Grand Finale

The Dow and the Chicago Bulls exit with a flourish

The Chicago Bulls, like tungsten filament in a light bulb, shone their brightest just before total burn-out. At the same time, the bulls of Wall Street demonstrated the same ultimate surge of adrenaline immediately before their inevitable demise.

For those unfamiliar with our analogy, we refer to our commentary of two weeks ago regarding the strange parallel between the fortunes (and misfortunes) of the Bulls of Chicago and the bulls of Wall Street. As we noted in that article, there exists an eerie similarity between both dynasties. For example, the Bulls won their first NBA championship in 1992—the first year of the '90s bull market. The Bulls proceeded to win the next year's championship but were knocked out of contention in 1994—the same year the Dow took a breather from its run-up and spent much of the year in decline. However, the Bulls of Chicago—and Wall Street—were back in force the following year with the basketball Bulls winning yet another title and the Wall Street bulls pushing the market to ever more vertiginous heights. Both bulls continued their respective legacies in 1996 and 1997, with Chicago running up the scoreboard and Wall Street running up the averages.

Then came the climactic and fateful year of 1998.

The year started off slowly for both bulls. Chicago faltered on the court while experiencing friction among its players, while the Dow declined in the midst of an unstable marketplace still in disarray after the sell-off from the previous October. February, however, saw the beginning of an impressive surge for the players in Chicago and Wall Street as the Chicago Bulls regained their solidarity and basketball prowess and the Dow Bulls regained their unshakeable bullish resolve to power the Dow Jones Industrial Average to new all-time highs.

The success for both bulls continued into March, April and early May before both seem to hit an invisible barrier. On May 13, the DJIA registered its final closing high at 9212. The Chicago Bulls, meanwhile, began struggling in uncharacteristic fashion with their divisional playoff opposition before barely obtaining a championship playoff berth. Clearly, both bulls were losing their once indomitable edge.

From then on, the Dow began a volatile descent—still fighting along the way and showing flashes of its former strength and vigor—but falling nonetheless. Chicago likewise, while ultimately prevailing in crucial matchups on their way to the championship, found themselves struggling with opposition it would have crushed in previous years. Still finding that unshakeable will to win in key matchups, it still seemed to find every game a life-and-death struggle.

Finally, the Chicago Bulls found themselves in the finals of the NBA Championships. Their opponent was the strong and determined Utah Jazz (whose mascot, incidentally, is a bear). The series proved a thrilling one, with Utah taking an early lead and Chicago still determined but looking tired. The Bulls rebounded in remarkable fashion in the second game to beat the Jazz by a humiliating 42 points. Simultaneously, the Dow Jones Industrials were forcing short sellers to cover their positions by rebounding an amazing 300 points in three days after having been in a period of decline for over two weeks. But neither set of bulls could maintain their advantage and subsequently faltered in the following sessions—the Chicago Bulls losing to the "Bears" of the Utah Jazz in game five and the bears of Wall Street reasserting their presence in the form of a falling market over the next two days.

The win by the Jazz forced a final game to decide the championship. Utah came ready, but Chicago was as determined as ever, and in an exciting and classic game, Chicago emerged victorious by a mere one point margin to claim their sixth NBA Championship of the decade. Paralleling this feat, the Dow surged an additional 300 points after previously falling through its short-term support level of 8750 and seemingly on the verge of crashing. Both bulls enjoyed their last hurrahs.

In the wake of this striking parallel, several things must be noted in concluding our analogy. First, while the Chicago Bulls went out winners, it seems obvious that their longstanding dynasty as the NBA's number one team is now over. The team's leader and shining star—Michael Jordan—announced he would probably seek retirement after the current season, thus ending one of the most brilliant careers in NBA history. Several other key players also announced plans to leave the team after this year. Without Jordan's presence, the Bulls obviously stand to suffer and will have a hard time indeed maintaining their winning form in the year to come.

Wall Street's bulls are also witnessing a breakup of sorts, with prominent stock market bulls and insiders quietly dumping their long-time holdings in publicly traded companies and exiting long positions in exchange for cash and put options. A number of well-known investment advisers and market gurus announced they had liquidated all their holdings in the stock market and were anticipating a bearish decline (or outright collapse). And the price of a seat on the New York Stock Exchange—long a benchmark for bullish sentiment on the Street—declined by more than 30% from the beginning of the year. The Dow itself fell back into its previous bearish mode in declining nearly 400 points last week. Both bulls, it seems, had had enough of the long ride upward and were prepared to go out on top and ride off into the sunset.

The next few weeks should show clearly the truth or error of our surmising on the "bulls." While some may see this analogy as nothing more than a pointless and irrelevant comparison, we prefer to think of it as a sociological phenomenon as manifested in two widely followed "benchmarks": the number one basketball team in the NBA and the number one stock index on Wall Street. Both the game of basketball and investing in the stock market are psychological phenomena which require a certain bullish psycho-kinetic energy to propel them. As it has previously been observed, both basketball and investing in the stock market enjoy their greatest popularity during bullish times, and we believe we are at the absolute pinnacle of just such a time.

We fully expect both investing and basketball—as symbolized by the demise of the Bulls of Wall Street and Chicago—to experience a decline in popularity in the bear market to come.