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Technically Speaking, August 2015

LETTER FROM THE EDITOR

Just four months after the winner of the 2015 Charles H. Dow Award was recognized it’s time to plan for the 2016 Award. This month we are announcing the deadlines for the Award.  Although there are several months before papers are due, planning and writing the papers is a large undertaking.  We hope many of you will begin that pursuit.  This month’s newsletter also includes an admission by one of Wall Street’s most-respected strategists that technical analysis is an important component of his work. Byron Wien, a name familiar to many readers, credits technical analysis with turning his career around.  We also have research on market liquidity, a growing concern especially in the fixed income markets.  Liquidity is a major factor in supply and technical analysis is dedicated to the study of supply and demand. Changes in market structure could make price action more volatile. As this article highlights, we have already seen several liquidity-related market events and are likely to see more. The potential implications of liquidity changes are important to technicians and we hope you’ll

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What's Inside...

TREND FOLLOWING

by Riccardo Ronco & Michael Carr, CMT

Editor’s note: Riccardo Ronco, CFTe, is the head of technical analysis at Aviate Global in London. He provided an overview of the benefits of trend following strategies at the MTA Annual Symposium...

BYRON WIEN IS A CLOSET TECHNICIAN

by Michael Carr, CMT

Economist Byron Wien is well known for his annual list of ten surprises. Less well known is Wien’s reliance on technical analysis to develop his more traditional market forecasts. In a recent Wall...

DOW HIGHLIGHTS: DOES KIRKPATRICK'S AWARD WINNING STRATEGY STILL WORK?

by Michael Carr, CMT

In 2001, Charles D. Kirkpatrick II, CMT, received the Charles H. Dow Award for his paper, Stock Selection: A Test of Relative Stock Values Reported over 17 ½ Years. The paper included results of a...

IT REALLY IS DIFFERENT THIS TIME

by Jeremy Grantham

Editor’s note: Jeremy Grantham is a widely-followed market analyst who has made a detailed study of bubbles. In the most recent quarterly letter to clients of his firm, GMO, he addressed the...

THE DEATH OF THE ZIMBABWE DOLLAR

by Dr. Bryan Taylor

Editor’s note: this article was originally published at the Global Financial Data blog and is reprinted here with permission. The government of Zimbabwe announced this week that they were finally...

MARKET PRICES AND INFLATION, DEFLATION AND HYPERINFLATION

by Michael Carr, CMT

Editor’s note: Dr. Taylor’s research inspired a search for hyperinflation in the world today. That search led to Venezuela and that country’s stock market shows the impact of...

INTERVIEW WITH NUTTAPOL KAMWONGSA, CMT

by Amber Hestla-Barnhart

How would you describe your job? I work for an Asset Management firm where I work in a dual job as a technical analyst for the investment team and also as a buy-side trader who handles orders for the...

BLOOMBERG BRIEF HIGHLIGHTS: A RECIPE FOR CHECKING U.S. SECTOR LEADERS AND LAGGARDS

by Cedric Thompson, CMT

Editor’s note: This article was originally published in the July 30 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article. In the same way that recipes can improve...

RESEARCH UPDATE: MARKET LIQUIDITY: A PRIMER

by Douglas J. Elliott, Fellow, Economic Studies at the Brooking Institution

Editor’s note: this paper was originally published at The Brookings Institution web site. It is reprinted here because it provides into the supply side of markets, a critical area of study for...

ETHICS CORNER: DUTIES TO EMPLOYERS

When leaving a job, is it ethical to take old files and code for technical models you developed over the years? Under the Code of Ethics and Standards of Practice, members have significant...

CHART OF THE MONTH

by Frank Teixeira, CMT, CFA

Editor’s note: while the Chart of the Month usually highlights a market of interest, this month’s chart highlights a potential investment management business opportunity that could be of interest...

TREND FOLLOWING

TREND FOLLOWING

Editor’s note: Riccardo Ronco, CFTe, is the head of technical analysis at Aviate Global in London. He provided an overview of the benefits of trend following strategies at the MTA Annual Symposium in March. The complete presentation is available at the MTA’s Knowledge Base, the web’s free repository for everything related to technical analysis.

Investing with the trend is a mainstay of many money managers who outperform their benchmark. Recent research proves this, showing that the majority of the returns from managed futures strategies is explained by tend following or momentum. That research provides a quantitative explanation for this behavior but it can also be explained with a simple chart. Behavioral finance heuristics, specifically anchoring and herding, explain why trend following works.

To achieve profitable performance, an investment manager needs to find

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Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Riccardo Ronco

Michael Carr, CMT

Michael Carr, CMT

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BYRON WIEN IS A CLOSET TECHNICIAN

BYRON WIEN IS A CLOSET TECHNICIAN

Economist Byron Wien is well known for his annual list of ten surprises. Less well known is Wien’s reliance on technical analysis to develop his more traditional market forecasts. In a recent Wall Street Week appearance, Wien discussed his early career. In his first job as a stock market analyst, he was struggling to make consistently good recommendations. In Wien’s words, he “was a wonderful security analyst but a lousy stock picker.”

After a year, his manager told him he needed to turn his performance around or find another job in the next 3-6 months.  Byron turned it around and went on to a successful career that has led him to the position of Vice Chairman at Blackstone Advisory Partners LP. Gary Kamninsky, co-host of Wall Street Week, asked what was responsible for the turnaround and Byron said:

“I began to use technical analysis and technical analysis helped me a

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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DOW HIGHLIGHTS: DOES KIRKPATRICK'S AWARD WINNING STRATEGY STILL WORK?

DOW HIGHLIGHTS: DOES KIRKPATRICK'S AWARD WINNING STRATEGY STILL WORK?

In 2001, Charles D. Kirkpatrick II, CMT, received the Charles H. Dow Award for his paper, Stock Selection: A Test of Relative Stock Values Reported over 17 ½ Years. The paper included results of a real-time test of stock selection criteria. Kirkpatrick explained that he maintained two lists, publishing selections in advance and tracking the performance after making the selections public. The results were summarized in two charts:

In the Dow Award paper, Kirkpatrick described the stock selection rules and sells criteria he followed.

Combining Criteria into model – The Parameters
Each week the entire list of available U.S. stocks (usually around 5,000) was screened for those stocks at or above the 90th percentile in relative price and earnings growth. In List 1 an advancing chart pattern was also required. 

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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IT REALLY IS DIFFERENT THIS TIME

IT REALLY IS DIFFERENT THIS TIME

Editor’s note: Jeremy Grantham is a widely-followed market analyst who has made a detailed study of bubbles. In the most recent quarterly letter to clients of his firm, GMO, he addressed the question of bubbles in the current market environment.  The full newsletter can be downloaded by clicking here (free registration may be required).

Investment bubbles in a world that is, this time, interestingly different

Two significant items seem to be different this time. First, profit margins in the U.S. seem to have stopped mean reverting in the old, normal way, and second, some real estate markets have bubbled up and then stayed there at high prices. Both seem surprising events, even against what I would call “the laws of nature,” or at least the usual laws of capitalism. What is going on?

Tentative thesis

When capitalism is left in a pure form, capital, like water, seeks its natural level: Higher than average profits

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Jeremy Grantham

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THE DEATH OF THE ZIMBABWE DOLLAR

THE DEATH OF THE ZIMBABWE DOLLAR

Editor’s note: this article was originally published at the Global Financial Data blog and is reprinted here with permission.

The government of Zimbabwe announced this week that they were finally demonetizing the Zimbabwe Dollar. Although the United States Dollar replaced the Zimbabwe Dollar in every day transactions back in 2009, banks still carried accounts that were denominated in Zimbabwe Dollars. Beginning on June 15, 2015, for only 35 quadrillion (35,000,000,000,000,000) Zimbabwe Dollars bank customers will receive one free portrait of George Washington. This opportunity expires in September.

Believe it or not, Zimbabwe will not get in the Guinness Book of World Records for the most insane currency conversion. Hungary holds this dubious record because 400,000 quadrillion pengo were required to obtain one forint back in 1946 when Hungary went through its own currency conversion.

Currently, the United States Dollars and South African Rand are used in Zimbabwe for everyday transactions. These two currencies

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Dr. Bryan Taylor

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MARKET PRICES AND INFLATION, DEFLATION AND HYPERINFLATION

MARKET PRICES AND INFLATION, DEFLATION AND HYPERINFLATION

Editor’s note: Dr. Taylor’s research inspired a search for hyperinflation in the world today. That search led to Venezuela and that country’s stock market shows the impact of hyperinflation.

Technical analysts study intermarket analysis because stocks, bonds and commodities tend to display recurring relationships. StockCharts.com explains that these relationships depend on inflation.

Inflationary Relationships

The intermarket relationships depend on the forces of inflation or deflation. In a “normal” inflationary environment, stocks and bonds are positively correlated. This means they both move in the same direction. The world was in an inflationary environment from the 1970’s to the late 1990’s. These are the key intermarket relationships in a inflationary environment:

  • A POSITIVE relationship between bonds and stocks
  • Bonds usually change direction ahead of stocks
  • An INVERSE relationship between bonds and commodities
  • An INVERSE relationship between the US Dollar and commodities

POSITIVE: When one goes up, the other goes up also. INVERSE: When one goes up, the other goes down.

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Michael Carr, CMT

Michael Carr, CMT

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INTERVIEW WITH NUTTAPOL KAMWONGSA, CMT

INTERVIEW WITH NUTTAPOL KAMWONGSA, CMT

How would you describe your job?

I work for an Asset Management firm where I work in a dual job as a technical analyst for the investment team and also as a buy-side trader who handles orders for the fund. I give recommendation to money managers based on my technical view after considering the direction of a stock’s trend, sector strength and my overall market view. For an institution such as my firm, outperformance is the key so I rely heavily on relative strength. There are a lot of opportunities to explore with relative strength. But more than that I believe the key to success is not the tools I use. It is the discipline to stick to the approach and a “think risk first” mentality. And, of course you need skill and experience to extract money from the market.

Do you look at any fundamental or economic inputs to develop your

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

BLOOMBERG BRIEF HIGHLIGHTS: A RECIPE FOR CHECKING U.S. SECTOR LEADERS AND LAGGARDS

BLOOMBERG BRIEF HIGHLIGHTS: A RECIPE FOR CHECKING U.S. SECTOR LEADERS AND LAGGARDS

Editor’s note: This article was originally published in the July 30 issue of Bloomberg Brief: Technical Strategies. Below is an extract of that article.

In the same way that recipes can improve when ingredients and techniques are shared, disclosing technical analysis concepts for comparing U.S. stock sectors can help perfect portfolio modeling. By ranking sectors by total returns over several time horizons, and graphing each sector to check price divergence with RSI, technical analysts can have an additional tool to gauge which sector is most likely to fall out of leadership and which sector may rise out of the laggard sphere.

Bloomberg’s GRR function can be used to rank sectors into different total-return buckets of one month, three months, six months, nine months and 12 months. A reusable template can be developed through Bloomberg’s Excel plug-in. An example is shown below.

Contributor(s)

Cedric Thompson, CMT

RESEARCH UPDATE: MARKET LIQUIDITY: A PRIMER

RESEARCH UPDATE: MARKET LIQUIDITY: A PRIMER

Editor’s note: this paper was originally published at The Brookings Institution web site. It is reprinted here because it provides into the supply side of markets, a critical area of study for technical analysts.

Introduction

US financial markets are critical to the functioning of our entire economy, providing more credit, for example, than banks do. Our unusually large financial markets have been an American competitive advantage for years, providing a costeffective means of matching investors with worthy companies and projects. Therefore, the current debate about whether market liquidity is drying up is an important one, since the ability to buy and sell securities is central to market functioning.  This primer provides an introduction to the issues by addressing the following questions.

  • What is market liquidity?
  • Why do we care about it?
  • Has it actually declined?
  • What do the recent bouts of market volatility mean?
  • Why would we expect market liquidity to be down?
  • Will market liquidity decline further?
  • What

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

Contributor(s)

Douglas J. Elliott, Fellow, Economic Studies at the Brooking Institution

ETHICS CORNER: DUTIES TO EMPLOYERS

ETHICS CORNER: DUTIES TO EMPLOYERS

When leaving a job, is it ethical to take old files and code for technical models you developed over the years?

Under the Code of Ethics and Standards of Practice, members have significant obligations to their employers. Specifically, under Standard IV(A) Loyalty:

In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

This Standard can present a number of questions when a member is changing jobs. As noted above, one of the questions can include whether or not technical trading strategies developed at work belong to the employer or the employee.  The Standards of Practice Handbook provides extensive guidance on this question. The bottom line is that the Standard does not prohibit experience or knowledge gained at one employer from being

To view this content you must be an active member of the CMT Association.
Not a member? Join the CMT Association and unlock access to hundreds of hours of written and video technical analysis content, including the Journal of Technical Analysis and the Video Archives. Learn more about Membership here.

CHART OF THE MONTH

CHART OF THE MONTH

Editor’s note: while the Chart of the Month usually highlights a market of interest, this month’s chart highlights a potential investment management business opportunity that could be of interest to some members.

Frank L. Teixeira, CFA, CMT, is an industry leader in “fusion investing” – integrating technical and fundamental analysis in the portfolio context. As a partner and senior vice president of the firm, he manages over $1 billion dollars in both domestic and foreign securities and leads the technical analysis division. During the MTA Annual Symposium, he shared some of his experiences managing money at Boston-based Wellington Management.

Among the many interesting points he raised was the idea that momentum investing, an approach grounded in technical analysis, offers an opportunity in the investment management business. Two charts summarize the idea.

Contributor(s)

Frank Teixeira, CMT, CFA