The Art of Contrarian Trading Part 6

Along the same lines, one can keep track of new book t.i.tles that appear on the subject of investing and related financial matters. At least three books predicting Dow levels ranging from 30,000 to 100,000 were published right at the top of the 1994-2000 stock market bubble, and this was a definitive indication of a mature bull market crowd. (The top of the Dow in 2000 was 11,750, and the top in 2007 was 14,164.) I suspect a similar phenomenon is occurring as I write this in the fall of 2008. A number of books have recently been published or are forthcoming that discuss the subprime meltdown in the financial markets over the past year. I think this means that a powerful bearish stock market crowd has developed. If so, this is a tremendous buying opportunity in the U.S. stock market.

Another interesting sign is a very subtle one, but nonetheless it is of great importance. An information cascade attracts new members to a market crowd by offering a rationale or logical explanation for past and future market performance. The cascade here is acting in a persuasive role, encouraging investors to accept the crowd's interpretation of events instead of their own. But a point is eventually reached in the life of every crowd when these rationales become premises instead of explanations. The time for logical argument has pa.s.sed. In other words, what was once offered as an explanation for a rising market, say, at some point becomes accepted as a fact, not a theory. As such it no longer needs justification or supporting argument. At this juncture the crowd's beliefs have become the axioms upon which all of its discussion and actions are based. The crowd here achieves its mental and emotional unity. Its disintegration lies not far ahead.

It is possible to detect this transition by observing carefully the balance that media content maintains between an effort to justify the crowd's beliefs and the best way to take advantage of the beliefs' investment implications. In the late stages of a crowd's life cycle, virtually all of the content will be devoted to methods for exploiting the market's projected movements, not to explanations of why these movements should occur at all.

CHAPTER 11.

The Grand Strategy of Contrarian Trading Becoming a contrarian trader * * learn by doing learn by doing * * start small start small * * a word to young readers a word to young readers * * put yourself in the line of fire put yourself in the line of fire * * my experience as a postcard trader my experience as a postcard trader * * investment vehicles for contrarian trading investment vehicles for contrarian trading * * the advent of the exchange-traded fund (ETF) the advent of the exchange-traded fund (ETF) * * investment goals investment goals * * no need to be perfect no need to be perfect * * an example from the boom and bust 1990-2002 an example from the boom and bust 1990-2002 * * tax issues tax issues * * CTS CTS # #1: don't speculate * * why this is really a contrarian strategy why this is really a contrarian strategy * * CTS CTS # #2: avoid big mistakes * * inoculate yourself against crowd contagion inoculate yourself against crowd contagion * * CTS CTS # #3: Contrarian Rebalancing * * underweight when a bullish crowd develops underweight when a bullish crowd develops * * overweight when a bearish crowd develops overweight when a bearish crowd develops * * an example an example * * best strategy to follow for the typical aspiring contrarian trader best strategy to follow for the typical aspiring contrarian trader * * suggestions for more aggressive contrarian trading strategies suggestions for more aggressive contrarian trading strategies * * an aggressive stock market strategy an aggressive stock market strategy * * look at bonds, commodities, stock market sectors, and individual stocks look at bonds, commodities, stock market sectors, and individual stocks * * it's harder to track the crowd in such situations it's harder to track the crowd in such situations * * the bandwagon strategy the bandwagon strategy * * the danger of trying the short side of a market the danger of trying the short side of a market * * the odds favor the stock market bulls in the long run the odds favor the stock market bulls in the long run CONTRARIAN INVESTMENT PLANNING.

In this chapter I want to show you how to take the ideas we have developed in the preceding 10 chapters and incorporate them into a contrarian investment plan.

Every contrarian trader begins as a novice. As a novice, the best approach is to start your media diary and to spend time constructing market tabulations of the sort I explained in Chapter 6. You should also think about the types of investment strategies I describe in this chapter and choose one that suits the time you can devote to your investments. I have found that learning by doing is the most effective way to acquire the skills of a successful trader or investor. Making decisions when there is real money at stake is the essence of the experience and the only way to find out whether your emotional makeup is suitable to the contrarian approach to markets.

With this in mind, I suggest that you begin your learning-by-doing phase by starting small. Devote only a small part of your investment portfolio to a single contrarian trading strategy. After a two- or three-year testing period, compare your contrarian trading results to your other investment results. If the contrarian results are visibly superior, earmark more of your portfolio to your contrarian trading strategy.

A word to my younger readers: At this moment you may have little or no savings that can be devoted to investments of any kind, let alone to contrarian trading. But there is still a learning by doing opportunity for you to develop your contrarian trading skills. In addition to your media diary, keep a notebook in which to record specific buy and sell decisions without making actual trades. This is called paper paper trading or investing. trading or investing.

It is even better if you have a friend to whom you can e-mail your investment decisions in real time, just as you would buy or sell in an electronic market. Ask your friend to keep a file of your e-mail "orders." This is the closest you can come to the actual experience of risking real money on your decisions, and it is far better than paper trading, where only you know if you have cheated.

When I was starting out as a contrarian trader in college, I mailed a postcard every few weeks to a very experienced and successful money manager who happened to be a family friend. On this postcard I would give buying and selling instructions based on the market average. The experiment lasted only a year, but it was an invaluable experience. Something was at stake: my own credibility and pride, something as valuable to me as money (of which at the time I had none!). Because I had something at risk when I made my decisions and mailed the postcards, I experienced something very similar to risking real money against an uncertain prospect. If you can do this, even if no actual money is at stake, you will acquire a treasure trove of experience in interpreting your market diary and identifying potential market mistakes. You will also learn a lot about your suitability for contrarian trading. Later, when you have saved enough to begin an investment program, your skills and experience as a contrarian trader will have been developed to the point where they will make a visible, positive contribution to your investment results. So don't pa.s.s up this opportunity to build your investment skills now. Prepare them for use when you have money to invest!

CONTRARIAN TRADER'S INVESTMENT PORTFOLIO What kind of a.s.sets are suitable vehicles for a contrarian trader's investment plan? The key thing to remember is that his princ.i.p.al tool is his media diary. It follows that the contrarian trader should focus on markets that receive the frequent attention of the print and electronic media. This means that a typical contrarian trader will focus princ.i.p.ally on stock market and bond market investments.

But opportunities in other markets sometimes arise. Occasionally there will be a lot of media attention on the currency markets, particularly on the U.S. dollar. Sometimes agricultural commodities make it to the front pages of newspapers and the covers of general interest magazines. Over the past three or four years the crude oil market has attracted world-wide attention. During the same period precious metals like gold and silver have experienced information cascades that have built big investment crowds in these markets. In my opinion, these currency and commodity market opportunities are generally best left to the very experienced contrarian trader. These markets usually move very quickly, and investments in them are typically highly leveraged. Not only can they be dangerous, but contrarian trading opportunities in these markets arise only sporadically. The typical contrarian trader's attention is best focused on stocks and bonds, the biggest markets in the United States.

Financial innovations over the past 20 years have been a boon to the contrarian trader. Up until the 1970s the only way to take advantage of contrarian trading opportunities in the stock or bond market averages was to buy a portfolio of individual stock or bonds. Not only did this involve high transaction costs, but it made it difficult for an investor of average means to construct a portfolio that was sufficiently diversified to reliably track the market averages. Mutual funds were generally not appropriate for this purpose because of their high management fees coupled with so-called load charges. These expenses made them unsuitable for anything other than the buy-and-hold investment strategy.

In recent years this financial landscape has been completely transformed, to the delight of the contrarian trader and of the average investor as well. Indexed mutual funds whose sole objective is to replicate the performance of the stock or bond market averages have grown popular. They are available to the investing public at low cost in terms of their management and transaction fees.

Of even greater importance to the contrarian trader has been the emergence of exchange-traded funds (ETFs). It is my view that these are ideal vehicles for contrarian trading. An ETF is an investment trust whose shares are listed for trading on an organized stock exchange like the American Stock Exchange and the New York Stock Exchange. The trust holds a portfolio of shares designed to track some specific market average and stands ready to exchange the shares in the trust for portfolios of individual stocks that make up that average. This exchange provision means that arbitrage between the ETF shares and the market portfolio it tracks is possible and will keep the price of the ETF shares in proper alignment with its chosen market average.

By far the most actively traded ETF at this writing is the S&P 500 "Spider" ETF, so-called because it tracks Standard & Poor's Depositary Receipts (SPDRs); its ticker symbol is SPY. There are other actively traded ETFs that track other U.S. market averages, as well as some that track sub-sectors of the U.S. stock market such as the financial sector, energy sector, or precious metals. There are also ETFs that track various sectors of the bond market. An even bigger innovation has been the development of inverse ETFs, which rise in price when a specific market average falls and vice versa. However, I urge you to be cautious when buying inverse ETF's in the hopes of taking advantage of a fall in some market. Because of the way inverse portfolios are constructed and managed, inverse ETF's may fail to move inversely to their index exactly. Worse, in extreme circ.u.mstances they may even wind up moving in the same direction as the index instead of inversely to it!

THE INVESTMENT GOAL OF THE CONTRARIAN TRADER.

The contrarian trader's goal is to beat the market. But what does this mean in practical terms? For most people, beating the market means outperforming the buy-and-hold investment policy. (If you are an expert in portfolio a.n.a.lysis, you will probably want to qualify this last statement by adjusting for portfolio risk.) I want to emphasize that one need not sell near the exact top of a bull market or buy near the exact bottom of a bear market to beat the buy-and-hold strategy. You need only do your buying and selling in the general vicinity of these tops and bottoms. Here is an example that ill.u.s.trates this point.

Let's imagine a hypothetical contrarian trader whose noncash investments are all in an S&P 500 index fund. During the first part of the 1990s let's suppose he was fully invested. The stock market showed no real evidence of a bullish investment crowd until 1996 at the earliest. Imagine that, for whatever reason, this contrarian trader concluded in 1997 that there was a mature bullish stock market crowd that was about to disintegrate. He therefore sold his entire portfolio at an average of 950 in the S&P. I should say that a contrarian trader who followed the Contrarian Rebalancing strategy described later in the chapter would not have sold until early 2001, and then near the S&P 1,250 level. Here I want to ill.u.s.trate the experience of a trader with only average or below-average skills.

At what level in the S&P might this trader have restored his original long position? I think there was a very good contrarian buy opportunity in the S&P 1,000 to 1,050 range in October 1998. But let's suppose our hypothetical trader pa.s.sed this opportunity up for some reason. (Again, an experienced contrarian trader would have seized the 1998 buying opportunity with both hands.) Instead, let's suppose that this trader waited until he saw the July 2002 Time Time magazine cover (which I discussed in the preceding chapter) before deciding to reinvest his portfolio in the stock market. Let's suppose furthermore that he did this at an average of 900. (In fact, my wife, a complete novice, did this at the 820 level at that time.) magazine cover (which I discussed in the preceding chapter) before deciding to reinvest his portfolio in the stock market. Let's suppose furthermore that he did this at an average of 900. (In fact, my wife, a complete novice, did this at the 820 level at that time.) The net result of our hypothetical trader's decisions was a sale in 1997 at 950 and a purchase in 2002 at 900. Now, the yield on money market instruments exceeded the yield on the S&P by an average of 250 basis points per year during this five-year period. (A basis point is one one-hundredth of a percentage point, so 250 basis points is 2.50 percent.) So a tax-deferred portfolio sold at 950 in 1997 and then invested in a money market fund until 2002 would have grown to a value equivalent to the 1,074 level in the S&P and in 2002 would have been reinvested at the 900 level. This represents a gain of 19 percent relative to the buy-and-hold strategy during that time, or about 350 basis points per year. Moreover, this was achieved by taking no market risk during those five years. In contrast, the buy-and-hold strategy during those five years was fully invested throughout a bubble of historical proportions and its ensuing collapse. I should point out that any professional money manager who beats the buy-and-hold strategy by 300 basis points per year is a hero on Wall Street.

In my opinion our hypothetical contrarian trader exhibited only average or even below-average skills over the 1990-2002 time frame. Yet he did visibly better than the market during the dangerous and very difficult bear market period of 2000-2002 and over the entire 13 year period as well. He did not sell anywhere near an important top. His buying was more skillfully done, but still was nothing to brag about.

This example ill.u.s.trates that to achieve market-beating results it is not necessary to be anywhere near perfection in the timing of your buy and sell activity. The main thing is to have enough portfolio liquidity available to take advantage of bearish market crowds when they form. They are much easier to identify than bullish crowds and are usually very near to disintegration once they can be identified.

A WARNING ABOUT CAPITAL GAINS TAXES.

The active contrarian strategies described in this chapter will subject the investor to capital gains taxes when employed in a taxable investment account. These taxes may affect the contrarian trader's performance relative to the baseline buy-and-hold strategy. This issue demands careful consideration before one adopts a contrarian trading strategy in a taxable account. In fact, for this reason only expert contrarians should use such strategies in a taxable account. Generally, contrarian trading strategies are more suited for use in tax-deferred retirement accounts.

CONTRARIAN TRADING STRATEGY #1: DON'T SPECULATE You may have found the first few chapters of this book so persuasive that you have decided that contrarian trading is not for you. If so, you have already achieved more than many aspiring investors do in a lifetime. Congratulations on your self-knowledge! It will save you from many personally and financially painful experiences in the world of investing.

Contrarian Trading Strategy #1 (or CTS #1 for short) is: Don't speculate. Don't speculate. Instead choose an allocation for your investment portfolio among indexed mutual funds or ETFs that mirror the stock market averages, the bond market, and money market instruments. A simple example would be a 60-30-10 allocation among Spiders, a bond market index fund, and a money market fund. Each year, at the same time of year, take a look at your portfolio to see if market movements during the past year have changed your portfolio's allocation away from its desired 60-30-10 allocation. Then do whatever buying or selling is necessary to bring your portfolio back to 60-30-10. If you do this systematically, year after year, your investment results will be better than those of the typical professional money manager! Instead choose an allocation for your investment portfolio among indexed mutual funds or ETFs that mirror the stock market averages, the bond market, and money market instruments. A simple example would be a 60-30-10 allocation among Spiders, a bond market index fund, and a money market fund. Each year, at the same time of year, take a look at your portfolio to see if market movements during the past year have changed your portfolio's allocation away from its desired 60-30-10 allocation. Then do whatever buying or selling is necessary to bring your portfolio back to 60-30-10. If you do this systematically, year after year, your investment results will be better than those of the typical professional money manager!

You may wonder why I call this a contrarian trading strategy. Trading Trading it certainly is not. But it is a it certainly is not. But it is a contrarian contrarian strategy in the truest sense of the word. How many investors do you know who follow it? Not many, I'm sure. Why? Because to follow it you first must recognize that you do strategy in the truest sense of the word. How many investors do you know who follow it? Not many, I'm sure. Why? Because to follow it you first must recognize that you do not not have a speculator's edge over other investors. Good for you! Now you can spend more time with your family, pursue your other interests, and not be bothered at all by the ups and downs in market prices and public psychology. have a speculator's edge over other investors. Good for you! Now you can spend more time with your family, pursue your other interests, and not be bothered at all by the ups and downs in market prices and public psychology.

CONTRARIAN TRADING STRATEGY #2: DON'T INVEST WITH THE CROWD This is a somewhat more active approach than CTS #1 but is still in the spirit of winning by avoiding mistakes. It is an essentially defensive strategy. Contrarian Trading Strategy #2 is: Don't invest with the crowd. Don't invest with the crowd. If you can avoid becoming part of big investment crowds you will also avoid the financial losses attendant to a crowd's disintegration and collapse. Not only this; you will also avoid the foolish decisions investors caught in such collapses often make that compound their mistakes (like keeping their money in money market funds thereafter, or throwing good money after bad). If you can avoid becoming part of big investment crowds you will also avoid the financial losses attendant to a crowd's disintegration and collapse. Not only this; you will also avoid the foolish decisions investors caught in such collapses often make that compound their mistakes (like keeping their money in money market funds thereafter, or throwing good money after bad).

In this contrarian trading strategy, your media diary acts as an inoculation against the information cascades that build investment crowds. You will know that a cascade is under way and see that the market is in the process of making a valuation error. Armed with this knowledge, you will not be tempted to increase you portfolio allocation to the crowd's investment theme, especially when the siren song of the crowd is strongest. In this way you can avoid big losses in your portfolio when the crowd inevitably disintegrates. At the same time you pursue whatever investment strategy you prefer, even if it is not an explicitly contrarian one. To be a winner in the game of investment, it is essential to avoid big mistakes. Follow CTS #2 and you will achieve that goal.

CONTRARIAN TRADING STRATEGY #3: CONTRARIAN REBALANCING.

The strategy of Contrarian Rebalancing Contrarian Rebalancing aims to sidestep the market collapses that attend the disintegration of bullish investment crowds. It also tries to be overweighted in a market that is undervalued and in the grips of a bearish crowd. This is the strategy I think most aspiring contrarian traders should use. I think of it as a very conservative strategy, and I discuss more aggressive contrarian trading strategies later in this chapter. I think that this strategy works best when the contrarian trader has chosen to limit his investment universe to ETFs or indexed mutual funds that mirror the stock and bond market averages. So let's suppose he adopts a baseline (normal) allocation of 60 percent stocks, 30 percent bonds, and 10 percent cash, the same allocation as was used to ill.u.s.trate CTS #1. (There is nothing special about these allocation percentages. They are, however, the average allocations of investors as a group.) Here's how CTS #3 works in the stock market. During a bull market, any above-normal allocation to the stock market should be cut back to normal levels once the averages have risen about 65 percent from the low of the preceding bear market. However, this should be done only if the advance has also lasted at least 20 months. I think the S&P 500 is the best market index to use for these calculations. aims to sidestep the market collapses that attend the disintegration of bullish investment crowds. It also tries to be overweighted in a market that is undervalued and in the grips of a bearish crowd. This is the strategy I think most aspiring contrarian traders should use. I think of it as a very conservative strategy, and I discuss more aggressive contrarian trading strategies later in this chapter. I think that this strategy works best when the contrarian trader has chosen to limit his investment universe to ETFs or indexed mutual funds that mirror the stock and bond market averages. So let's suppose he adopts a baseline (normal) allocation of 60 percent stocks, 30 percent bonds, and 10 percent cash, the same allocation as was used to ill.u.s.trate CTS #1. (There is nothing special about these allocation percentages. They are, however, the average allocations of investors as a group.) Here's how CTS #3 works in the stock market. During a bull market, any above-normal allocation to the stock market should be cut back to normal levels once the averages have risen about 65 percent from the low of the preceding bear market. However, this should be done only if the advance has also lasted at least 20 months. I think the S&P 500 is the best market index to use for these calculations.

When should the stock market allocation be cut to below-normal levels? The worst mistake a contrarian trader can make is to be underinvested in stocks during an extended bull market. Such markets are times when the baseline buy-and-hold strategy performs best. To avoid this mistake, the Contrarian Rebalancing strategy dictates that a below-normal stock market allocation can be adopted only in the following circ.u.mstances. First, the S&P has advanced at least 65 percent from its preceding bear market low. Second, the contrarian trader must be able to identify a bullish stock market crowd from the material in his media diary. Finally, and most importantly, the 200-day moving average of the S&P 500 must fall 1 percent from whatever high it has reached during the bull market. (This moving average is calculated by adding up the latest 200 daily closes in the S&P and then dividing the total by 200, an easy task in a spreadsheet.) This last requirement will keep the contrarian trader invested in stocks during those rare times when a stock market bubble sends prices upward more than anyone can antic.i.p.ate.

How does CTS #3 tell the contrarian trader to act during a bear market? If the bear market results from the disintegration of a bullish stock market crowd that was visible toward the end of the preceding bull market, the contrarian trader would have cut back his stock market allocation to below normal once the 200-day moving average of the S&P dropped 1 percent from its high point. In all other circ.u.mstances the contrarian trader would sit through a bear market maintaining a normal stock market allocation. In either case, once the S&P has dropped 20 percent from its preceding high point and a bearish stock market crowd has developed, the contrarian trader looks for an opportunity to increase his stock market allocation to above-normal levels. This he does once he observes the 200-day moving average of the S&P 500 advance 1 percent from whatever low it makes after the drop of at least 20 percent that has encouraged the growth of a bearish stock market crowd.

THE AGGRESSIVE CONTRARIAN.

In contrast to his conservative cousin, the aggressive contrarian trader will generally make two or more changes to his stock market allocation each year. The aggressive contrarian allocation strategy I describe now is a long-only strategy and involves no short sales or purchases of inverse exchange-traded funds (ETFs). There is a simple reason for this: Every trader can benefit from specializing in one specific trading strategy and in using a small universe of trading certain instruments. In the case at hand I am suggesting that most aggressive contrarians should focus on increasing or decreasing their stock market allocations with the goal of beating the results of the buy-and-hold strategy. The stock market part of their investment portfolio should be invested in ETFs like the Diamonds or Spiders (which track the Dow and the S&P respectively) that mirror the performance of the major market averages. Such a long-only strategy will lose money when the averages are in bear markets. But the psychological demands it makes on an individual are much more modest that those made by a strategy that allows short sales, too.

Every contrarian trader should keep in mind that his investment goal is to beat the market-that is, to do better than the performance of the benchmark buy-and-hold strategy. Sadly, I find that many investors believe it is more important to be right right in their guesses about the prospective direction of movements in the market averages. Nothing could be further from the truth. In fact, philosophers would call such an att.i.tude a in their guesses about the prospective direction of movements in the market averages. Nothing could be further from the truth. In fact, philosophers would call such an att.i.tude a category mistake category mistake. Right and wrong are concepts that have no place in evaluating investment performance. The only concepts that matter are profit and loss, especially when measured relative to some appropriate benchmark. The contrarian trader is emphatically not not in the business of detecting high points or low points in the stock market averages. He is concerned only with uncovering market mistakes in a timely way and in making portfolio adjustments that will exploit such mistakes. Over time he will be able to measure his success or failure by comparing his portfolio's performance to that of the buy-and-hold strategy. in the business of detecting high points or low points in the stock market averages. He is concerned only with uncovering market mistakes in a timely way and in making portfolio adjustments that will exploit such mistakes. Over time he will be able to measure his success or failure by comparing his portfolio's performance to that of the buy-and-hold strategy.

A LONG-ONLY STRATEGY FOR THE AGGRESSIVE CONTRARIAN TRADER.

The basic idea underlying this long-only strategy for an aggressive contrarian is simplicity itself. Look for a bearish information cascade and a.s.sume an above-normal allocation to the stock market when one is spotted. Reduce this allocation to normal or to below-normal levels after the market has advanced a historically typical amount from the low point a.s.sociated with the bearish information cascade.

Bearish information cascades in the context of bull markets tend to be shorter in time and a.s.sociated with more modest drops in the averages than are bearish cascades the context of bear markets. To take advantage of this, the aggressive contrarian trader must have some way of distinguishing between bull markets and bear markets in the averages. A mechanical method for doing this using changes in the direction of the 200-day moving average of the S&P 500 has already been discussed. Here is another, more sensitive mechanical method for identifying bull and bear markets. Watch the relationship between the S&P 500 index and its 200-day moving average. When the S&P 500 drops 5 percent below its moving average after a bull market of normal extent and duration, the aggressive contrarian can be pretty sure a bear market is under way. If the average moves 5 percent above its 200-day moving average after a bear market of normal extent, one can be confident a bull market is under way. I should point out here that I think that for bear markets in general it is better to be concerned only with the extent of the bear market (the percentage drop from the preceding bull market high), because the time duration of bear markets varies wildly.

Now for the details of this long-only strategy: In a bull market the aggressive contrarian trader wants to be on the lookout for bearish information cascades. Often these will show up as newspaper headlines about falling stock prices. Sometimes one finds only page 1 stories, not headlines. Depending on the tenor of the times, one might find bearish magazine stock market covers as well. One must remember that bearish cascades in a bull market tend to be very brief, lasting a matter of days or at most a few weeks.

But a bearish information cascade is not by itself enough evidence to justify increasing your stock market allocation. In addition, you want to see the S&P 500 closing below its 50-day moving average (just add up the past 50 daily closes and divide by 50-easy to do in a spreadsheet). The S&P should also be relatively close to its rising 200-day moving average, say within 1 percent if above it or less than 5 percent below it. Sometimes it is also helpful to compare the extent of the recent short-term drop in the S&P to the extent of previous drops in the context of the same bull market, since these short-term drops tend to be the same size. If these additional criteria are met, then it will be time to increase stock market allocation to above-normal levels.

Having increased his stock market allocation to above normal during a bull market, the aggressive contrarian now is on the lookout for the opportunity to move the allocation back to normal levels. (I don't think there is ever any justification for moving to below-normal allocations in a bull market.) Generally this will come when the S&P has advanced to a new bull market high. Here it is often useful to look at the percentage gains made in previous upswings in the same bull market, for they often turn out to be comparable. The time to move stock market allocations back to normal levels often comes when the current upswing has equaled the average percentage gain of previous upswings.

In a bear market this approach has to be modified a bit. The typical stock market allocation for the aggressive contrarian is then a below-normal one. A below-normal allocation can be temporarily increased during the bear market, but only in special circ.u.mstances.

First, a bearish information cascade must be visible in your media diary. It is important to note that bearish information cascades last longer in a bear market than they do in bull market. One must give the market enough time to drop from a short-term high to a new low point for the bear market to reinforce the bearish state of affairs in investors' minds. As a rule I want to see a drop of about two months in duration in the S&P to new bear market lows before I act on any indication of a bearish cascade. Then, if the S&P is also trading at least 10 percent below its 200-day moving average, it is generally time to increase stock market exposure. To time the subsequent reduction in stock market exposure, watch the 50-day moving average of the S&P. When the S&P moves 1 percent above above its 50-day moving average, it is time to return your stock market allocation to below-normal or to normal levels. its 50-day moving average, it is time to return your stock market allocation to below-normal or to normal levels.

Of course, like all strategies that objectively try to distinguish between bull and bear markets, this one will always be late. In other words, it will identify a bull market only after the low of the preceding bear market has occurred, and a bear market only after the high of the preceding bull market has occurred. Missing the start of a bear market is generally not too much of a problem, because in most bear markets the worst percentage declines develop toward the end. But missing the start of a bull market can be a very expensive mistake. It is in the early stages of a new bull market that the buy-and-hold strategy makes its biggest percentage gains, and the aggressive contrarian trader generally does not want to wait for the bull market signal from the 200-day moving average before adopting a bull market policy.

I handle this dilemma by using my tabulations of the duration and extent of preceding bear markets and by paying careful attention to the relative intensity of bearish information cascades during bear markets. If the most intense bearish cascade (as measured by the number, frequency, and semiotic content of media stories) occurs after a bear market has dropped the averages a typical amount, I am willing to bet that the bear market is complete and that the next up leg will be the first of a new bull market. Once I have an above-normal stock market allocation because think that the first leg of a new bull market is under way, I then wait for the S&P to rally for at least six months and 25 percent from its bear market low. At that juncture I start watching the 50-day moving average. As soon as it drops 0.5 percent from a high point, I reduce my above-average allocation back to normal levels.

The novelty and power of this aggressive stock market strategy arise from coordinating bearish information cascades with the position of the S&P 500 relative to the appropriate moving averages. Historical tabulations of previous market swings play an important role, too, especially near the end of bear markets.

MORE AGGRESSIVE CONTRARIAN TRADING STRATEGIES.

This is the realm of the expert, experienced contrarian trader. The ideas I am about to discuss can be very dangerous to your financial health unless you already have several years of experience with contrarian methods and have been able to beat the market significantly during that time.

First, one may apply these contrarian methods to smaller markets. It is often possible to take advantage of market crowds that form in bonds, in commodity markets (crude oil, gold, silver, soybeans, etc.), or in individual stocks or industry groups. The problem one faces here is that these markets generally attract much less public interest than does the stock market as a whole. Consequently, it is more difficult to observe the communication process and the information cascade that builds the a.s.sociated investment crowd. Doing this often requires partic.i.p.ation in industry a.s.sociations, subscriptions to special-interest publications, attendance at investment and industry-sponsored seminars and events, and the like. This makes much greater demands upon a contrarian trader's time and commitment.

Even so, there are very significant contrarian opportunities open in these market segments. The reason for this is the advent of ETFs intended to replicate the performance of these markets. These instruments make it possible for the experienced contrarian trader to take advantage of swings in interest rates, commodity markets, and individual stock market sectors (e.g., finance, housing, banks, technology) efficiently, with low trading costs and good diversification. Therefore, trying to identify mature market crowds in these markets can be well worth the time and effort required.

Here is another idea, a different twist on the usual contrarian trading approach. I like to call this the bandwagon strategy bandwagon strategy. Bullish market crowds generally take at least a year, or more often several years, to develop and mature. This contrasts with the typical bearish crowd, whose lifetime is measured in months. Since bullish crowds take so long to develop, the contrarian trader can often beat the market by detecting the communication process that is building the bullish crowd soon after it starts. At this juncture the market is probably still trading near fair value. The bullish crowd is still far from being mature. The trick at this point is to join the bullish crowd temporarily by adopting the crowd's investment theme and buying the a.s.set that attracts the crowd's interest. By doing this the contrarian trader is trying to partic.i.p.ate in a market move that will bring the price from fair value up into the rarefied air of extreme overvaluation. These bull markets in individual sectors, stocks, or commodities often show great percentage gains over fair value and can make a very significant contribution to a contrarian trader's investment results.

It goes without saying that this bandwagon strategy can be dangerous. The contrarian trader might forget his methods and become a permanent member of the chosen investment crowd. If he allows this to happen, his investment portfolio will suffer for it, and this is why only an expert should attempt this sort of strategy.

So far I have said nothing about methods for taking advantage of the disintegration of a bullish market crowd and the accompanying big drop in the price of the a.s.sociated a.s.set. There is a good reason for my reticence here, because taking the short side of any market, either shorting stocks directly or by buying an inverse ETF, is a dangerous tactic. Bullish market crowds tend to last longer, are harder to identify, and may carry prices to levels of overvaluation that no one can imagine. In the U.S. stock market, indeed in the stock market of any free-market economy, the long-run odds always favor the bulls. For these reasons taking the bearish side by buying an inverse ETF, for instance, means bucking the long-run odds, which favor the bulls. Doing this successfully requires a very high level of skill and market knowledge. Moreover, a long-short strategy typically yields much more volatile investment results than does a long-only strategy. Even when generally positive, investment returns that jump around a lot put a great deal of emotional stress on an investor, and this usually leads to bad decisions. It is not something I recommend to the novice contrarian trader.

CHAPTER 12.

The Great Bull Market of 1982-2000 Gloom in 1982 * * amazing stock market gains during the next 18 years amazing stock market gains during the next 18 years * * the 1987 crash the 1987 crash * * bull market crowd before the crash bull market crowd before the crash * * Contrarian Rebalancing during the 1987 crash Contrarian Rebalancing during the 1987 crash * * the same strategy during the 1929-1932 crash the same strategy during the 1929-1932 crash * * the savings and loan crisis the savings and loan crisis * * the 1990 bear market crowd the 1990 bear market crowd * * I'm on CNBC I'm on CNBC * * the conservative contrarian increases his stock market allocation the conservative contrarian increases his stock market allocation * * no joy during a big rally no joy during a big rally * * the bubble starts to inflate the bubble starts to inflate * * irrational exuberance in 1996 irrational exuberance in 1996 * * the conservative contrarian stays with stocks for four more years the conservative contrarian stays with stocks for four more years * * the aggressive contrarian during the bull market the aggressive contrarian during the bull market * * 1987 revisited 1987 revisited * * my experience during the crash my experience during the crash * * bullish at the 1990 low bullish at the 1990 low * * the 1998 collapse of Long Term Capital Management the 1998 collapse of Long Term Capital Management * * bearish information cascade bearish information cascade * * the aggressive contrarian goes long the aggressive contrarian goes long * * the bubble's grand finale the bubble's grand finale

PROLOGUE.

During the summer days of August 1982, stock market prospects appeared gloomy. Three years earlier, in its August 13, 1979, issue, BusinessWeek BusinessWeek magazine published its "The Death of Equities" cover story. Now magazine published its "The Death of Equities" cover story. Now BusinessWeek BusinessWeek seemed prescient. Stock prices were nearly 10 percent lower in August 1982 than they had been at the time of the seemed prescient. Stock prices were nearly 10 percent lower in August 1982 than they had been at the time of the BusinessWeek BusinessWeek cover story. No one imagined then that the greatest bull market in history was about to begin. On August 12 the Dow closed at 776.92. That same day the S&P 500 index closed at 102.42. During the subsequent 17 and a half years the Dow would rise an astounding average of 16.42 percent annually until it reached its towering high close at 11,722.98 on January 14, 2000. The S&P would do even better, advancing an average of 16.63 percent each year until it reached its high close of 1,527.46 on March 24, 2000. cover story. No one imagined then that the greatest bull market in history was about to begin. On August 12 the Dow closed at 776.92. That same day the S&P 500 index closed at 102.42. During the subsequent 17 and a half years the Dow would rise an astounding average of 16.42 percent annually until it reached its towering high close at 11,722.98 on January 14, 2000. The S&P would do even better, advancing an average of 16.63 percent each year until it reached its high close of 1,527.46 on March 24, 2000.

But these two averages were tortoises compared to the hare of the NASDAQ Composite index. On Friday the 13th in August 1982 this index closed at 159. On March 10, 2000, it stood at 5,048. The NASDAQ had gained an unprecedented average of 21.73 percent annually over a period of almost 18 years to reach its bubble top in the new millennium.

This chapter chronicles most of this great bull market from the perspective of the contrarian trader. We pick up the action in 1987 at the time of that year's stock market crash. Our story of this great stock market bubble culminates during the 19-month period from August 1998 through March 2000, which saw the index of the bubble stocks, the NASDAQ Composite, rocket up 235 percent from 1,499 to 5,408.

Stock market bubbles occur perhaps once every 30 years on average. During the twentieth century we saw peaks of minor bubbles in the U.S. stock market in 1906 and 1973. Major bubbles developed in 1929 and 1999. Bubbles like these will happen again. We might expect the next one around the year 2030 if it develops on schedule. It seems that a generation must pa.s.s and its mistakes be forgotten before the seeds of another stock market bubble can be sown.

THE 1987 CRASH.

Among the more dramatic events of the 1982-2000 bull market was the market crash of 1987. On October 19 of that year both the Dow and the S&P 500 fell about 20 percent, a one-day drop greater than any other in the history of the U.S. stock market. This panic decline was the biggest part of a very brief bear market. In the S&P 500 (the index I recommend for use by contrarian traders) the 1987 top occurred at 336.77 on August 25 and the closing low at 223.92 on December 4, a drop of 34 percent. In the Dow the corresponding numbers are a high of 2,722 on August 25 and a low of 1,739 on October 19, a drop of 36 percent.

Investors were very fearful after the crash, and this showed in the newspaper headlines and magazine covers at the time. In its October 20 edition the New York Times New York Times headlined in big, bold, black letters: "Stocks Plunge 508 Points, a Drop of 22.6%; 604 Million Volume Nearly Doubles Record; Who Gets Hurt?" In its November 2 edition (on the newsstands October 26) headlined in big, bold, black letters: "Stocks Plunge 508 Points, a Drop of 22.6%; 604 Million Volume Nearly Doubles Record; Who Gets Hurt?" In its November 2 edition (on the newsstands October 26) Time Time magazine published an all-text cover in black and white on a red background, the colors of fear. The headline read: "The Crash: After a Wild Week on Wall Street the World Is Different." Of course, the world really hadn't changed at all; only investors' perceptions of it had changed. magazine published an all-text cover in black and white on a red background, the colors of fear. The headline read: "The Crash: After a Wild Week on Wall Street the World Is Different." Of course, the world really hadn't changed at all; only investors' perceptions of it had changed. Newsweek Newsweek magazine chimed in with the cover of its November 2 issue. It depicted a line chart in red showing a drop in prices and an inset photograph of worried investors. It was headlined: "After the Crash." magazine chimed in with the cover of its November 2 issue. It depicted a line chart in red showing a drop in prices and an inset photograph of worried investors. It was headlined: "After the Crash."

In this headline and these covers we see the bearish information cascade triggered by the crash itself and the search for the explanation of such an extraordinary one-day drop. There was an almost instantaneous change in sentiment, and a bearish stock market crowd developed quickly. Such a rapid and dramatic shift in sentiment over only a few days is a very unusual phenomenon. How would a conservative contrarian trader employing the Contrarian Rebalancing strategy responded to the crash?

In mid-1987 there seemed little doubt that a substantial bullish stock market crowd had developed during the preceding three years. I had just begun keeping a media dairy that year, and the doc.u.mentary evidence it contains pointing to a bullish information cascade is sketchy. But I do remember that five years of steadily rising prices had lifted the gloom that had prevailed in August 1982. By August 1987 the dividend yields of the Dow and the S&P had dropped to historically low levels. Price-earnings ratios on the averages were above 20, at the time a historically high level (but one that would be spectacularly exceeded 13 years later). Market commentators publicly worried about a possible stock market bubble.

During the earlier stages of the 1982-1987 advance the Contrarian Rebalancing strategy called for an above-normal stock market allocation. But once the S&P 500 reached the 250 level in 1986 and had risen 65 percent from its July 1984 low at 148, the conservative contrarian trader would have reduced his stock market exposure to normal levels because the bull market had entered a zone of potential overvaluation based on historical tabulations. Once he observed the generally bullish commentary in the media during the first half of 1987 and the historically high price-earnings ratio and low dividend yield on the S&P, he would have concluded that a bullish stock market crowd had formed. At that point he would be looking for a drop of 1 percent in the 200-day moving average of the S&P 500 as a signal to reduce his stock market exposure to below-normal levels.

The 200-day moving average turned down by 1 percent from its high by November 20, 1987, when the S&P itself closed at 242. This occurred after after the intraday bear market low for this average, which occurred on October 20 at the 216 level. The conservative contrarian trader would have by then noted the bearish information cascade cited earlier. Moreover, at the October low the averages had dropped about 35 percent from their 1987 highs, a drop of normal extent when a bull market crowd disintegrates. What to do on November 20? the intraday bear market low for this average, which occurred on October 20 at the 216 level. The conservative contrarian trader would have by then noted the bearish information cascade cited earlier. Moreover, at the October low the averages had dropped about 35 percent from their 1987 highs, a drop of normal extent when a bull market crowd disintegrates. What to do on November 20?

The answer is simple. Follow the rules of the Contrarian Rebalancing strategy! Even though a steep, 35 percent drop had already occurred and a bearish crowd was visible, the fact that the 200 day moving average had turned downward by 1 percent meant that the stock market allocation had to be reduced to below-normal levels. But remember that this is done only because bullish crowd was visible at the preceding stock market top. If no bullish crowd had been visible, the Contrarian Rebalancing strategy would have dictated that a normal stock market allocation be maintained during any subsequent drop.

Having reduced his stock market exposure to below-normal levels at the S&P 242 level on November 20, 1987, what would be the conservative contrarian trader's next move? He had observed a drop of at least 20 percent in the averages and a bearish stock market crowd. The Contrarian Rebalancing strategy then requires a move to an above-normal stock market allocation once the 200-day moving average turns up by 1 percent. This happened on September 9, 1988, with the S&P closing at 267 that day. On that part of his portfolio representing the difference between a normal and below-normal stock market allocation, the conservative contrarian trader fell behind buy-and-hold investors during that nine-and-a-half-month period by about 10 percentage points (or 1,000 basis points).

INTERLUDE: THE 1929-1932 CRASH AND BEAR MARKET.

The inexperienced contrarian is probably already beginning to doubt the efficiency of the Contrarian Rebalancing strategy. After all, didn't buy-and-hold investors do better during the 1987 crash? Yes, they did. But any market strategy must be judged on its performance over the years, not by its performance during any one market episode.

There is an even more important point to be made here. The Contrarian Rebalancing strategy is very cautious in moving to an above-average stock market allocation once a bear market has begun. There is good reason for this. Sometimes a market crisis develops into an economic crisis as well. In such circ.u.mstances one finds a sequence of distinct bearish information cascades, each leading to progressively lower lows in the stock market and potentially dropping the averages a very substantial amount from their highs. The cla.s.sic example of this phenomenon occurred after the Crash of 1929. During the 1929-1932 bear market the Dow Jones Industrial Average fell from 381 to 40, a 90 percent drop over 34 months. There were repeated bursts of pessimism, each triggered by new signs of a deteriorating economic situation: record high unemployment, bank failures, and so on. This sequence of bearish information cascades began in late 1930 when the Dow was still above the 200 level and continued through the bank holiday of March 1933.

This was a situation when the tactic of using the 200-day moving average as an indicator would have dramatically improved performance relative to the buy-and-hold strategy. In 1929 the 200-day moving average of the Dow had fallen 1 percent from its high by October 28 when the Dow closed at 261. A reduction in stock market exposure to below-normal levels was then warranted. This moving average continued to drop steadily for more than three years afterward. It finally turned upward by 1 percent from its low on March 31, 1933, about two weeks after the end of the 1933 bank holiday. On March 31, 1933, the Dow closed at 55. Then and only then would the conservative contrarian trader have been justified in moving his below-normal stock market exposure to above-normal levels.

THE S&L CRISIS, THE 1987-1990 BULL MARKET, AND THE 1990 BEAR MARKET CROWD.

A number of legislative changes during the 1980s lengthened the list of permissible real estate investments by savings and loan (S&L) a.s.sociations and commercial banks. These changes also made it easier to finance loan portfolios by paying higher yields on a wider variety of deposits. The result was a boom in lending on commercial real estate. Sadly, many of the resulting loans were unsound or fraudulent and these led to the collapse of many savings and loans and commercial banks. The situation became so dangerous to the economy's health that in August 1989 the U.S. Congress pa.s.sed the Financial Inst.i.tutions Reform, Recovery, and Enforcement Act of 1989. One of its provisions established the Resolution Trust Corporation, which was to purchase and then dispose of failed thrift inst.i.tutions taken over by regulators after January 1, 1989.

The continuing stream of S&L and bank collapses during 1988-1990 was a backdrop that discouraged the development a bullish stock market crowd. Memories of the 1987 crash were strong as well, and these also put a damper on bullish sentiment.

The conservative contrarian trader who followed the Contrarian Rebalancing strategy would have a.s.sumed an above-normal stock market allocation on September 9, 1988, when the S&P 500 closed at 267. In July 1990 the S&P had reached 368.95 while the Dow hit 2,964, gains of 65 percent and 71 percent respectively from their crash low points in 1987. Since more than two years had pa.s.sed since those lows, the conservative contrarian would then have reduced his stock market exposure to normal levels. Since no bullish information cascade was yet visible in his media diary, he would not be contemplating any further reduction in stock market exposure even if the 200-day moving average of the S&P 500 were to subsequently decline by 1 percent.

On August 3, 1990, the world awoke to the news that Iraq had invaded Kuwait and was ma.s.sing troops on the border with Saudi Arabia, the source of much of the world's crude oil supply. The stock market averages had already begun to drop in late July, and this news accelerated the decline. The first stock market headline appeared in the New York Times New York Times on August 24: "U.S. Stocks Plunge on Heavy Selling over Crisis in Gulf." By then the S&P had already dropped to 307.06 from its high close of 369.95, a decline of nearly 17 percent. This wasn't quite the 20 percent minimum drop for a bear market, but the latter percentage was reached on the nose on October 11, 1990, when the S&P closed at 295.46, its bear market low close. on August 24: "U.S. Stocks Plunge on Heavy Selling over Crisis in Gulf." By then the S&P had already dropped to 307.06 from its high close of 369.95, a decline of nearly 17 percent. This wasn't quite the 20 percent minimum drop for a bear market, but the latter percentage was reached on the nose on October 11, 1990, when the S&P closed at 295.46, its bear market low close.

During the period between August and October the media were worrying about possible war in the Gulf and its economic and human consequences. More than this, there were additional worries about rising unemployment, a possible recession brought on by the real estate bust, and a Federal Reserve policy of restraint intended to bring down uncomfortably high inflation rates of over 6 percent.

Evidence for this bearish information cascade was not hard to find in magazine cover stories. First up was BusinessWeek BusinessWeek, which asked on the cover of its August 13 issue: "Are We in Recession?" The cover of the October 1 issue of Newsweek Newsweek featured: "The Real Estate BUST." The October 15 issue of featured: "The Real Estate BUST." The October 15 issue of Time Time magazine, appearing just days before the low in the stock market, showed a photograph of a man hanging from a clock hand high above a busy city street. The cover caption read: "High Anxiety-Looming Recession, Government Paralysis, and the Threat of War Are Giving Americans a Case of the Jitters." Not to be outdone, the magazine, appearing just days before the low in the stock market, showed a photograph of a man hanging from a clock hand high above a busy city street. The cover caption read: "High Anxiety-Looming Recession, Government Paralysis, and the Threat of War Are Giving Americans a Case of the Jitters." Not to be outdone, the New Republic New Republic's October 29 issue showed a cartoon picturing an abyss and captioned: "Oil prices are doubling. Foreigners don't want to lend us any more money. The real estate market is in the toilet. The banking system is tottering. Rising unemployment and stagflation are just around the corner. And the government can't think of a d.a.m.n thing to do about it. Uh, oh." Bringing up the rear was New York New York magazine. Its November 19 issue showed on its cover a 1930s-era photograph of a young man dressed in a three-piece suit and shouldering a box of apples with a sign that said: "Unemployed-buy apples-5 cents each." The cover caption? "Hard Times." magazine. Its November 19 issue showed on its cover a 1930s-era photograph of a young man dressed in a three-piece suit and shouldering a box of apples with a sign that said: "Unemployed-buy apples-5 cents each." The cover caption? "Hard Times."

Even a novice contrarian would have recognized this bearish information cascade. By mid-October a very bearish stock market crowd had formed. It was universally believed that war with Iraq would send the stock market much lower, and that the banking crisis would not be resolved anytime soon.

At that time I made a number of television appearances on the then very young financial network, CNBC. I was relentlessly bullish about the stock market and about the bond market in every TV interview I gave. I predicted that the S&P would rise from its 295 low to over 400 over the next couple of years. I also predicted that long-term bond yields would drop from the 9 percent level then to 6 percent during the same time frame. Both predictions were on the money. I offered a number of technical reasons for these views, but my confidence in them arose from my recognition of the depth of the prevailing bearish sentiment and the strength of the convictions of the bearish market crowd. Mine was a very lonely market stance. The CNBC staff referred to me as "the bullish market technician" to distinguish me from their other guests!

Through all these events the Contrarian Rebalancing strategy dictated holding a normal stock market allocation. Since the averages had dropped 20 percent from high to low and since a very obvious bearish stock market crowd had formed, the conservative contrarian would be looking for a turn upward in the 200-day moving average of the S&P to tell him to increase his stock market allocation. On March 26, 1991, this moving average did turn up by 1 percent from its low point. On that day the S&P closed at 376 and the conservative contrarian trader would have increased his stock market allocation to above-normal levels. Notice that he would have increased his stock market exposure at a point that was actually a new high level for the advance in prices that began in 1982. No matter. The conservative contrarian is not trying to buy near the low and sell near the high. His only objective is to beat the buy-and-hold strategy.

RALLY WITHOUT JOY, 1991-1994.

From its October 1990 low at 295 the S&P 500 index advanced steadily for more than three years. It reached a temporary high point at 482 on February 2, 1994. This represented an advance of 63 percent from its 1990 low over a period of 40 months. Over the same period of time the Dow advanced 68 percent. The Contrarian Rebalancing strategy dictated a reduction of stock market exposure from above-normal to normal levels at this time because the bull market had met normal expectations for duration and extent.

A contrarian trader must always be contemplating his next move in every circ.u.mstance. In February 1994, with a normal stock market allocation going forward, he has to know how he will act should the 200-day moving average of the S&P drop 1 percent from any high level it attained during the bull market. The only circ.u.mstance in which this event calls for a reduction in stock market exposure is the presence of a bullish stock market crowd created by a bullish information cascade in the media. Had such a bullish crowd developed by early 1994?

My own media diary for the period shows that no bullish information cascade had even started by early 1994. This is easily seen from a sampling of magazine covers from 1991 to 1993.

The October 7, 1991, issue of BusinessWeek BusinessWeek had a cover cartoon of a man thinking: "I'm Worried about My Job!" On November 4 had a cover cartoon of a man thinking: "I'm Worried about My Job!" On November 4 Newsweek Newsweek chimed in with a cover cartoon showing a family inside the jaws of a ferocious-looking wolf. The cover caption read: "What Recovery? The Bite on the Middle Cla.s.s." Inside the magazine the lead story was headlined: "That Sinking Feeling-the recession that won't go away has average Americans spooked-and politicians running scared." On December 2 chimed in with a cover cartoon showing a family inside the jaws of a ferocious-looking wolf. The cover caption read: "What Recovery? The Bite on the Middle Cla.s.s." Inside the magazine the lead story was headlined: "That Sinking Feeling-the recession that won't go away has average Americans spooked-and politicians running scared." On December 2 BusinessWeek BusinessWeek published a "High Anxiety" headline that emphasized concerns about an elusive economic recovery. The November 29 issue of the published a "High Anxiety" headline that emphasized concerns about an elusive economic recovery. The November 29 issue of the Economist Economist had on its cover a cartoon depicting stock traders tumbling down a graph of falling stock prices worldwide. The caption read: "And they all cried, 'Help.' " Finally, the December 23 issue of the had on its cover a cartoon depicting stock traders tumbling down a graph of falling stock prices worldwide. The caption read: "And they all cried, 'Help.' " Finally, the December 23 issue of the New Republic New Republic was done with a completely black background with a pair of cartoon eyes peering upward from the bottom of an economic recovery. The caption read: "What's really wrong with our economy-and how to fix it." This was a remarkable gaggle of pessimistic economic cover stories within a short three-month span. It was proof positive that no bullish information cascade had begun by the end of 1991. was done with a completely black background with a pair of carto