How to Beat the Stock Market by Watching Girls, Counting Aspirin, Checking Sunspots and Wondering Wh

Jesse Livermore, a big-time speculator from an earlier era, once remarked that the stock market is crazy and that to beat it you have to be crazy yourself. Liver-more was right. Unfortunately, he wasn't crazy enough. He made four colossal fortunes but lost all four and died in virtual poverty, a suicide.

Still, the truth of his epigram survives in his absence. Witness the following eight formulas to predict how stock prices will move. They have little or no basis in common sense. All that can be said about them is that they seem to work.

The Hemline Indicator

In 1967, Ralph Rotnem, then research chief at the brokerage firm of Harris Upham & Company, discovered a profound truth. He drew a graph of the Dow-Jones Industrial Average over a 70-year period and superimposed on it another graph showing the ups and downs of women's skirts. The correlation was astoundingly close. When hemlines rose—notably, in the early Twenties, the mid-Thirties and the Sixties—so did the Dow. When hemlines sank floorward—as happened in the late Twenties and late Forties, for example—the Dow either collapsed or entered a period of stagnation.

Rotnem grew nervous in the late Sixties. Hemlines had reached a point where they literally could go no higher. So, by extension, had the Dow. Pants suits and longer skirts were beginning to show up in the fashion magazines. "This worried me," Rotnem recalled. "I hoped maybe the pants suit and the floor-length skirt were passing fads that wouldn't catch on with most women. But when I began to see knees disappearing on the streets, I thought, Oh-oh. ..."

Somebody asked Rotnem in 1969 whether he and his brokerage house took the Hemline Indicator seriously. He replied, "No, but we should. It's the only forecasting tool that's right one hundred percent of the time." It was right again in the late Sixties. The 30-inch plunge from miniskirt to pants suit was followed by a 250-point plunge in the Dow. Today, the Hemline Indicator fails to point out a clear trend for the future of the stock market. Nearly all hemline lengths are in vogue. The index seems to be saying that the market, like the eyes of leg men the nation over, will wander up and down indecisively at least for a while.

The Heel Hypothesis

Though the Hemline Indicator went slightly awry in the Fifties (skirts dropped sharply, but the Dow just stagnated), a companion indicator held up well. This device forecasts the market's moves by measuring current fashion in the heel heights of women's shoes. Heels were high in the booming Twenties, lower in the gloomy Thirties. During and after World War Two, they rose to preposterous heights (platform soles were then in vogue) and the Dow more than doubled. When platform soles went out and heels fell accordingly, the market went nowhere. There was no further significant drop in heel heights for the next decade and a half, and the market got over its early-Fifties doldrums and soared dramatically until the late Sixties. Then low heels came back in and stocks sank sympathetically.

The originator of this peculiar forecasting technique is a Wall Street banker who believes that his employer, a rather solemn institution, would not appreciate the brilliance of his insight. "Don't identify me," he says. "Just call me the, um, Sole Proprietor of the Heel Hypothesis." The Sole Proprietor observes that heels are rising again and platform soles are returning after a 20-year absence. If pants suits and maxiskirts fade into limbo (which some fashion authorities think likely), the Hemline Indicator will also turn up and the middle Seventies will be a grand time to own stocks.

Indexes such as these may be a little less farfetched than they seem. According to a Florida psychiatry professor, "People enjoy sex more and want it more when they're feeling happy. In generally buoyant, optimistic times, women tend to dress in more revealing or exaggerated styles to catch the male eye. In gloomier times, they may dress in a more utilitarian manner. So these indexes of women's clothing styles might not be utter nonsense. Many women are highly sensitive to the emotional ambience around them. If their changing dress styles show they are feeling more buoyant, that may be a clue to emotional factors that will affect the stock market."

The Drinking-Couple Count

If market forecasts can be made from observations of women's behavior, there should be a complementary theory about men, and there is. It is preserved for posterity by David Canfield, an executive in the brokerage house of Fahnestock & Co. Canfield, an enthusiastic chronicler of Wall Street oddballs, has a client who times his market play by observing evening crowds at cocktail lounges. The theory goes like this: In times of general discontent, men tend to drink alone or with other men. When optimism is rising, they grow sexier, partly because women are inviting such conduct. You can spot the re-emergence of optimism after a depressed period, Canfield's client says, by counting drinking couples after hours at your favorite water hole. When the average number per evening rises by about 20 percent and stays high for a few months, the stock market is about to rise. Conversely, a significant long-term drop in the number of couples presages a decline.

Canfield's client recently perceived a steady increase in drinking couples. "I must admit he has shown good timing in the past," says Canfield. "But so have a lot of other guys. I have another client who can be timed by the phases of the moon. ..."

The Sunspot Theory

David Williams is a retired executive living in Florida. According to his own account, he has increased his money by an average 25 percent a year since he ventured into the market in 1958. He says he has made 279 purchases to date, of which 275 produced gains totaling $169,953 and four produced losses totaling $312.

Williams does it partly by counting sunspots. His theory starts with the premise that the human brain and nervous system work by means of minuscule electrical impulses. If this is so, Williams figures, changes in the sun's radiation ought to change the way people think and feel. Certain types of radiation might interfere with our synapses, with the result that in some periods we tend to be abnormally jumpy and irritable, making more than our usual quota of judgment errors. This would interfere with commerce and make everybody glum, with the end result being a stock-market slump.

If all this is true, Williams proposes, the way to predict the market's course in any future period is to predict what the sun will be doing, via sunspots, those huge, hurricane like storms on the solar surface that are visible evidence of periodic changes in the sun. As it happens, the number and distribution of sunspots, Williams says, vary in a cyclical, predictable way. His formula for predicting these changes is stunningly complex—there are cycles within cycles overlapping other cycles—but Williams claims he has worked everything out with enough clarity for his own purposes, and, given his past success, who can argue with him? His prediction for 1973: third quarter down, last quarter up a notch. For the first half of 1974: a thundering bull market—perhaps.

The Aspirin Formula

This theory, of unknown origin, begins with the reasonable proposition that people get a lot of headaches when their business affairs, love affairs and other affairs are turning sour. Such a period of failure and sore synapses would expectably be followed by a market collapse. Therefore, says the theory, you can see the market's future by watching the ups and downs of the aspirin business. The forecasting technique is capable of looking one year ahead: When aspirin sales and production rise in a given year, the market will drop the following year.

Here follows the record since the mid-Sixties. In the left-hand column are the yearly changes in acetylsalicylic-acid output, as reported by the U. S. Tariff Commission. The right-hand column shows what happened on Wall Street a year later, as measured by Standard & Poor's broad-based composite stock index:

Aspirin S. & P. Index

1964 down 1965 up

1965 up 1966 down

1966 up 1967 up

1967 down 1968 up

1968 up 1969 down

1969 up 1970 down

1970 down 1971 up

1971 down 1972 up

1972 up 1973?

The theory failed once: The market perversely and unaccountably went the wrong way in 1967. Maybe hemlines were so high that year that nothing else mattered.

On the basis of incomplete figures for 1972, the trade journal Chemical Marketing Reporter estimates aspirin production for the year at 34,500,000 pounds, up from 31,700,000 in 1971. Figures also show that sales of Alka-Seltzer, down for the previous two years, rose again in 1972. All those 1972 headaches bode ill for 1973, but final returns aren't in yet.

The Yellowness Rule

A Wall Streeter once approached New York color consultant Faber Birren and excitedly described a forecasting technique based on the color yellow. The Streeter had noticed that there was always a lot of yellow around—on living-room walls, cars, men's shirts, women's dresses—just before the market began a major rise. Conversely, the disappearance of yellow seemed to signal a slump.

Birren replied, "Well, all. ..." But after a while he grudgingly allowed that the theory might have something to it—"not much, but something." Yellow is an odd color, he says. In color-preference tests, though people associate it with sunshine and optimism, relatively few call it beautiful or rank it as a clear favorite. However, Birren says in his book Your Color and Your Self, yellow is often favored by people in mental institutions. Psychiatrists associate it "not with melancholy ... but rather with violent, raving lunacy." Thus, in the manic-depressive cycle of economics, the appearance of yellow on the scene might signal the beginning of a manic episode, a time of wild speculation.

"Farfetched," mutters Birren. But his records of paint and dye sales do show that yellow fell in popularity during the late Sixties—which would have been a sell signal to any stock trader using this technique. Yellow is now rising rapidly again—in fact, has become the third most popular color, after off-white and gold. This obviously means the market will soon go up—provided it doesn't go down.

The Great Lake Watch

This theory, at least 25 years old, holds that you can predict economic booms and busts by watching long-term changes in the water levels of the Great Lakes. The rationale is that rising lake levels show there has been a lot of rainfall, which means farmers' harvests have been good, which means—well, you can take it from there. Supposedly, there's about a four-year lag between the surges of the lakes and those of the stock market. It takes that long, the theory postulates, for sad or happy agricultural times to spread to industry and reflect themselves in stock prices. Thus, the Great Lakes reached unusually low levels in 1925, 1935 and 1964, which would have warned lake watchers that the market was due for trouble in 1929, 1939 and 1969. Needless to say, the troubles occurred on schedule.

The U. S. Commerce Department's Lake Survey Center, which has been monitoring lake levels since 1860, agrees that the levels reflect significant long-term variations in rainfall and snowfall. The lakes drain enormous areas of this country and Canada. They hold enough water, in fact, to cover the entire continental U. S. to a depth of nine feet. But the center's director, Captain Kenneth MacDonald, doesn't use his soundings as a basis for playing the stock market. Says he: "We hear these theories from time to time. But as far as we're concerned, when the lake levels are high, all it means is that there's a lot of water around."

The levels have been high since 1970. At the end of 1972, the several lakes were (concluded on page 170)Beat The Stock Market(continued from page 118) anywhere from six inches to two feet above their long-term average depths. Both Lake Erie and Lake Michigan were at record highs. This would suggest a grand bull market starting sometime between 1974 and 1976. To Captain MacDonald, that spoilsport, the high 1972 levels are a reflection of the ravages of Hurricane Agnes.

The Bad-Guess Theorem

Investors Intelligence, an advisory service in Larchmont, New York, has a peculiarly unkind view of market forecasts. It holds that no matter what forecasting techniques people use, most of them are wrong most of the time. It believes an excellent way to elucidate the future is to poll leading advisors and reverse their consensus: Whatever they think will happen, won't.

This uncharitable poll has been conducted regularly since 1963 and its record as a forecasting tool is embarrassingly good, though not perfect. Let's look at a few samples. In the left-hand column are the proportions of bulls and bears on various dates. The right-hand column shows what the Dow actually did in the 12 months following each poll.

Consensus Dow

May 1965: Bullish 6 to 1 Down 70

Sept. 1967: Bullish 2 to 1 Down 40

Dec. 1968: Bullish 2 to 1 Down 180

May 1970: Bearish 2 to 1 Up 270

Nov. 1971: Bulls and bears even Up 150

The proportion of bears to bulls in this poll increased steadily through most of 1972, from one against three in January to four against five as the year progressed—a fact indicating to followers of this index that the smart money ought to be increasingly bullish.

• • •

And so, fellow students, we can now peer into the future. The Bad-Guess Theorem, the Heel Hypothesis, the Sunspot Theory and the Drinking-Couple Count say the market will go up. The Hemline Indicator, the Great Lake Watch and the Yellowness Rule seem to agree, but they make no promise that the rise will begin in 1973. The Aspirin Formula says it definitely won't. Investors Intelligence would assume that most of these forecasts, perhaps including its own, are wrong. However, since Investors Intelligence is itself a forecaster and therefore may also be wrong, we can conclude—well, we can conclude that the stock market, just as Jesse Livermore said, is crazy.