Molly Schilling (MS): Tell me something about your background and school and how you got into technical analysis.
David Keller (DK): I went to Ohio State, and I actually studied music and psychology. My plan was to go on to study conducting at a conservatory. I ended up with the two degrees, and after six years of school, I was really burned out with music, and so I decided to do something else for awhile.
That’s when my wife and I moved out here and I joined Bloomberg. I started in an entry-level position, but there was no one at Bloomberg to spearhead technical analysis. So a couple of us seized the opportunity and started to study it. We talked to everyone we could to learn and after a while, I ended up being the one to move into a full time position. I found it to be a good match because when you study music seriously, especially contemporary 20th century music, and being inclined toward conducting and score study, I was used to looking at a piece of music and trying to pick out patterns looking to see how all the pieces fit together. I realized that looking at a chart involves the same thought process. So it just clicked immediately, and I knew technical analysis made sense.
MS: Now what about psychology? What did you study?
DK: Studying psychology exposes you to a range of topics from developmental theories to brain structures. My focus and interest was in industrial organizational psychology, where you’re basically looking at group theory. It’s more like sociology – how groups come to a decision, how a company is structured, and what type of people do well in different roles. Today it is called Behavioral Economics, Behavioral Finance.
MS: Behavioral Finance…
DK: Looking at the market and the psychology of it, looking at the relationships. When I started to study technical analysis, I saw the psychological part of it. All these individual traders and investors, their emotions, and how they’re trading relative to their emotions. That was interesting.
MS: When did you come to Bloomberg?
DK: I started in June of 2000.
MS: From your worldwide vantage point, where is TA strongest, and how is it growing and changing?
DK: The United States has a greater concentration of the “higher-end use,” where people are doing a lot of back testing and optimization and more exploration of new techniques. I have spent time recently in South America, and in the emerging markets. There definitely is an interest in technical analysis, but they’re about 10 years behind the US and London.
Techniques that we take for granted are just gaining traction in other parts of the world. That’s so with the markets there in general. A lot of the markets don’t have any derivatives, so there are no options, no shorting. When I went to Colombia, traders told me that there are very limited ways to have exposure to a stock. It is basically long only. Techniques that you can use to try and generate returns are limited. You have to use ones that are going to make sense for that type of environment.
MS: Do you see the role of the technical analyst changing?
DK: Things are changing in that the role of the traditional sell-side technical analyst is going away. We’re seeing a technical analysis role more frequently located at a hedge fund or as an independent research analyst, or maybe a third party independent-research contributor. And you don’t necessarily have to be in New York City or in the financial hub. You could be in Cleveland, or wherever. You have the ability now to be all over the place.
MS: So the TA job opportunities have evolved?
DK: Absolutely. Ten, even 15 years ago, most major banks in the US had a sell-side technical analysis “shop”. Now, Smith Barney and CitiGroup, Prudential, Lehman, and Morgan Stanley – all of those firms have cut their technical analysis group during the last five years. They are tending to use small, niche types of independent research shops. The key idea here is that the jobs are still out there.
MS: Can you say more about these types of jobs?
DK: What basically has happened is, as sellside research overall has changed – and they’ve been segmenting the research, so instead of the idea that “I have a relationship with Merrill Lynch, so I get all of their research”, you’re actually paying hard dollars or you’re selecting what pieces you want to get – and sell-side firms are deciding that technical analysis, quantitative, economic research a lot of times is stuff that isn’t really a big driver, so they don’t really need them as much.
MS: So, the big players are still buying TA, but…
DK: I think investors, traders, and market participants overall are using more charting and technical analysis now than they ever have before. And I think the need for technical research is greater than it has ever been. The only thing they’re changing is where that research is coming from and whether it’s Dave Keller, the technical analyst at Morgan Stanley, or Dave Keller, the founder of Dave Keller’s Buckeye Technical Research. That’s the only difference. It’s how it’s getting to you as the investor.
MS: So there’s more of an entrepreneurial community of technical analysts now.
DK: Definitely. Absolutely. And really there’s only a handful now of sell-side firms that still maintain an active technical-research group. Merrill Lynch has one with Mary Ann Bartels, and Fred Meissner, and Walter Murphy. Barclay’s has Jordan Kotick and MacNeil Curry, some other guys. But there’s very, very few compared to what they had been before.
MS: How important is the CMT?
DK: That’s a great point and I think it’s actually essential right now because what’s happened is if I’m Dave Keller at Lehman Brothers, the fact that I’m part of a Lehman Brothers’ technical team or the Lehman Brothers’ research has that credibility automatically because Lehman’s a recognizable name, of course, with a great history of investment strategy, etc., etc. Whereas if I’m Dave Keller from Dave Keller Research, there’s really no track record, there’s no implied credibility there at all, unless there’s something that demonstrates my understanding, and something like the CMT designation, I think, is really the best way that you can do that to show, yes, this is recognized that I have expertise and I know what I’m talking about.
MS: You’d have credentials.
DK: Definitely.
MS: You are currently on the board of the MTA.
DK: That’s right.
MS: When did you start?
DK: I actually just joined the MTA Board
August of 2007.
MS: What’s it like?
DK: The organization has a lot of energy driving it now. The Board meets every month on a conference call to discuss what’s going on. And then, of course, there are lots of casual discussions among the members going on all the time.
The MTA is going through a real revival. The leadership continues change. There’s a lot of interest in what the group needs to do for long term goals. The MTA understands that the market is changing and that technical analysis as a job, as a practice, is changing as well. So I think the organization is really trying to clarify its direction. It is more focused on how we can get the members connected with jobs, what we as an organization can do to promote technical analysis to leverage our members, that kind of thing. I spend a lot of time working as a Board member.
MS: Tell me more about your global vision at Bloomberg.
DK: We’ve become more global in terms of how we are looking at the markets. The average American investor looks overseas and as a professional, you have to understand how other markets are performing, whether they have the potential to take business away or whether there are opportunities there. Bloomberg has 40-50 global offices. Many of those are news bureaus, though, that don’t have a sales force or a core terminal force. Those are just news bureaus. But in terms of our terminal, our core users, we have, I’m going to guess, eight sales offices. So New York, San Francisco, Sao Paolo, Tokyo, Hong Kong, Sydney, London, Frankfurt.
At Bloomberg, we have over a quarter of a million clients; we have about 260,000 users now globally. Many of those are in the financial centers, of course, but in the course of doing this, we have users in Dubai, in Brazil, in Vietnam, pretty much everywhere, and they’re all using charts to some degree. In terms of a guess in how many of those are using technical analysis, my guess, right off the top of my head, would be 65, 70%. You write off 30% because remember half of our business are going to be fixed income users, and a bond trader definitely is going to look at charts to look at interest rates, but someone who’s in muni origination or we have a lot of municipalities that are issuing muni bonds, they’re not going to have a lot of interest in looking at charts. But in terms of the core investor, yes, 70% I think is reasonable.
MS: Are you making world wide relationships?
DK: We’re finding, through the MTA, that we’re starting relationships with, for example, the Arab Society of Technical Analysts. We’ve talked to a group in Hong Kong. At our last major event, our annual seminar in Florida, we met with representatives of a portential collaboration partner in India. They talked of exceptional interest for the need of additional technical analysis information. I think that as those markets become more developed, and as they try to understand how they can better analyze their markets, technical analysis will become an important feature.
MS: What about China?
DK: China is difficult broadly speaking, and at Bloomberg, China is difficult because there are so many regulations regarding who can do business there and how you’re able to do business there. Hong Kong is different because it’s a Western area. We have a lot of Bloomberg clients in Hong Kong. We have an office there. But mainland China is very tough.
MS: What inspired you to write your book, Breakthroughs in Technical Analysis?
DK: Bloomberg Press had written a book back in 1998, bringing together different contributors, and calling it “New Thinking in Technical Analysis.” That book ended up being the most successful book for Bloomberg Press ever. And so they knew that there was an interest in technical analysis, and when they approached me about writing a new version, my response was there really hasn’t been a global technical analysis book where you have contributors from across the world. Our new book was designed to have a contributor from Japan, and one from Australia, some from Europe, some from the US, to really get an idea of people were using techniques and what short of techniques made sense for the different markets everyone was using. And that was the real driver of it.
MS: What did you like most about writing that book?
DK: I didn’t want it to become too scripted where every chapter would be identical and that was a challenge. We didn’t want cookie-cutter chapters, but we needed the chapters to conform to a central theme. We worked to make sure that each chapter could stand alone, but if you moved through all ten, it would feel coherent, and it would flow.
MS: What is your feeling about the state of the market?
DK: I have to qualify it by saying I’m definitely not making a recommendation or anything. But in terms of what our technicals are saying, the indicators we have been looking at and at Bloomberg we put out a weekly “purely educational” technical report, we’ve found two things that have been very interesting: first, a lot of our indicators turned very bearish on the equity markets in the second half of 2007. Probably the most glaring one that we watch is the percent of stocks above the 200-day moving average, on the NYSE is the one that we use.
If you look at that relative to the S&P for the last five years, going back to 2002, they’ve pretty much moved identically. So if the S&P’s rallying, more stocks are above the 200 day, which makes sense, they’re going to be in an uptrend. And what happened, there’s this very interesting decoupling at the middle to end of last year where the S&P was doing the final move up. You saw the percent of stocks just started to drop off a cliff, and by the time we had that second peak in the S&P, I think it was October of 2007, it was almost right at or just below 50%, meaning over half of stocks had already broken down while the S&P was still going higher, and that sort of weakness was glaring, I mean, it jumped off the page in terms of how key of a divergence that was. Since then, most of those breadth indicators that we followed have stayed fairly negative suggesting that there’s really no necessarily end in a bear move.
Secondly, we keep track of interest rate movement through one of our Sequential indicators which is basically looking at trend exhaustion. And if you look at weekly charts of the 10-year yield, or I think you could also look at the long-bond future, the 10-year future, you’ll find that they all signaled a pretty major reversal about two months ago. And on the 10-year yields, suggested the yields were bottoming out this is a little unusual because assuming the Fed continues to lower rates, you would think that interest rates would probably be starting to come down, but it sort of suggests a steepening in the yield curve. And if you look, the signal still appears to be in place where it’s a long-term bottom and starting to rally. So those are probably two of the key signals we follow.
MS: David, it’s been a pleasure to learn about your work. Thank you so much.
DK: Thank you.
BREAKTHROUGHS IN TECHNICAL ANALYSIS: New Thinking from the World’s Top Minds
Figure 1 – Weekly Chart of BSC from www.stockcharts.com.
Figure 2 – P&F Chart of BSC from www.stockcharts.com.
Figure 1: WIREI from 1969 (Winans International, http://www.winansintl.com/index.html, used with permission)
