Investors Benefit From a Historical Perspective

Few investors living today have ever seen anything similar to the volatility we’ve witnessed across markets over the past two years. Those looking for some historical precedent might be served by checking out Markethistory.com, a unique subscription-based research tool that aims to predict a market’s future by looking at its past.

The web site, and the company behind it, was founded by Tony Kolton, an old-time Chicago options floor trader who banked a small fortune shorting IBM before the crash of 1987 after comparing it to the price action of blue chips back in 1929. Stock charts seem to run in his blood.

As we pointed out last week, no tools for market prognostication always work. But while ticker symbols change throughout the years, human nature remains the same. How XYZ acted in the past can be very telling of how it might act in the future. So what’s Tony’s database keying in on now?

One ominous blueprint has been uncovered in Google (GOOG), which Kolton noted has closed below its lower Bollinger Band after a 3% decline on Tuesday. His database indicates that, according to the seven previous occurrences of this pattern, Google proceeds to decline further every time, with an average that peaks 35 days later down some 17%.

Google a Goner?


Another study, called an analog, plots a stock’s price action against previous examples in which it moved in a similar fashion. To that end, there’s bullish indicators from Latin American utility Empresa Nacional de Electricidad S.A. (EOC), whose current price movement is a 98.6% match — virtually identical, to that of Nov. 22, 2006. Back then the stock rallied an additional 10% over the following quarter.

It’s Shocking

With all the talk about how much stimulus is needed to put the economy back on track, I’m reminded of a series of advertisements from AT&T (T) that first aired nearly 15 years ago. Titled “You Will,” the ads presented an optimistic and brazen view of a technologically advanced future, with then unimaginable revolutions such as video teleconferencing, wristwatch cellphones and electronic toll roads part of our everyday routine.



Less than a generation later, virtually all the technologies have not only arrived, but have efficiently and inexpensively been integrated into contemporary life. How advancements that had previously seemed nearly impossible were achieved was not by government stimulus, but by profit-seeking corporations looking solely to make a buck. Scores of 1990s-era growth firms like Motorola (MOT), Microsoft (MSFT), Cisco (CSCO) and yes, AT&T, all contributed to making sure “We did” accomplish what “You Will” promised. Government spending, or control, provided little catalyst at all.

The belief now propagated in America — and echoed this week by the Pope — is that business is destructive, that wealth creation can’t be trusted to the greedy profit-seeking capitalists, but should be left to an altruist government to invest money the “right” way. 

Could government bureaucrats have developed the iPhone or the wireless router? Could a presidential committee have come up with antiretroviral therapy to treat AIDS, turning what was an epidemic in 1993 into a chronic, treatable illness by 2009? Not likely. Since 1993, a competitive market has caused technology to plummet in cost and soar in quality. The cost of a first-class stamp? It’s up 51% since then — and it’s not as if the mail moves any faster. Stimulus and government spending does not create wealth. The next raft of technological advancement can only come once we can return to a competitive, capitalist free market — and Uncle Sam reassumes his rightful role as referee, not a participant in the game.

Back in the mid 1990s, Russian comic Yakov Smirnoff would punctuate his act with his signature line “What a country!” It was remarkable that this citizen of the evil Russian empire, then our sworn enemy, would be so welcome in America.

A modern day incarnation has quietly unfolded on the floor of the New York Stock Exchange, where the first American ETF investing in accordance with Shar'iah, or Islamic law, has been listed and begun trading. The Javelin Dow Jones Islamic Market International Index Fund (JVS) seeks to track the performance of the Dow Jones Islamic Market Titans Index, which consists of 100 non-U.S. companies from over 23 countries.

Like iShares KLD Select Social Index (KLD) and other socially responsible funds, JVS limits its holdings, in this case only to companies that adhere to Islamic law. This means no financial stocks, no alcohol, weapons, pork or gaming stocks. Highly leveraged companies are also off limits. The rules date to the 7th century Prophet Mohammed; the fund maintains its own Shari’ah board to ensure Islamic law is followed.

This means a large energy component (30%), with names such as BP (BP) (4.94%) and Total (TOT) (3.79%) and Petroleo Brasileiro (PBR) (2.07%) holding dominant spots. Middle Eastern stocks, such as we wrote about earlier this spring, are not represented in the holdings. England (21.04%), Canada (10.71%) and Japan (9.83%) are the biggest country allocations.

What’s in the Islamic ETF?


In a capitalist society, investors are free to support any companies they wish. Personally, I happen to appreciate financial companies like Visa (V) or alcohol manufacturers like Ambev (ABV), not to mention Playboy (PLA), for providing goods and services that I believe improve the human condition. Ever tried holiday shopping without a credit card or having a BBQ without a Budweiser?

Still, with over seven million Muslims in the United States, the fund has a built-in audience. But weather Shari’ah-compliant investing will ever become more than a small niche, especially in a period of depressed equity returns, remains to be seen.