Technically Speaking, May 2012

At the recent Annual Symposium, the MTA recognized six individuals for their contributions to the field of technical analysis and the MTA. Three individuals – Dr. Martin Zweig, Steven C. Leuthold, and Ned Davis – were honored for their life-long outstanding contribution to the development and widespread acceptance of technical analysis by institutional practitioners and individual investors. Edward C. Johnson III was the Recognition Award recipient. The Service Award was presented to Marie Penza (MTA Member Services Director) and the Memorial Award recipient was George Lane.

The Annual Award is issued to a person(s) who made an outstanding contribution to the field of technical analysis.

Dr. Martin Zweig

Martin Zweig contributed to the acceptance of market timing in the 1980s. He achieved success with an advisory service and managing money in private accounts and closed end mutual funds. His award recognizes that, “He was one of the first practitioners of technical analysis to validate his research with solid statistical evaluation and subject his work to the rigors of academic challenge and debate. His testing work set the rigorous standard that we now employ in evaluating papers for the Journal and the Charles H. Dow Award.”

Dr. Zweig completed his bachelor’s degree at University of Pennsylvania’s Wharton School of Finance and then earned an MBA at the University of Miami before completing a Ph.D. in finance at Michigan State University. His doctoral thesis, written in the late 1960s, was on relative strength.

In the early 1970s, Dr. Zweig wrote several articles for Barron’s and made a number of successful market predictions. He also began publishing The Zweig Forecast, an investment newsletter which was highly ranked by The Hulbert Digest as one of the best performing newsletters of the 1980s and early 1990s. The newsletter delivered an average annual gain of 16% from 1980 to 1995, outperforming all other market advisory services during that time. He was also a regular guest on PBS’s popular Wall Street Week and he predicted the stock market crash of October 1987 in an appearance on that show the weekend before the crash.

Dr. Zweig also wrote a book, Winning on Wall Street (1986), which provided detailed insight into his methods. In the book, Zweig presents a number of monetary indicators that he monitors, along with technical and fundamental indicators. He combines the various indicators into a model that assesses market risk and invests in equities when risk is relatively low.

In looking at monetary indicators, Dr. Zweig reviews the prime rate to assess the impact of interest rates on businesses. Installment debt is monitored to determine the impact of debt on consumer spending. His Fed indicator  follows the Federal Reserve’s discount rate and the central bank’s reserve requirements.

Market momentum is also important to consider. Zweig Breadth Thrusts are often found at market bottoms. The Advance/Decline Line can be expressed as a ratio. When this ratio moves from below 40% to above 61.5% within ten days, it gives a buy signal. This indicator was written about in the 1980s and correctly forecast the market bottom in March 2009.

Dr. Zweig also studied up volume as a ratio of total trading volume and found that when 90 percent of the volume is upward, a significant, bullish market move should be expected.

The Four Percent Model is a simple trend following tool that Dr. Zweig presented. He applied the model to the Value Line Composite Index although it can be used with any index. Variants of the indicator are also popular. Using the weekly close of the Value Line Index, a buy signal is given when the index rises 4% or more from its previous low. A trend reversal of 4% from a previous peak is a sell signal. In an update to his original book, Dr. Zweig provided results that showed from 1966 through 1993, the Four Percent long/short trading strategy delivered a 12.6% annualized return, compared to a 2.7% gain for the Value Line Index.

On a fundamental basis, Dr. Zweig wrote that he liked to buy stocks of companies that have reported earnings growth in at least four of the last five years and show earnings growth year-over-year in the most recent quarter. He also looks for sales growth over those time frames.

He then filters stocks based on the price-to-earnings (P/E) ratio. Dr. Zweig follows a philosophy that has become known as growth at a reasonable price (GARP). He is looking for stocks where the P/E ratio is less than the earnings growth rate. The P/E ratio of a company he is looking at buying should also be in line with the P/E ratio for the stock’s sector. For buys, he sets a minimum P/E ratio of 5 since stocks with ratios less than that are prone to having operational or financial problems.

Technical analysis is also applied to the trading decisions. Dr. Zweig likes stocks that are outperforming the market and he prefers buying breakouts from basing patterns.

Dr. Zweig has been credited with developing a number of technical tools, including the puts/call ratio, a well-known sentiment indicator.

Editor’s note: The biographical information and photo for this article are from www.martinzweig.org, a site that is not affiliated with Dr. Zweig.

Steven C. Leuthold

Steve Leuthold is the Founder and Board Member of The Leuthold Group, an investment management and institutional research firm. Steve also serves as a Director of the Leuthold Funds Board of Directors. His MTA award notes that, “Steve has been a stalwart of the MTA Organization nearly since its founding in the early 1970s. He established his presence first at Piper Jaffray in Minneapolis as their Chief Technical Analyst, then at this own firm and most recently with Weeden His contribution to the field centers on very long-term cyclical  analysis (typically 50 years or more) of a wide variety of technical indicators of major indices, but of also sub-sectors and specific technical measures of investor sentiment.

His work remains fresh, innovative and highly respected. Steve has demonstrated the value of the profession in the professional management of various funds over the last 20 years that validates the utility of technical research in the investment process, perhaps putting together the longest buyside performance benchmark of a manager using a suite of technical tools. Steve has been a respected contributor to the financial media uplifting the reputation of the profession. His contribution to the MTA via Committee Chairs including editing the MTA Journal for several years lifted the quality of that publication to new standards in which the entire profession can be proud.”

Prior to founding The Leuthold Group, Steve was an Officer and Portfolio Manager of two mutual funds for Criterion Investment Management; and from 1969 to 1977, he was an Officer and Investment Strategist at Piper, Jaffray & Hopwood. Steve has also previously served on the Board of Directors of Weeden & Co., L.P., an institutional equity trading firm.

Steve’s work includes co-authorship with Eric Bjorgen of the 1999 Dow Award winning paper, “Corporate Insiders’ Big Block Transactions.” In this study, the authors studied insider activity from 1982 to 1999. They found that the 10-week average of dollar volume of net insider selling seemed to work well as a market timing tool. They normalized the selling by dividing the raw value by the stock market capitalization. High levels of net selling (greater than 0.07% when normalized) tend to precede lower than average returns in the stock market. Low levels (less than 0.01%) are associated with reliable buying opportunities.

Editor’s note: The biographical information and photo for this article are from http://www.leutholdfunds.com/steve-leuthold.

Ned Davis

Ned Davis, Senior Investment Strategist, founded Ned Davis Research Group (NDRG), in 1980. His award notes that, “Under his direction and with his encouragement, Ned Davis Research has become a wonderful training ground for quantitative technical analysts. Ned has been a tireless contributor to the profession and MTA through his participation as a speaker at many MTA programs and conferences over a career that now spans nearly 40 years.”

While arguing that forecasting reliably (“Being Right”) is impossibly difficult, he espouses a philosophy that he feels can consistently win (“Make Money”) through a disciplined strategy of following the weight of objective indicator evidence. Because he also believes flexibility (ability to adapt) is crucial, Ned Davis Research Group also produces many sentiment indicators warning investors to be wary at crowd extremes, and helping them to be open-minded about potential trend changes. A self-proclaimed risk manager, Ned dedicates his research to avoiding major mistakes, cutting losses short, and letting profits run.

Ned is the author of Being Right or Making Money and The Triumph of Contrarian Investing. He has been the subject of numerous featured interviews in Barron’s, and has been a featured guest many times on the late Lou Rukeyser’s Wall Street Week. NDRG is widely quoted by various media and Wall Street sources.

The firm combines macro, technical, and fundamental research into what they call fusion research. Using more than 200 data vendors, NDR has access to more than 10 million data series and over 10,000 visually rich charts and graphs to help clients understand macro environments and execute asset allocation strategies.

Ned Davis Research charts are a model of clarity and usefulness. Examples are plentiful. Below is a chart taken from “Using IPOs to Identify Sector Opportunities,” the 2009 Charles H. Dow Award winning paper written by Kevin Lapham, CMT. Kevin is a Data Integrity manager at NDRG and his work is an example of the inspiration that Ned Davis provides.

In the paper, Kevin applies the number of initial public offerings (IPOs), a well-known, long-term stock market indicator, to market timing. With the popularity of sector investing and the increased use of exchange traded funds, it would be advantageous to employ a new IPO-based indicator to assess sector health, improving upon available technical market measures.

This study will examine how the number of IPOs within the ten market sectors can be used to help identify overbought or oversold conditions in each respective sector.

This chart shows how that indicator could be applied to the Industrials sector. It presents clear buy and sell signals, explains the performance of the indicator in a box that is easily understood, and shows the indicator with key levels in the bottom of the chart. All of the work inspired by Ned Davis is similar in that it is innovative and well presented.

Editor’s note: The biographical information and photo for this article are from http://www.ndr.com/marketing/bios/ned_bio.pdf.

Edward C. Johnson, III

The MTA recognized Edward Johnson, noting, “A lawyer by trade, Edward C. Johnson III built Fidelity with the mindset that price action was predictable. As a result, the company has stressed the importance of technical analysis as part of the normal course of business consistently maintaining a highly regarded department dedicated to the practice.”

Along with daughter Abigail Johnson, Edward Johnson owns and runs Fidelity Investments and Fidelity International. After  graduating with a Bachelor’s degree from Harvard College in 1954, Mr. Johnson served in the US Army, before becoming a research analyst at Fidelity Investments in 1957, a company founded by his father Edward C. Johnson II in 1949. He became the portfolio manager for the Fidelity Trend Fund in 1960 and ran the famous Fidelity Magellan Fund from 1963 until 1977. He became president of the company in 1972 and chairman and CEO in 1977.

Among his many industry accomplishments, he started the practice of permitting check writing on money market funds. Under his leadership, Fidelity was among the first to sell discount brokerage services to banks, insurance companies and consumers.

Mr. Johnson’s father was the recipient of the third MTA Annual Award recognizing his lifetime of accomplishment in 1976. The senior Mr. Johnson died in 1984, at the age of 86.

Editor’s note: The biographical information and photo for this article are from Forbes.

Marie Penza

Marie is “A longtime member of the MTA staff, [who] has gone beyond professional service. As Member Services Director the organization is fortunate to have a detail-oriented, gracious person as a first/on-going point of contact for its members. In addition, as support to various committees and groups within the organization, her patience and agility in making things happen are also appreciated.”

Marie has been with the MTA since 2003. As the Member Services Director, she is responsible for the administration and scheduling of the CMT Program. Additionally, Marie handles administrative duties for the MTA Board of Directors, coordination of the Dow & Annual Awards, and general membership inquiries.

George Lane

Summarizing a successful career, the MTA Memorial Award states, “George Lane developed the widely followed stochastics oscillator to address problems encountered when data was dropped from a series as you move forward in time. His double-smoothing process to normalize the data has been referenced by many different practitioners along the way. Mr. Lane focused on the commodities markets and traveled throughout the Midwest teaching his techniques, which require experience and judgment, to farmers.”

George humbly attributed his success to being “in the right place at the right time” to grow with the industry. He was a professional trader for more than 50 years and is well known as the originator of the widely used stochastics indicator.

During his career, George was a floor Broker for 10 years and a member of three Exchanges. He served on the Board of Directors of Mid-America Commodity Exchange in 1965. He also owned a regional brokerage firm with 41 branch offices and served as Research Director/Economist for two other brokerage firms.

George wrote a daily market letter with a hot line for 16 years and authored four courses for commodities education and an additional course for stock market traders. Among all of his accomplishments, he probably enjoyed training thousands of farm families, ranchers, and producers in other industries, along with their brokers and bankers, how to hedge the risk of production in the futures market.

Since 1953, has taught thousands of market analysts, money managers and individual investors in more than thirty states and abroad how to use technical analysis to trade the markets more effectively. In 2004, George passed away at the age of 83.

A detailed discussion of George Lane’s life and work, prepared by George Schade, CMT, was presented in a recent issue of Technically Speaking and can be read at http://go.mta.org/282.

Editor’s note: The biographical information and photo for this article are from http://www.lanestochastics.com/George%20Lane’s%20Bio.htm