2. Factors not intimately related to any individual company, but which are a decisive element of the specialized environment in which the company must operate. The effect of tight-money situations on a savings and loan company would be an example here.

3. Factors not necessarily related to a specific company, nor even to its specialized environment. A general monetary crisis or the eruption of armed conflict somewhere in the world would exemplify this type of environmental factor.

The question is whether or not any of these contribute to cycUcality.

It is difficult enough to conceive of the complex interaction of these three types of factors as being capable of inducing a cyclic response in the decision-making process with regard to any single stock, but when we consider what we learned in Chapter Two about the synchronization in time of the cyclicality of many issues, it becomes simply impossible. Certainly the factors which most closely affect one issue, but should not afTect another in the same way if at , cannot be held responsible for the fact that both issues demonstrate time-coordinated cyclicality!

But there is another part to the question. We have already admitted that random events do occur and must have some influence on stock prices. We have seen that the impact of this type of event must be approximately 2,0% of the total stock price. We have also seen another possible source of additional random effects in the irregularity of the variations in fluctuation magnitude with time.

Likewise we admit to the existence of fundamental factors, and feel instinctively that there must be some impact of these on the decision-makir process, and hence on stock prices. Can we gain some sort of feeling for the magnitude and nature of this impact?

HOW COMPANY-RELATED FUNDAMENTALS AFFECT PRICES

Of the three types of fundamental factors discussed, the first two may be considered together for our purposes. The effects are Ukely to be quite similar except that a factor relating to only one company will exert most of its influence on the price of that companys stock whereas events influencing a group (steels, oils, etc.) wiU show effects more or less across the group.

This situation requires very little consideration and no specific examples. We have aU observed a stock in which seUing suddenly soars. If trading becomes sufflcientiy panicky, trading in the stock may be suspended for a time. The stock may re-open (hours, days, or even weeks later) at half the price at the time trading was halted. In the interim, the news regarding the specific fundamental factor involved has probably become common knowledge. The stock price changed not because of the fundamental factor itself, but because of the effect of that factor on the thinking and decision processes of investors. Nevertheless, the correlation of stock price change, through the decision process, to the fundamental factor is obvious and undeniable. The same type of thing takes place on the upside, notably in recent years upon the advent of a conglomerate takeover type of tender offer. These are certainly examples of the more obvious impact of fundamental factors. It is highly likely that many less obvious

effects are incuned as well. In fact, given the knowledge that random effects are small and that cyclicality is synchronized, all other observed differences between individual stock price motions must be considered as being caused by fundamental factors!-or at least by what investors think the effects of these factors should be. That the result in terms of magnitude of influence is quite large is at once evident when we study the price patterns of stocks in any of the wide-coverage stock chart services now available.

But is this all we can leam of the influence of fundamental factors? It would certainly seem that the above reasoning, while straightforward and valid, is difficult if not impossible to quantify. So lets try another approach!

THE INFLUENCE OF BROAD ENVIRONMENTAL FACTORS

Every day we are told in innumerable ways about this or that world or national situation which, it is implied, is the principal cause of the current behavior of the market. True, any analyst worth his salt will admit to the simultaneous existence of many such factors-some purported to have bulUsh influence while others presumably favor the bears. It is, supposedly, the on-balance sum of all ttiese push-pull forces which shapes the course of market action. In order to better examine the influence of such factors, Figure IX-2 was prepared. Lets see if we can detect the uifluence in the market of the major historical events shown!

SHOULD YOU SELL IN THE EVENT OF WAR?

First of all, note the shaded areas emphasizing the behavior of the market throughout periods of armed conflict. Can we honestly say that if these shaded areas and the dates at the bottom of the chart were removed, we could detect any abnormal behavior of the market that would permit us to identify the war periods? Not really. During the Korean War a 52-month cycle topped out and ended, just as similar cycles have been behaving since 1897. It was complete down to the three (nominally) 18-month cycles we have come to expect. The same action has occurred since the start of the Vietnam War. A 52-month cycle was about half-way along at this time, and it just continued and terminated as expected in 52 months time, whereupon another promptly started! And yet, if the news were suddenly flashed on the broad-tape tomorrow that the U.S. was involved in still another war, wouldnt you be concerned about the impact on the price of the stocks you hold? But, should you be concerned?

WHAT ABOUT CURRENCY DEVALUATIONS?

Remember the panic about the foreign currency devaluations of 1949? Did this situation change the course of the market? Both an 18-month and a 52-month cycle were four months along at this time, and each continued to completion in blissful ignorance of the currency troubles! But, you say, when the British pound was devalued in late 1967 the market took a tumble. So it did. But you notice that it was falling before the devaluation took place. Furthermore, the drop was predictable-as much as

How History Does Not Influence The Market!