A Career of Anecdotal Signals in the Stock Market

I began to follow the stock market at the age of 10 in 1961. Yes, ten years old.

My Uncle Sid taught me how to read The Wall Street Journal when I was ten. "Bruce," he told me, "you read the WSJ from the back to the front. By the time a story gets to the front page, it was old news."

I understood, even at a tender age, what he told me. But I got to see it in action when I worked at Reuters decades later.

A building story about a shortfall in coffee stocks did not get published at Reuters until prices began to soar higher. All of the signs were there and coffee traders were buying, but reporters could not or would not write about the future. They had to write about old news — when a report was finally published by the exchange showing that coffee stocks were truly low.

Anecdotal stories are something that most journalists do not understand because they are journalists first and analysts second or third. Charles Henry Dow was a journalist, but he worked on the floor of the New Stock Exchange for a while and he learned how markets really worked. They are discounting mechanisms.

What Are Anecdotal Stories?

I had read in college — and maybe you did, too — about the shoe shine boy in 1929.

The story or legend goes something like this: In 1929, old man Rockefeller or Bernard Baruch was going to the stock exchange and he stopped for a shoe shine. The shoe shine boy recognized them and asked for a tip. A tip in 1929 may have been a nickel, but this shoe shine boy wanted a stock tip. The bull market and the use of leverage had gone on so long that it had reached a young shoe shine boy.

Traders like Baruch would have recognized that the rally was "too long in the tooth" and would have acted by selling.

It was not until 1975 when I got my first real-time example of an anecdotal signal.

I was working in NYC at a commodity consulting firm at 42nd and Lexington across the street from the Pan Am building. It was February 3, 1975 when Eli Black, the head of United Brands, went up to his Pan Am Building office and threw himself out a window. The Dow Industrials made lows in October and December 1974 after a 50% decline.

I then read about the 1929 crash and found that the suicides happened in 1932 at the second decline. Bad news happens at or near the lows.

While taking a course in technical analysis at the New York Institute of Finance with Ralph Acampora in 1974, I learned about "when your Aunt in Kansas calls you up for a stock market recommendation" being another anecdotal signal. I did have a brother who lived in Kansas, but the idea is that when someone who is so far removed from Wall Street becomes interested in the market, the rally is in its last innings.

In the late 1980s, I learned about sell signals from Wall Street strategist John Mendelsohn. It had happened for stocks in the summer of 1987 and in fall of 1986 for bonds. Mendelsohn told an audience at a monthly meeting of the Market Technicians Association that, in early 1986, he walked out on the trading floor of Dean Witter and he saw grown men cheering their Telerates as bonds rallied.

"Go! Go!" they chanted.

It was anecdotal evidence that the rally in bonds had gone on too long.

Mendelsohn also related that, in the summer of 1987 at a board meeting of a parochial school that his children attended, that a nun questioned the sale of stock that was donated to the school. The light went off in Mendelsohn's mind that the five-year bull market in stocks had run too far when a nun, who had taken a vow of poverty, was interested in the stock market. Understand?

In the late 1990s I made a lot of money for my three sons in their custodial accounts. I found an offshore driller with a big base and bought it aggressively and added to it as it rallied from $2 to $30.

Then, one night, I got a call from one of my mentors — Mike Epstein. Epstein was a guest lecturer at MIT but liked to visit the gym at Harvard. He got home from his workout and couldn't wait until the next day to tell me that the MBA students were talking in the locker room about the rally in the offshore drillers. The rally had gone on so long that it went from Wall Street to sleepy Cambridge and, eventually, the guys in the locker room were talking about that instead of the hot women in the gym.

I promptly sold the entire position. Thank you, Mike.

In early March of 2009 I was speaking at an office that was part of a growing Morgan Stanley. This was in Philadelphia and it was originally a Legg Mason office and these guys had seen a number of ups and downs in the market. I gave my "we are at a bottom" talk over lunch with lots of charts and I got a lot of pushback from the financial advisors (they were called "brokers" at the time). These seasoned guys were hiding under the table and could not recognize the early bottoming process.

They also were fearful when their clients called. An anecdotal buy signal in my book.

This past Friday, while sitting at the pool in my community, a neighbor and friend checked on the close of the DJIA on their phone. They gave a spirited fist bump to me and the others around the table. It was a new high close and they were already spending the gains in their mind.

I am taking this as another anecdotal sell signal.

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