CHAOS ON WALL STREET - Gann's Ideas: Prophecy Or Just Nonsense? - Second of Two Parts
The Atlanta Journal and The Atlanta Constitution - Monday, September 18, 1989
Readability: >12 grade level (Lexile: 1310L)
Author: HENDRICK, BILL, Bill Hendrick Staff Writer: STAFF
OVERLAND PARK, Kan. - Bill McLaren once lived in one of the finest mansions in the Sunflower State. He drove a Rolls-Royce, had a Porsche 911 Targa for sport and dated a Playboy magazine centerfold model.
Then, out of the clear blue Kansas sky, a financial tornado blew it all away.
The stock market fell apart without warning, and poof - like magic -everything was gone: the mansion, the cars, the girlfriend. Everything but the bill collectors. So he hightailed it down to Texas, where he hoped he could find a place to hide.
Like a lot of people down on their luck, he found God instead. But more significantly for his bill collectors, he also found a wizard. William D. Gann.
Like the prophets of old, Gann was long dead. But Mr. McLaren began studying his teachings, along with the Bible, and concluded that one reinforced the other. The combination, he says now, 16 years later, changed his life.
He went to work, paid his bills, returned to Kansas, got married and had a son, and now lives in a middle-class suburb, coaches Little League baseball with a passion, drives a BMW, and trades the stock market again for a living, but much more cautiously.
Though hardly as rich as he once was, he's doing OK, Mr. McLaren says with a smile, thanks to the teachings of Gann, an obscure, turn-of-the century stock market prophet who rose from humble beginnings in Lufkin, Texas, to become one of the biggest tycoons on Wall Street.
Like some modern-day physicists, Gann believed that unseen "natural forces" had a perceivable impact on the stock market. So does Mr. McLaren. But he says his years of study of Gann's methods have proven to him that the market reflects perfect order, rather than the "order in chaos" some academics claim to be finding.
In short, Gann analysis holds that stocks move according to strict mathematical rules and that market movements can be predicted with geometric formulas.
Many market forecasters have equally bizarre beliefs, including a widely accepted but tamer group of Wall Streeters known as "technical analysts," who claim history has predictive powers and that mass psychology rules the market more than economic fundamentals do.
Most academics openly ridicule such notions as mysticism, but like many other traders with money-making "systems," Mr. McLaren doesn't care what doubters say and describes his methods with the fire of an evangelist.
"Look at this," he said excitedly one morning, unrolling a 4-foot-long chart on his desk. "This is wild."
The chart was covered with squiggly lines as well as straight ones of various lengths.
"Here's an '82 low," he pointed. "Come up here to the high. Another 360 degrees gives you this. At this point we're here, within three points of a full cycle. Here, we've got the one-year cycle coming out. And this was a key point, because everything vibrated off it."
He jabbed a jagged line with his index finger. "This is where I got out."
Before the Black Monday crash two years ago, Mr. McLaren said, he did what his charts and calculator wheels told him to do: He sold his stocks, and he also sold the market "short." That's a technique in which traders who want to bet that prices are headed down can borrow stock, on the hope they can repay the loan with shares purchased at much lower prices.
Phyllis Kahn is perhaps the nation's best-known Gann analyst. She publishes a popular monthly stock market newsletter called Gann Angles and claims she also made a fortune during the crash because her charts signaled a "death zone."
"The market is not chaotic," she said in an interview in her plush Carmel, Calif. home. "The market is knowable. It's 100 percent knowable. It's totally and completely mathematical."
Like Ms. Kahn, a blond-haired grandmother in her late 50s, and Mr. McLaren, an intense, chain-smoking, 47-year-old, Gann felt that natural forces - similar to gravity - affected human behavior on a mass scale and showed up in the sawtooth patterns of market charts.
He believed the zigs and zags could be predicted precisely with geometric calculations he devised after years of studying historical prices of stocks and commodities in moldy archives in New York and London.
Ms. Kahn and Mr. McLaren believe that "price is a function of time" for individual stocks, commodities and indexes. For example, if the range between a high and low in the market is 100, then 100 days from the date of the high, time is said to be "squared," and "when a square runs out, a change in trend follows," Ms. Kahn said.
The number supposedly works for days, weeks and even years.
"The lowest [point] of the Dow [Jones industrial average] in this century was 40.5 on July 8, 1932," she explained. According to her calculations, 40.5 years from July 8, 1932, was Jan. 6, 1973. That was only five days before the Dow hit what was then an all-time high of 1,067. So within days of 40.5 years after the Dow bottomed at 40.5, the index peaked. For the next two years, the market declined, and the Dow ended up at 570. In Gann analysts' terminology, the market declined after time and price "squared" with each other. It was during that period that Mr. McLaren lost his shirt.
Ms. Kahn added, "Every current price swing, major and minor, is the mathematical result of continuous squaring and re-squaring out of ranges, highs and lows, from past market movements."
Skeptics assert that Ms. Kahn, Mr. McLaren and, for that matter, all other ma rket prophets, essentially trick themselves into seeing cycles, patterns and numerical relationships that really don't exist; they torture data until it confesses; they see what they want to see.
John D. Palmer, a professor of physiology at the University of Massachusetts who has long studied human behavior, said people seem to have an innate desire for orderliness to help them sort out disordered lives, and they'll grasp at any explanation.
Correlations between various cycles and stock movements that forecasters see occur "by chance," he said. "They are what we call nonsense correlations. The stock market moves are just random."
J. Doyne Farmer , a physicist at Los Alamos National Laboratory who is studying the financial markets to see if any "hidden order" might exist in data over time, said he also feels that most market forecasters simply find exactly what they're looking for.
"They sort of sift through the patterns looking for the right pattern that satisfies their special relationship, and it's always after the fact: `Ah ha, I've found one that illustrates my theory,' " he said.
But believers like Mr. McLaren couldn't care less about the skeptics. "I'm making money at it," Mr. McLaren declared.
As strange as such beliefs may seem, Gann's ideas, when compared to some market theories, sound as conservative as the opinions of a bank economist. And even in the academic world, seemingly bizarre notions are being discussed these days.
Physicists like Dr. Farmer in the emerging new field of "chaos," for example, say they have discovered "hidden order" in the behavior of many physical systems that previously were thought to move randomly. And recently, some economists, and a few physicists like Dr. Farmer, have begun to explore the possibility t hat an abstraction like the stock market might obey nature's laws of motions that apply to the physical world.
Though their work is still in the theoretical stages, they hope to detect patterns in stock movements that could provide clues as to whether the market might actually be predictable, at least over a very short period of time.
This new science has resurrected hope on Wall Street that it might be possible after all to develop new mathematical tools for predicting the market.
"Wall Street is getting interested," said Peter Borish, research director for the Tudor Group Inc., one of New York's most renowned trading firms.
Mr. Borish, a trained economist who said he gets "tons of phone calls" from self-styled fortune tellers with "magic" theories, doesn't rule anything out.
"A lot of people thought Einstein was crazy," he said. "Too many people dismiss ideas just through lack of understanding and institutional biases."
Mr. McLaren said only a few thousand investors follow Gann's methods not because they don't work, but because "nobody wants to work that hard." Gann analysis takes years of study to master, as well as Prussian-style discipline to do what the angles and other tools dictate, he said.
Mr. McLaren said the tools of Gann's methods warned him the '87 crash was coming and the discipline he'd developed since 1973 helped him ignore the euphoria that prevailed on Wall Street just before Black Monday.
Mr. McLaren said he advises a few mutual fund managers who practice Gann analysis but "they have to keep their charts at home or they'll be discredited" as mystics. Ms. Kahn counts some Wall Street money managers among her "less than 1,000" subscribers, who pay $360 a year for her monthly letter.
But such skepticism and name-calling doesn't faze most market gurus who sell their self-proclaimed expertise, and who, in most cases, sincerely and ardently believe that they have made earth-rocking discoveries.
"There are many roads that lead to Rome," said Ms. Kahn.
Caption: Color illustration: Image produced by a supercomputer showing an ordered pattern within a chaotic event./ Iterated Systems Inc. Color photo: Bill McLauren./ Cheryl Klauss / Special Color photo: Mason Sexton is a market forecaster in New York./ Cheryl Klauss / Special Photo: Phyllis Kahn publishes a popular monthly stock market newsletter, Gann Angles./ Bill Hendrick / Staff
Edition: The Atlanta Journal Constitution
Index Terms: Economics ; Science ; Research ; Forecasts ; Investments ; Series ; Publications
Record Number: 890904217
Copyright 1989 The Atlanta Journal and The Atlanta Constitution
To bookmark this article, right-click on the link below, and copy the link location: