Tuesday, September 18, 2001

Chaos, Fractals, and Complexity

Ten years ago I was spending the days studying geologic information and the late evenings analyzing stock charts. One day it occurred to me that well logs and sea level curves had similar patterns. It later became obvious to me that the patterns on the geologic information resembled the patterns on stock charts. What did these things have in common? Nothing that I've ever determined except "sameness in form". This made me curious.

In 1987, James Gleick published a book called Chaos. This book brought knowledge of a new science to the masses. An excerpt.....
"Where chaos begins, classical science stops. For as long as the world has had physicists inquiring into the laws of nature, it has suffered a special ignorance about disorder in the atmosphere, in the turbulent sea, in the fluctuations of wildlife populations, in the oscillations of the heart and the brain. The irregular side of nature, the discontinuous and erratic side---these have been puzzles to science, or worse, monstrosities. But in the 1970s a few scientists in the United States and Europe began to find a way through disorder. They were mathematicians, physicists, biologists, chemists, all seeking connections between different kinds of irregularity."

Chaos theory and complexity are being studied in every imaginable field integrating science and mathematics.

In 1988, I attended a seminar on chaos theory. From that point on, I was forever curious about the relationship between "things" and mathematical algorithms. The most interesting to me has been the "s-curve" or logistic equation. We've all seen S-curves representing many things. Its first breakthrough was in studying population growth in various species.

This pattern seemed to appear constantly in stock charts.... especially on "moving averages".

Fractals are similar patterns that repeat in a variety of scales. Fractals appear naturally
in living and non-living things. Heartbeats create fractal patterns...snowflakes, clouds,
and the stock market.

This self-study of chaos and complexity has led me through over thirty books on the subject. I can't say I understand more than 10% of it, but it continues to be fascinating.

Spirals and Fibs

Last year I read a book called, The Spiral Calendar by Christopher Carolan.

I don't remember how I heard about the book, but on the initial look, it appeared "way out
there". Basically, the premise is that many things on the earth, including events, are aligned with the lunar cycles. Yes, we know that the tides are controlled by that and the fish are aligned with it, but that's about all we are buying. Well this book took the concept a little farther. In 1987, the author was a bond trader on the Pacific Exchange. He became fascinated with the stock market and through his research became curious about the similarities between the 1929 and 1987 market crashes. His initial research concluded that there were four similarities:
-Both had a small correction that ended in late spring
-Sharp rallies in both markets peaked in late summer
-Both markets attempted rallies in the early fall
-Both crashes occurred in October

His research led him to the lunar calendar. Here are some excerpts....
"The calendar that we use is the Gregorian calendar. It is an improve version of the Julian calendar named for Julius Caesar. Our calendar, with its Roman origin, does a very good job of keeping time. The time it keeps is solar time, the rotation of the earth around the sun once every 365.25 days. The Jewish calendar is a lunar calendar, which is
still in use to mark religious holy days. One of the holy days, Yom Kippur, fell exactly on the third point of the four market similarities in 1987, the fall market top. There is an old stock market adage,' buy on Rosh Hashanah, sell them on Yom Kippur'. Selling stocks on Yom Kippur in 1987 was a good thing to do. My desire to know when Yom Kippur fell in 1929 was the original impetus for my calendar investigations. With this calendar, I realigned the comparison of 1929 and 1987 stock charts. Four points are very similar. The crash of 1987 occurred on the same lunar date as the crash of 1929! The other three points each fall one day later on the lunar calendar than their 1929 counterparts. Within one day, the 1929 autumnal market top occurred on the Jewish holy day of Yom Kippur. Could this be a coincidence? Now seen in lunar terms, the likeness is an empirical fact. Where there was similarity, there is now sameness. What appeared as a resemblance is revealed to be a replication. It was 1988 when I made the discovery of the lunar connection between the crashes. I understood immediately that this was an important advance in the understanding of both markets and man. However, it does not provide a method for forecasting market behavior by itself. It was a clue to the market's mechanism, and it points the direction I should look to for additional discoveries. It is not a new idea that the position of the moon and sun in the sky has influence on the behavior of man. Each event in 1987 occurred approximately 717 moons form the analogous point in 1929. I felt that if there were a larger pattern to be found, this number should turn out to be significant. My first inclination was to check if it was a Fibonacci number. My experience with Fibonacci numbers came through the work of R.N.Elliott and Robert Prechter and their analysis of the stock market."
"Yet 717 is not a Fibonacci number. I wondered if 717 might be some permutation of a Fibonacci number, maybe a multiple or a square root. With calculator and pencil in hand, I proceeded through the sequence of Fibonacci numbers. When I entered the 29th Fibonacci number, 514,229 into the calculator and pressed the square root button...there was 717.0976. My first thought then is still very close in my memory: the world is a very beautiful place. Market panics have long been considered a mystery. The Spiral Calendar lifts the veil of mystery from the bouts of sudden fear that periodically sweep the market. This is a dramatic and convincing demonstration of the Spiral Calendar's role as the time piece and primary regulator of social human nature.”

“Yom Kippur is the ‘day of atonement’, when Jews are to atone with fasting for their past mistakes before God. The ancient myth associated with Yom Kippur is that a person’s behavior during the period between Rosh Hashanah and Yom Kippur will form the basis of a judgment by God which will determine his fate for the coming year. In 1987 and 1929, anyone who shorted stocks during those ten days was judged as successful by the market in the following weeks and, likewise, anyone who bought stocks during those ten days were quickly judged as damned.”

“These are threads that connect the knowledge and actions of the ancients and come down to our time as ritual and custom. In this so called age of science, we too readily dismiss much of our inherited culture. We do not have a reasoning power or brain capacity greater than that of those who live three or five thousand years ago. In the case of the Mesopotamians, we have not begun to equal the tradition of observation of nature over time that they accomplished.”

“In fact ultimately, when viewed as a societal whole, human actions assume the shape, structures and fractal patterns found elsewhere throughout nature.”

…..end of excerpt……

So what does all this “mumbo jumbo” mean????? Hell, I don’t know. All I know is this:
· Today the Dow Jones Industrial Average suffered its worst point loss in history
· Tomorrow, September 18, is Rosh Hoshanah, and
· September 27 is Yom Kippur

What any of this means, I have no idea, but it sure keeps me up at night!!!!

Sunday, September 16, 2001

Airlines at The Crest of The Tidal Wave

Saturday afternoon I happen to catch the Continental Airlines CEO's press conference where he announced major cuts and incredible "doom and gloom" for the airlines industry.

This event forced me back to my information source, "At The Crest Of The Tidal Wave" by Robert Prechter, because I remembered some interesting comments on the transportation

...some more "brain candy"....

Saturday September 15, 11:19 am Eastern Time
Press Release
SOURCE: Continental Airlines
Continental Airlines Announces Long-Term Schedule Reduction And Furlough of 12,000 employees
HOUSTON, Sept. 15 /PRNewswire/ -- Continental Airlines (NYSE: CAL - news)
Continental Airlines announced today that it will immediately reduce its long-term flight schedule by approximately 20 percent on a systemwide available seat mile basis, and will be forced to furlough approximately 12,000 employees in connection with this reduction. "The U.S. airline industry is in an unprecedented financial crisis. We call on the President and members of Congress to take immediate action to restore the stability of this vital industry, on which our nation's economy heavily depends,'' said Gordon Bethune, Continental chairman and chief executive officer. "Our industry needs immediate Congressional action if the nation's air transportation system is to survive.'' Prior to the terrorist attacks and this announcement, Continental Airlines and its subsidiaries flew over 2,500 flights a day. The airline, which currently employs more than 56,000 people, has been the industry leader with superior operational performance, 26 straight profitable quarters, numerous national and international customer service awards, and repeated designation as one of the 100 Best Companies to Work For in America.

"At The Crest of The Tidal Wave"....published in 1995
"The airlines issue credits to reward people who fly, order flowers, take a language course, stay in certain hotels, rent cars, call long distance, or even invest in a mutual fund. This frezied purchase of customer goodwill has been paid for with future obligation, so it is simply debt, a huge debt. Already, nonpaying flyers account for 7% of the seats filled on the average flight by major carriers. When the depression arrives, that percentage will soar. The industry's debt
to its best customers is now huge, and its ability to pay it is negligible. The problem is just beginning to show up in airline's policies of further restricting the time and seats available for certificate redemption. This is only the hint of the default that is coming. Any renewed contraction in the economy will devestate the transportation industry. If you have accumulated
any frequent flyer miles, you should use them up as fast as you can."

"Only a true understanding of the nature of people's behavior as it relates to markets will allow you to reason through emotionally charged situations and deal with them properly"

"Even at this early date, we might speculate on just a few developments that appear likely. For instance, I would be inclined to expect that the Middle East and Latin America will destabilize;....wars will erupt in Asia and the Middle East....foreigners will commit terrorist acts on U.S. soil"

"So what is the right course of action? The Elliott Wave Theorist cautioned in early 1986,'Once the craze really takes hold, just be aware of what is going on, and make sure you are not caught up in the amorphous feelings of confidence, complacency and love at the ultimate top.' The reader of this book faces a difficult task, one that will put him in such an extreme minority
that he will feel isolated and unsupported. By selling all of your stocks, you will take the maverick road, and you will take it alone. I have no doubt that by the time this bull market is ending, our call for a huge crash and depression will be laughed off the street. Do not lose your perspective when the time comes. It will take great courage to make money during this bull market. However, it will take greater courage to get out near the top, because that's when the world will call you a damn fool for selling."

It forces the analyst to look at the big picture. A proper long term perspective elevates the wave analyst above the cacophony of daily news. It provides the opportunity to make sense of the great trend changes in markets and dramatic social events that accompany them."

"If you can keep your head when all about you are losing theirs...Yours is the Earth and everything that's in it" Rudyard Kipling

"Collective man will enjoy the same successes and repeat the same mistakes over and over, with minor differences in specifics, throughout eternity, although each time from a higher level of advancement. Mistakes are repeated not because people fail to learn from history, as many contend, but precisely because they do learn from history, from recent history, their own experience."

A must read......

Thursday, September 13, 2001

Capitulation - Worden Brothers Perspective

interesting comparison.........

The Worden Report

The staff of Worden Brothers, Inc. laments the violence we witnessed this week and extends its condolences to all who lost loved ones or family members.

It is a sad way for it to happen, but the calamity we have experienced this week may well provide the psychological capitulation so many investors were waiting for. It has not been unusual for calamitous events to occur into declining markets. When they have happened, they have generally marked the bottom or the low occurs very soon after. The Cuban Missile Crisis and the assassination of John Kennedy are good examples. In both cases, the national psyche was held in thrall, as it is now.
(A zoom-three daily chart running from late April of '62 to early March of '63 shows the entire bottoming of the 1962 crash.)
The 1962 crash hit its first capitulation-type bottom in June. The subsequent rally peaked in late August. The market then began to sink toward a possible test of the June low (not dissimilar to the decline that began in May of this year). On October first, an intermediate rally within the intermediate downtrend began. Simultaneously, the U.S. became suspicious that medium range ballistic missiles were being deployed in Cuba.
On October 14, a Strategic Air Command mission obtained photographs that were the first hard evidence of MRBM sites in Cuba. On October 16, the minor stock market rally hit its peak.
On October 15, more evidence in was analyzed. Key Washington officials were briefed about the discovery. Troop and equipment deployments were aimed at increasing military readiness for a strike on Cuba.
On October 16, President Kennedy is informed of the MRBM sites early in the morning. He immediately named 14 advisers he wanted present at a meeting later in the morning. The group became known as the “ExComm.” This is the beginning of the Missile Crisis. The next five market days will be down and accelerating. Options discussed were 1) a surgical air strike; 2) an attack a various Cuban facilities; 3) an invasion of Cuba 4) a blockade of Cuba. In the second “ExComm” meeting that day, it was reported that the missiles could be fully operational within two weeks.
On October 17, intermediate Range Ballistic Missiles with 2200-mile ranges were discovered in Cuba, which would become operational in December or later.
On October 18, hours and hours of discussions and intense debate on whether a surgical strike or a blockade was appropriate. President Kennedy met with Andrei Gromyko, who argued that the Soviet Union was only interested in helping Cuba with its defensive capabilities.
October 20, the Washington Bureau Chief of the NY Times phones and asked key officials why there is such a flurry of activity in Washington. He was told but asked to withhold the story in the interests of national security.
October 21, leaks to the press were surfacing. Kennedy managed to suppress most of the stories.
October 22, SAC initiated a massive alert of the B-52 nuclear bomber force. B-52s were kept in the air continually, with a bomber taking off each time one landed. President Kennedy addressed the nation warning of a strict quarantine of offensive military equipment and warning the Soviet Union that any missile launched by Cuba against any nation would be regarded as an attack by the USSR on the United States, requiring a full retaliatory response.
October 23, Fidel Castro announced a combat alarm. Cuban forces were placed on high alert. It is generally believed that Soviet ships will defy the blockade. Moscow placed armed forces of Warsaw pact countries on high alert. The stock market declined over 10 points (equal to approximately 200 points today).
October 24, Soviet ships en route to Cuba capable of carrying military Cargos reversed their courses and returned to the Soviet Union. The stock market advanced 18.70. Thereafter, it advanced continually for three years.
President John Kennedy was assassinated on Friday, November 22, 1963. The market was shut down early, but not before it had declined 21.20 to 711.50 (equivalent to about 300 points today.) Unless you lived through it as an adult, it is difficult to appreciate the feeling of depression that descended upon the country. Much like what is being experienced in the current disaster.
At the time of the assassination, the market had been going down for about a month. On that fateful Friday it seemed to collapse. It was a weekend of national mourning and a funeral that was highly personal to American citizens, with little John-John wrenching hearts with his immortal salute as the casket passed by. The market stayed closed on Monday. It opened Tuesday and advanced 32 points. It continued to advance for over two years.