Valentine's Day, a chance encounter on a busy street — and the start of something big. Plus: Vic's V-Day market pattern.

Not only did he never hesitate, but he never imagined that he could hesitate. — Albert de Musset, reviewing Casanova's memoirs.

 I first met him around Valentine's Day 1999. He was limping across an intersection in midtown Manhattan, near where I worked. In one hand he grasped a sheaf of computer outputs that flapped in the breeze, and in the other was an ancient copy of Casanova's memoirs. He carried a cane under his arm. It was the dead of winter, but he wore a blue-and-white cotton seersucker suit.

"May I help you across the street?" I said. "Your papers look like they're going to blow away in the wind." And you do, too, I thought to myself.

"Yes," he said. "If you promise me one thing. I've often admired your sweetness, wit and bearing on television, and I've read your columns on the wire. Please don't unload any untested stuff about moving averages or buying on up-volume on me."

"I won't," I promised.

"In that case, as Casanova said, 'Opportunity is like fortune — one must seize it or it will run away and not return.' Would you consider it overly presumptuous if I suggested we leaven the quantitative analysis of the predictive properties of interactions between stock prices with a bit of food?" he said, allowing me to take his papers. "I guarantee that it will not be entirely without profit to you."

"I don't even know who you are," I said.

"I'm just a speculator," he said. He handed me a card. Revolutions fomented, it said. Damsels rescued. Ballyhoo deflated.

Something clicked. I had seen this man on a book cover playing checkers.

"Do you fancy yourself a Casanova with damsels?" I asked.

"I admire Casanova for many things," he replied. "He was a great speculator, a gifted gambler and mathematician, and translated many of the great French masterpieces into Italian. He was the first to design a derivatives product in the fixed-income market, and created the first French lottery. His memoirs provide the best depiction of 18th century European life. His escape from prison in Venice is one of the great flight stories of all time, and we all could learn from the careful attention to detail that led to its success. Regrettably, I lack Casanova's aptitude in the romantic arts he is so well known for."

"What's the cane for?" I said, curiously. He had a lurching gait, but he wasn't using the cane.

"I always carry a cane after the S&P 500 ($INX) has declined more than 4% in the past week," he replied. "That's how the old-time speculators made all their money. When panic came to Wall Street, they'd buy to the full extent of their bank balances. Casanova, for example, often profited from buying stocks during panics and was quite generous with the proceeds in his chivalrous adventures.

"Cane investing still works," he added. "Over the past six years, there were 64 weeks when the S&P fell more than 4%, and the average change during the next seven trading days was a 3% rise."

"That seems rather humdrum."

"Well, the numbers can be fascinating. If you come tonight, I will show you a special Valentine's Day pattern. Will you come?"

"Mind if I take my laptop?"

He started laughing. He said that reminded him of the scene in "The Fountainhead" where Gail Wynand comes back from a publishers' convention all ready for a private evening with Dominique Francon and she tells him to get dressed because they're going to see a play, "No Skin Off Your Nose."

He said it would be ideal if I brought my laptop. The salad bar at a certain nearby restaurant had some great imitation crab, he said, as well as an electrical outlet by the soft-drink machine for my computer. "I will await your arrival with zeal, young damsel."

I surmised that my new friend's interest in Casanova may have been strengthened by the latter's frequent speculative losses in foreign markets and subsequent struggles back to prosperity in the derivatives markets. It seemed entirely possible that similar misfortunes were forcing him to entertain at the local deli.

I handed him back his papers and told him I had an appointment with a value manager. This seemed to greatly agitate him. Casanova, he said, often found that the best antidote to waiting was a little speculation, and accordingly he planned to do a little speculation of his own while I was away. He appeared somewhat mollified when I told him that the manager just wanted me to hype his stocks, and that I would be careful.

First, Some Necessary Diversions

The value manager was waiting for me when I arrived at the bar of the St. Regis. I swung into the booth. "So, Alan. Tell me what you've been buying."

"I picked up some Bethlehem Steel (BS, news, msgs) the other day," the man said. "P/E of 5."

I couldn't help yawning. "Yeah, and sales are growing at about 7%. The stock has been going down for 20 years."

"My screens say that the stock is a great pick," the man said, a little huffily. "Why, it was a member of the Dow Industrials ($INDU) just a couple of years ago. We're also recommending Carmike Cinemas (CKECQ, news, msgs)," he said. "It trades at 1.7 times book value. By contrast, the rest of the market is trading at more than six times book."

That doesn't mean Carmike won't go to 0.08 times book, I thought to myself. I escaped after three-quarters of an hour and went on to my next appointment. Jack Flanders was a famous technical analyst, and I wanted to persuade him to send his updates to us before he gave them to Brand X. Jack needed no prompting to talk.

"I have spent over 10 years developing a technical indicator, the Guaranteed Known Thing (GKT), using number sequences that occur throughout nature," he said. "It has made me a fortune. The GKT is based on the work of two famous mathematicians, Johann Heinrich Lambert (1728-1777) and Leonardo Pisano Fibonacci (1170-1250).

"Lambert is renowned among physicists as the founder of the theory of light measurement, and his Cosmological Letters are famous among astronomers. Lambert attempted to explain the structure of the universe in these writings. My GKT uses Lambert's series of color-triangles, which proceed from 45 hues built from yellow, cinnabar and azurite to smaller, brighter triangles with hues numbering 28, 15, 10, 6, 3 and finally 1, a total of 108.

"I check the entire universe of stocks for action around the 45- and 108-day moving averages, then look for golden-hued crosses at the moving averages corresponding to the hues in Lambert's other triangles. I then screen the surviving stocks for Fibonacci Fan and Arc intersections. So powerful is this analysis that I caught the start, top and bottom of the entire Internet move.

"But I am not greedy, and have decided to divulge the stocks picked by the GKT indicator on my new hotline, the King's Ransom. You can be my first subscriber."

"Have you back-tested it?" I asked.

"That would be difficult," he said. "But it works."

"Do you give complimentary subscriptions to the media?" I asked. "Since you've done so well…."

"Sorry, gorgeous. Can't do it. What will you have to drink?"

I don't drink the hard stuff, but at that point I might gladly have tossed back a double Scotch. Instead, I politely excused myself and slipped out through the glass doors, winking at the doorman. What a bunch of mumbo jumbo, I thought.

The Romance of Stocks

Finally it was time to see the speculator. As I walked the few blocks to the deli, I realized that I had been thinking about him all evening. Somebody had already claimed the table by the soft-drink machine. I sat down and took out my laptop anyway and was scrutinizing the latest earnings reports when he suddenly appeared at my side. I hadn't realized how tall he was. His blue eyes alight with amusement, he handed me a plastic container of imitation fish. I opened it and stuck a plastic fork into the red-and-white contents, hoping he would be satisfied with a gesture of polite intent.

"What do you do when you're not playing checkers?" I said.

"I conduct experiments."

"What kind?"

"I look for patterns that investors haven't seen yet. That's why I came to you. I saw those stories you wrote about how 'Moby Dick' and the All-Star break are related to the market. That kind of writing gives your readers a meal for a lifetime. Much better than the usual stuff that reporters write, quoting tired advisers with mediocre records hyping the stocks they finished buying a few days or weeks ago, or back-patting themselves with reports of their timely sales."

He put his computer outputs on the table. "If it's knowledge, it's quantifiable," he told me. "For example, I've noticed a special Valentine's Day pattern. The V. It happens when the S&P falls more than 10 one day and then rises more than 10 the next day."

"Anything significant?"

"Quite. It will make you about 1%, on average, by buying at the close of the rising day. And as Casanova said, 'Money can buy the same degree of happiness whether in Italy or France.'"

We talked about the market all evening. My companion told one fascinating story after another.

"Do your patterns work with individual stocks?" I asked.

"I don't trade them," he said. "Futures are more liquid."

"But you're missing half the fun and romance, Vic. Individual stocks have stories. The great entrepreneurial themes are like instruments in the market orchestra."

"Perhaps we could hoist our sails together," he said, looking at me with interest. "I understand there's a good port in Seattle that's open to this sort of union. You could help me with the stories, Laurel, and I could help you with the numbers."

And that, dear reader, is how this site began.

P.S. One of the gravest errors in the area of testing and counting is the assumption that if something is statistically significant in one period it will be predictive in the next (in markets or life). Oh, how many fortunes and dreams have been, and will be lost because of this error. In the above article, which was written on 02/14/01, we look at a Valentines pattern, that was statistically significant — It was bullish and frequent and significant in the five years ending in 01. Regrettably it has hardly ever has happened since. I asked Doc. Castaldo to update the study for the prospective period, the out of sample period, or the period within which the pattern would have been approved by the old duck hunters club et al. … An excerpt of his report follows:

"Regrettably…. the effect has completely disappeared. From 1996 to 2/15/2001 buying the S&P after it was down more than 10 points one day, up more than 10 the next, gave profits of 5.5 S&P points for the following day, statistically significant, z=2.2. After the publication of the article, that is from 2/15/2005 to 1/30/2007, the profit was 0.6 S&P points, statistically indistinguishable from zero." What seasonal studies have stopped working, what fixed systems have gone from black to red, because of the crucial neglected factor?"


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