QQQQ: Leaving Marianas

"Out of the crooked timber of humanity no straight thing was ever made." -Immanuel Kant. Putting only logic and reason to the stock market fails to accurately predict future movements. Using past experience only also fails to predict. The philosopher quoted above argued that both logic and experience must be used in tandem since, "using reason without applying it to experience will only lead to illusions, while experience will be purely subjective without first being subsumed under pure reason." -wikipedia (I. Kant) In the present situation of the stock market, a combination of both logic and experience might produce a reasonable prediction of the next movement: Facts: QQQQ lost as much as 49% of its value in the past 12 months and now sits at 60% of its November 2007 peak value. In 2000 the Q reached an all time high value of ~120 and subsequently crashed nearly 84% down to ~20 over the next 18 months. When looking at other famous bear markets, such as the 1932 crash, the prices of the stocks returned to their original amount gradually over the next several years. By 1955, the Dow had recovered completely and continued upward. Experience tells us that we can expect the Q to fall a further 34% over the next 6 months and then recover gradually back to the peak value reached in the year 2000 over the next 15-17 years. As Kant argued though, experience is subjective without adding logic. For the logic, we turn to one of the greatest market theoreticians of all time, William Hamilton, who preferred (like Charles Dow) to describe each major swing of the market in three phases. This is my paraphrase of his thoughts: Stage 1: The smart money begins to realize that the price of the stock is way above fair value and begins to distribute while the greedy public continues heavy buying. Because of this heavy buying, fundamentals still appear bullish. After a moderate decline, a rally occurs retracing part of the decline. This recovery movement gives confidence to the bulls - however, the reaction high of the recovery move will form - and will be lower than the previous high. Stage 2: Panic. The general public realizes that a new high has not been reached and a new low is occuring or about to occur. Heavy selling insues. Prices return to below their inherant value. Stage 3: Accumulation. The smart money notices that the value of the stock is now below what is fair value and begin to slowly accumulate the stock. (The author of this article has noticed that this stage tends to form a "line" of price that ranges between a narrow high and low for several days or weeks.) A new bull market forms. Logic tells us that since the price of one share of the QQQQ is 60% of its previous high value, and that since all three of the stages above seem to have happened, (or are currently happening since a line has formed from 10/6 to 10/29 and may continue on) that now would not be an incorrect time to buy for value. We could even go as far as to say that logic and experience together call for a 400% increase in the price of the Q over the next 15-17 years. That's not a bad ROI!