scale by institutions, that is clearly unfair. As William J. ONeil put it:

They [the institutions] are allowed to hook up directly to the New York Stock Exchanges own computers and spit out massive market orders instantaneously. You and I must contact our brokers and have them transmit our orders by wire to New York, for execution several minutes later. 5

In lieu of complete deregulation of the markets, which is the ideal alternative as far as Im concerned, the least the regulators could do is define clearly what "manipulation" is, so that everyone understands the requirements of trading within the bounds of so -called "legality."

Beginning in the mid-1980s, programs completely changed the character of intraday price movements, introducing a degree of uncertainty that never existed before. Now, at any moment, the judgment of one program manager can start a buy or sell program that may create a swing in the market of from 5 to 30 or more points on a purely technical basis (that is, without any fundamental changes in the eamings prospects of the underlying stocks). (Se e Figure 6.2.)

1 used to day-trade the S&P futures by the clock. Before programs, you never saw a sell-off last more than 1 2 hours without some kind of rally. You also very rarely saw the kind of spikes in either direction as you see them now. Because the institutions deal in such huge size, and because the public has fled the markets, when you day-trade the S&Ps now, it feels like you are performing with a gun at your back. At any moment, a program manager can pull the trigger, and the market roars again st you before you have time to get out with just a small loss, especially if you are trading large size.

Being caught on the wrong side of a program-induced swing in the short term can be deadly financially to the trader or speculator. But being on the right side

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Figure 6.2 Five-minute bar chart for December 1990 S&P Futures and S&P Cash Index-how program trading affects intraday price movements. Prior to program trading, the market never sold off this sharply for so long a period without being interrupted by at least a small rally. Programs move both the futures and the averages dramatically, often confusing ones perception of market price movements.

can be equally rewarding. The problem is that since one persons judgement causes the move, and since no one knows the plan but that person and perhaps a handful of others, being involved in short -term trading is much more difficult today and often can tum into something of a crapshoot. However, by watching the charts of the S&P 500 cash and S&P 500 futures index, prudent speculators or investors can leam to recognize the pattem of program price movements and time their buys and sells to optimize profits. This kind of market timing can add significantly to portfolio profits. Conversely, to buy or sell large blocks of stocks or futures "at the market" in the presence of a program is simply foolis h.

Over the intermediate-term and long-term, programs cannot fundamentally manipulate prices, but they can change the character of the price trend, accelerating intermediate price movements in one

direction or the other. On the upside, their massive involv ement can generate long speculative interest. On the short side, they can have a devastating impact on the speed of major market downturns, as happened in the October 1987 crash.

Coming into October, the market was in trouble from a fundamental point of vi ew. Prices were at 21 times eamings, one of the highest PEs in history.

The average book value to price ratio was nominally higher than it was in 1929. and if adjusted for inflation, was much higher. These factors, especially when combined with record -breaking debt figures at all levels, made the market ripe for, at minimum, a major correction. The question at the time was not "if" but "when."

The billions of dollars of institutional money involved in the markets prior to October 19 was there purely to prof it through various short-term hedge, arbitrage, and manipulative strategies. It was evident that if the Fed tightened substantially, or if the dollar fell significantly, this "hot" money would be withdrawn from the market, dramatically accelerating the downward move. As I said in a Barrons interview published in the September 21,1987, issue:

When the stock market does slip into a full-fledged downswing, program trading will exaggerate the move to such a degree that the sell-off may be the steepest on record ...

This exaggeration of sell-offs, typically called "unwinding," induces such a degree of uncertainty and risk near the top of major bull movements that the risVeward in being fully invested in the stock market is heavily weighted toward risk. When change is due, those that change first usually profit the most.

THE PURISTS

Some technical analysts believe, on a formal, theoretical basis, that price is everything, that everything known or knowable with respect to the future of the markets is already contained in market prices and their movements. These are the technical purists, notably R. N. Elliot, Krondodiov, and on a more limited scale, some unthinking followers of the teachings of Edwards and Magee, and some heretical Dow Theorists. In variant forms and to various extents, the technical purists pre sume that there is a metaphysical inevitability to price movements, that they are somehow determined by the dictates of fate, God, evolution, or some other nebulous universal force, and that economic analysis and forecasting consists in finding the right mathematical correlations or cycle times to characterize the movements.

Any attempt to forecast the future by rigorous cycle theory or by strictly mathematical means totally ignores the subjective nature of market activity. In addition, such attempts ignore the fact that govemment intervention and Federal Reserve policy can dramatically influence the long-term trend, as will be shown in Chapters 9 and 10. To the extent that individuals are successful in applying these types of theoretical systems to market forecasting and analysis, it is mostly because they depart from th e rigor that consistency would require. Either their formulations temporarily characterize market behavior because of the consistent behavior of market participants, in which case it is simply a short-term technical observation, or the formulations themselves are so general and so loosely defined that they permit interpretation and individual reasoning to be imposed over them.

In the first case, basing speculative or investment decisions on technical mod els which predict in advance extent and duration points will be inconsistent-market

conditions can change rapidly. In the second case, the formulations are little more than an obstacle to sound reasoning and analysis. In either case, inevitably, conditions will change, attitudes will change, and their market models fall flat.

Again, I want to emphasize that I am not speaking here of all methods and ap plications of technical analysis, just those that claim that the future is predetermined and therefore predictable with rigorous mathematical models.