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Monthly Discussion

NYSE’s Long “Hot” Winter

Sustained growth can only take place along successive natural growth steps (S-curves). As a result, the rate of growth periodically alternates between high and low rates. Periods of low growth rates correspond to low-profit winter-like business seasons that are accompanied by large fluctuations of a chaotic nature. Exhibit 3 is taken from Conquering Uncertainty and illustrates how the turbulent chaotic period begins before and extends beyond the winter season.

Low-Growth Winter Seasons Witness Chaotic Phenomena

Exhibit 3. In a succession of S-curve steps low-growth transition periods are characterized by large erratic fluctuations.

Theoretically chaos begins to appear when the growth process reaches the 90% level of its maximum. This phenomenon has been amply observed with the growth of NYSE’s daily share volume and dollar value (see for example Exhibit‑4). This drawing first appeared in An S-Shaped Trail to Wall Street. in October 1998. It showed that relative chaos occurred at the end of previous S-curve steps, and predicted that we were just about to enter another such period of chaos. He graph in Exhibit 4 is updated with almost two-years’ worth of data and confirms that we indeed entered a period of zero growth and large fluctuations.

Four S-curve Steps at the NYSE

Exhibit 4. Data and four S-curve fits (in four different colors) depicting the manyfold rise of the NYSE’s daily exchanged dollar value during the second half of the twentieth century. Going back in time requires expansion of the vertical scale. The big black dots indicate the theoretical time for the appearance of chaotic fluctuations. The data confirm these estimates. The open circles in the top graph show what happened during the seven quarters following the graph’s first publication.

The fourth S-curve step is redrawn in Exhibit 5 with a new S-curve fit and “seasons” superimposed to better define NYSE’s present winter. Chaos appeared roughly at the expected time but presently we are only halfway through. The next growth step, sketched in purple, will only pick up before well into 2004 and before then no growth trend can develop. In fact, even after growth picks up in the dollar value and share volume, there is no guarantee that the DJIA will also pick up. It is possible that the dollar value and the share volume—that follow similar curves—“conspire” so as to yield a flat DJIA even after growth picks up. One thing is sure, however: until then large chaotic fluctuations will be with us, and a basically horizontal market.

This may be bad news for those buy-and-hold investors who are not gifted with lots of patience. But it is not necessarily bad news for the day trader and particularly the broker. If you know that the market will come back, no matter what direction it jumps to, you won’t need sophisticated strategies to become profitable. You will get a free ride on the back of indefatigable wishful thinkers and incorrigible alarmists.

We Are only Half-Way through the Period of Chaos

Exhibit 5. The most recent growth step in NYSE’s daily dollar value with a new S-curve (gray line) fitted on all available data. The blue vertical lines delimit the “seasons” of the S-curve. The purple line is a scenario for the next growth step.