After 45+ years as a technical analyst I have found that this breed of folks comes in many sizes and flavors. I can write about each of them simply because I have at one time or another been there, done that, and still doing it. In doing this I’ll share some stories along with the usual strong opinions. I always like to set a goal for an article, so this one is just trying to share an awareness that you may or may not know.
Probably self-explanatory, however a newbie can originate from different directions and angles. We have all been Newbies, but we might have become one for different reasons. For example, I lost money in the bear market of 1974-75 after lots of research into earnings, sales, products, managements, etc. or in a nutshell – fundamentals. The few books I had read at the time made this seem like the surefire way to be successful in the stock market. Well, it didn’t work – for me. As the market plunged, the fundamentals kept getting better. No kidding! It is just math. Price over earnings; when prices fall the ratio gets smaller – gee, what a concept. Being an engineer and searching for a different process, I discovered a book by Michael Zahorchak, called, “The Art of Low Risk Investing.” He described an almost mechanical process using weekly data with five, fifteen, and forty week moving averages. These averages were calculated on the NYSE Index, the NYSE Advance Decline Line, and about 50 large company stocks. They were simple (arithmetic) moving averages so it was easy to calculate on a columnar pad with a calculator. You know, add the new number, drop the one five weeks ago, etc. If you are under the age of 50, maybe you don’t remember! Computers have opened a gap between the individual and the data. I think this might be a problem, but maybe not. I have written articles on the Zahorchak Method here, here, and here.
I expect very few become technical analysts the very first time they get involved in the market, yet I’m sure there are some. It would be rare to start off in a field that is so small relative to the giant world of fundamentals. Another group are the ones who give it a try along with a healthy dose of skepticism since decades ago it was truly disdained by everyone – a black art - alchemy. These folks might be good contrarians. I think I was lucky that a huge bear market occurred early in my investing career.
This is the technical analyst who absolutely is addicted to charts and indicators. I was a hobbyist for quite a while. Once I got into the Zahorchak systems calculating the weekly averages each Sunday afternoon, with data from Barron’s magazine, I found I was enamored by the process and didn’t even try to trade it with real, or even paper money. I just loved doing the calculations and drawing the charts. This is probably the largest field of technical analysts, even though many will not admit it. There is nothing wrong with it, just don’t share with me about all your successful paper trades.
Another word for the TV experts, talking heads, special guests, pontificators, gurus, and those that are part of the endless parade showing up daily in the financial media. I remember I was on a panel in front of about 75 advisors on May 6, 2010 in Dallas, TX along with representatives from GS, JM, and LG. I’ll use initials instead of actual names to stay out of jail, however, these are big investment firms. It was after lunch and the question from the moderator was, “What are your current portfolio holdings correlated with?” I knew that we had just sold our last holding that morning and were 100% in cash, but that is not the story here. The GS guy was first and spoke for almost 15 minutes, talking about Greek bonds, the Federal Open Market Committee, the outlook for medium term interest rates, the housing market, his firm’s outlook for GDP next month, the amount of cash on the sidelines, on and on and on. He never answered the question he was asked but he sure did sound like he knew what he was talking about. Everything he said sounded so well thought out and logical; he was clearly a professional story teller. The JM guy wasn’t much different, except he covered a few other subjects and in a different order. The LG guy sounded like a combination of the first two as he went on and on for what seemed like forever. Then the moderator asked me, and I simply said, “cash!” Just then a guy jumped up with his Blackberry and said the Dow was down over 400 points. The audience then directed their questions to me. They wanted to know how I knew this was going to happen. I apologized for making them think I knew that and explained that as a disciplined trend follower using stops, the market had been going down for almost two weeks; our stops had taken us out. Simply good disciplined trend following accompanied with a little luck.
Story Tellers come in all sizes and shapes. You know who they are. They are the ones who speak with such conviction and assurance that you find yourself believing them. They rattle off data and statistics assuming you will believe it supports their predictions and opinions. They are good at this; they seem almost naturally gifted to stand up and spew forecasts as if they know it will be fact. Trust me, no one knows what the market will do tomorrow, next week, next month, next year, or anytime in the future. No one would ever put their life on the line for their forecast. Personally, I think all forecasts and predictions should have consequences. Unlike aviation where being wrong might be the end of your career; how about baseball, where you get three strikes and you’re out. Three incorrect guesses about the future and you hit the road - permanently. Sadly, the financial media would grind to a halt.
For the last 25+ years I have been a Practitioner. This is the technical analyst who manages money or trades using real money and has a track record or P&L statements to prove it. I don’t think I have to dwell on this one with examples. I also believe it is the smallest group of technical analysts. Of all the different types of technical analysts, this one has also been the most rewarding.
Typically, this is a person working at a brokerage firm. I do not call them stockbrokers because they are not stockbrokers; they are salesmen who work for a stockbroker. Sedge Coppock of Trendex in San Antonio (yes, the famous Coppock curve guy, even though he never called it that) taught me that in 1983. These are very necessary people in the investment industry and many adopted technical analysis as their modus operandi. If I were going to be a salesman I would want to adopt a technique that separated me from the morning squawk box, the in-house experts, and the onslaught of thousands of research reports using fundamentals. Did I say research reports? I should have said marketing material under the mask of research. I have never been a salesman at a brokerage house, but I think during the MurphyMorris.com days, I certainly was a salesman.
The sterile laboratory of modern finance has produced hundreds of thousands of white papers and theories about the markets. Many of these have been adapted by the Wall Street community as fact and are rarely challenged. Modern Portfolio Theory has many aspects. My problem with many of them is that the author has never traded with real money, only hypothesized about how to do it. I wrote a number of articles for Stocks and Commodities magazine over the past thirty years, so I am an academic of sorts. I recently was the Chairman of the NAAIM Wagner paper award and lead the judging of the white papers, so I am again an academic of sorts. There is absolutely nothing wrong with an academic in most cases, except, when you read their works, just keep in mind that the ivory tower of academia is a special place.
I’m sure there are other categories of technical analysts. One is the authors of technical analysis books, of which I am one and will write about at a later time.. This article might seem like I was critical of some of them. I am not, they are all part of the big picture of investing with technical analysis. At some point you will find yourself moving from one to another and maybe back again. One thing you must always ask yourself is about the quality of the information from the various sources (categories); is it based on someone’s opinions who may or may not actually trade, or is it based on someone’s opinions based upon actual trading with real money. I know my friend Larry Williams realizes there are hordes of technical analysts who pontificate but don’t trade and that is why his internet domain is ireallytrade.com. If you were to ask which categories I think are the ones to pay attention to, I’d say the practitioner is first and foremost since they really trade; sadly, most practitioners do not write or are not in the public sphere. Next the academics, while they may or may not actually trade, at least they have done some research. Lastly, there are many top-notch technical analysts from all categories who offer decades of experience in their analysis – learn from them.
Dance with the Trend,