York Times headlined: "Central Banks Intervene to Calm Volatile Markets." This headline was spread over two columns, as opposed to the single column occupied by the August 4 and August 10 headlines, thus showing more emotional intensity. This event was also headlined by the headlined: "Central Banks Intervene to Calm Volatile Markets." This headline was spread over two columns, as opposed to the single column occupied by the August 4 and August 10 headlines, thus showing more emotional intensity. This event was also headlined by the Chicago Tribune Chicago Tribune that day with "Jittery Markets Look to the Fed" in bold letters, spread across the top of page 1 and accompanied by a photograph of a worried trader at the New York Stock Exchange. that day with "Jittery Markets Look to the Fed" in bold letters, spread across the top of page 1 and accompanied by a photograph of a worried trader at the New York Stock Exchange.
The July-August stock market drop also prompted some magazine cover stories, but, like those a.s.sociated with the February-March decline, these appeared only in business-focused magazines, not those of general interest like Time Time or or Newsweek Newsweek. The August 13 issue of Barron"s Barron"s had a cover announcing "Market Turmoil" in bold red letters against a black background. From a semiotic point of view I note that red and black are colors a.s.sociated with fear and danger. The August 18 issue of the had a cover announcing "Market Turmoil" in bold red letters against a black background. From a semiotic point of view I note that red and black are colors a.s.sociated with fear and danger. The August 18 issue of the Economist Economist showed a cartoon of an investor surfing shark-infested waters and about to suffer a surfer"s wipeout (note the double meaning). The headline read "Surviving the Markets." Finally, the September 3 issue of showed a cartoon of an investor surfing shark-infested waters and about to suffer a surfer"s wipeout (note the double meaning). The headline read "Surviving the Markets." Finally, the September 3 issue of Fortune Fortune (which would have been in subscribers" hands around August 24) sported a black cover that shouted "Market Shock 2007" in bold red and white lettering. Compared to the March 2007 magazine covers I discussed earlier, these covers conveyed somewhat stronger bearish sentiment. This would have further reinforced the aggressive contrarian trader"s choice to increase his stock market exposure earlier in August. (which would have been in subscribers" hands around August 24) sported a black cover that shouted "Market Shock 2007" in bold red and white lettering. Compared to the March 2007 magazine covers I discussed earlier, these covers conveyed somewhat stronger bearish sentiment. This would have further reinforced the aggressive contrarian trader"s choice to increase his stock market exposure earlier in August.
After a.s.suming an above-normal allocation to the stock market in August, the aggressive contrarian would probably have reduced his exposure to normal levels on a 10 percent advance from the closing low at 1,406 on August 15. This occurred on October 1 when the S&P closed at 1,547. The S&P reached its high close for the 2002-2007 bull market on October 9 at the 1,565 level. The curtain was about to rise on the panic of 2008.