Me and My Mantra (aka The Gurus "Put" It to You)
by MF Cubster

This is your Stock Market Guru talking. Take a deep breath in. Hold, then sloooowly exhale. Now start chanting your Mantra: Dooooooowwnnnnnn. . . Uuuuuuuuuuppppppppppp. . .

OK. Now back to "reality."

One of the regular investment columnists in my local paper loves to quote market-timing Gurus in reaction to current events. Here's an example from October 5th: "Thursday could be an interesting day in the stock market. The recent steady erosion in computer-technology stocks continued Wednesday, but the trends may be on the verge of degenerating into something much worse than 'steady erosion.'"

The guru in the article was Richard Scarlata, research director at Chicago's Sutton Financial Services and a highly rated market timer. Scarlata is an expert in short-term indicators that tell him when to put money into the market, and when to pull it back out. (I guess he doesn't have to worry about commissions like I do.) The column in question discusses an indicator called "the Ratio of Stock Index Put Options to Call Options." Stock Index Put Options give the buyer the right to sell the cash equivalent of a basket of S&P stocks at a specified price, and it's one way to buy insurance against a market downturn. When the ratio gets higher than 1.25, as in 125 puts to 100 calls, it shows that people are expecting the worst. Since this is considered a contrary indicator of market sentiment, the Guru's believe the market will go back UP under these emotional circumstances. Mr. Scarlata noted that the purchase of put options in the S&P 100 index was near PANIC levels.

Of course, since this is just a sentiment indicator without fundamentals to back it up, a gooroo can just shrug off such market emotions. Scarlata did. "I'm inclined to ignore the usual short-term contrariness of the put/call ratio," said Scarlata, who last week correctly predicted the sell-off in computer technology stocks. "I'm inclined to believe that there's something else going on here."

Mr. Scarlatta explains that he didn't heed this indicator on account of a recent bearish prediction by Barron's own Guru and Market Forecaster, Joseph Granville, whose own recent article had apparently spooked investors. Scarlata, with tongue in cheek, said, "Although Granville has consistently missed the recent bull market, even a stopped clock is right twice a day." Yet Mr. Scarlatta noted that the technology stocks WERE weak, as insiders at computer and tech companies had been accelerating their selling. "If the backbone of the market was technology stocks, the BACKBONE was BROKEN Wednesday."

Wow. . . you ARE Bearish. Not only ignoring the high put/call ratio (as a contrarian indicator, this normally would be a bullish sign), but listening to ANOTHER Prognosticator's bearish opinion---UNprecedented!

Fast forward the clock now to November 3rd, a few weeks later. I was watching my local business TV channel in Chicago and Mr. Scarlata was reported to have said that he's now THROWING IN THE TOWEL, and expects an "Explosive Blow Off Rally." The announcer stated that Rick's TWO-DAY model has switched to bullish.

I'm confused. To quote Robert DeNiro in 'Taxi Driver,' "Are you talkin' to me?" Rick Scarlata is an award-winning market timer. His horizon for being Bullish or Bearish on the market ranges from 48 minutes to 48 hours. He's interviewed regularly on a local Stock Market TV program, and he presents himself very well. But I propose they put an addendum on the TV screen or newspaper column saying: "The opinions expressed by this panelist are subject to change within the next few minutes."

The problem with short quotes in the media from a Market Timer is that Joe Investor needs an extra dose of Prozac to deal with the inappropriate anxiety these Swami's dole out. Though I enjoy the squabbling of these media Prognosticators, I believe Mr. Scarlata could have been a bit more constructive. He should have sent Joe Granville an hourglass when he found out that his pal at Barron's had problems with his clock. As for Rick, he doesn't need a yearly calendar for his investing purposes---a stopwatch does him just fine!

And he should leave the diagnosis of Backbone Fractures to Spine Surgeons.

[MF Cubster, aka Joseph Hecht, M.D., is a board certified orthopedic surgeon, trained at the University of Chicago. He still works and resides in the Chicagoland region, and considers himself to be a Foolish investor.]