Contrary Opinion

October 25, 1998

Friday's close: Dow 8452, S&P500 1070, NASDAQ 1693
October 20:     Dow 8529, S&P500 1067, NASDAQ 1655
July peak:      Dow 9337, S&P500 1186, NASDAQ 2014

The price of stocks hasn't changed much since I last wrote.  The Dow is off
77 points, the S&P up 3 points and the NASDAQ composite up 38 (2%). Of the
Internet stocks that I wrote about, about half have reported third quarter
earnings.  I'll wait for more reports before writing about them again.  In
the meantime, let's talk contrarian.

The theory of "contrary opinion" holds that when everyone is bullish, no one
is left to buy, so the market will go down.  Conversely, when everyone is
bearish, no one is left to sell, so the market will go up.  Back in the
'60s I did a little free-lance programming for a fellow in Pasadena, named
Jim Sibbets if I recall correctly, who was a pioneer of contrary opinion.
He wrote a market letter, mostly on commodities, and it was based on contrary
opinion.  He would track the "bullish consensus" to see when commodities
were over-bought.  He did this by subscribing to every market letter known
and tabulating the results.  It seemed to work pretty well -- Sibbets
was a savvy old fellow.  He had an IBM 1401 computer which was obsolete
even then, but it sure looked nice in the window of his storefront.

Contrary opinion is now a well-known technique, and stock market commentators
of every stripe spout contrarian advice.  And herein lies a problem: the
theory of contrary opinion can't work right if the commentators it is based
on are contrarians themselves!  Just think about it: if everyone is bullish,
then they will all note the bullish consensus and immediately become bearish.
Then everyone is bearish - how bullish!  It is an unstable system, flopping
back and forth and not meaning much of anything.  Contrary opinion can't work
if everyone is a contrarian.

Richard Gillmann (richard@nwfolk.com)
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