Peter C. McCluskey (
Tue, 28 Oct 1997 22:54:59 -0800 (Hal Finney) writes:
>I'm not much of an investor, but my sense is that this correction will
>go on for many months. The market has been quite high by historical
>standards. The high valuation can really only be sustained by a bullish
>investor psychology, where people are buying in expectation of rapid
>price increases rather than for future value. Even though the proximate

Declines that last months generally require triggers such as rising
real interest rates, a recession, or a war. This is especially true
after a long bull market. I haven't seen anything that would cause a
sustained change in U.S. investor psychology.

>One interesting difference from the 1987 crash is the use of trading
>halts. This was a controversial measure put into place after that crash.
>The idea is that the crash is motivated by irrational panic, and that by
>halting trading for a while, reason will return. It's an unusual theory
>because it is based on the assumption that investors are irrational,
>which is contrary to the assumptions generally used in analyzing markets.

The assumption of irrationality is probably the main motivation behind
trading halts, but I can think of an alternative.
Many of the people selling at the bottom are using a very simple rule
(they no longer have enough equity to back their margin debt), and
brokers tend to give high priority to alerting investors to this.
On the other hand, people buying because stocks have become cheap
want to compare a number of stocks to find the ones most underpriced,
and the communications needed to alert them that stocks have suddenly
become cheap can easily be slower.

>It could be that these holds and shutdowns may make the psychological
>factors even worse. If the market is falling, at least you can assume
>that at any given moment the valuation approximately reflects people's

Another way that trading halts can accelerate declines is that people
who think they may be forced to sell to cover margin debts feel greater
urgency if they expect they won't be able to sell if they wait.

>I don't think now is a good time to buy. Although recent drops have
>been followed by quick recoveries, I don't think that will be the case
>this time. It should be possible to get a much better deal in a few
>months, although by then the psychology will have turned so that no one
>will be very excited in stocks at that time (which is itself a time to
>start buying).

I did some buying this morning.

Peter McCluskey          | caffeine   O   CH3            |            ||  |            |      H3C   C   N |         \ / \ / \     |          N   C   C
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