Second Derivative (2D)

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   From today's WALL STREET JOURNAL, "Heard on the Street," Wednesday, 1 August 2001, pg. C1, col. 2:

_Investors Recall_
_College Math:_
_2D=Recovery?_
By KEN BROWN
   In their search for a bottom for slumping corporate earnings and share prices, many money managers are harking back to their days of college calculus to figure out when things will turn.  "Second derivative," which dredges up memories of unsolved math mysteries in some people, is the latest catch-phrase.
   For the arts majors among us, second derivative basically means the change in the rate of change.  Or, are things getting worse at a faster rate or ar they getting worse, but only more slowly?  (The first derivative is simply the rate of change.)
   This logic may sound like it is two steps removed from reality, but it actually has been moving the market all year.  "I think it's a real argument," says Eric Ross, a technology analyst at San Francisco investment bank Thomas Weisel Partners.  "Whether people laugh at it or not, investors are looking at it."
   Many investors hope it will help them get into the market ahead of any big rallies.  In essence, the second-derivative approach involves looking at such things as profit warnings, analysts' earnings (Pg. C2, col. 3--ed.) estimates and equipment orders (including cancellations) for signs that the downward momentum is slowing.  Some people dismiss second derivative as a tool of momentum investors, those gunslingers who buy what is going up, no matter what the price.  But even for investors interested in company fundamentals such as earnings and profit margins, trying to spot a turning point is important.