Hello readers, and welcome to a new edition of Technically Speaking.
We’re halfway through the year, and the market is thriving! This is probably the best time to consider where the market forces are weighing in heavily to prepare for the remainder of the year. The technical signals alluding to stocks moving higher at the beginning of the year were right after all! (No surprises there!) And what’s been the motivation for this occurrence? A less excited Dollar Index move has a lot to do with it. If DXY comfortably made higher highs and higher lows above the 106-mark, the stocks would return to their den well before curfew. Nasdaq continues to power through into what’s been its best start to a year ever! Markets across the globe are participating in the rally that we’re witnessing, with the asset classes playing an exciting game of musical chairs. The more you interact with market forces, the more apparent it becomes that certain aspects stand tall, given any and every trend in place. Sure, we all enter the market to invest or trade to generate significant returns. But rarely is that accompanied with patience and risk management in tow. And burning your fingers in the market teaches us just that! So, if you are someone who is thinking of jumping into this world, and has a long-term idea of excelling after dedicating time and effort to this field of study, know that you are at least five years ahead of the folks who want to “double their money and never make a loss.” This means you don’t need just motivation but the right one.
As are these vehicles of investment, human beings also run on motivation. As the editor of CMT India’s Newsletter, back in 2020, I got a message notification on LinkedIn from the President of the CMT Association. Brett Villaume reached out to me to make an acquaintance, thank me for being an active volunteer, and encourage me to continue working towards my goals. That message alone made me feel like my efforts were being appreciated and noticed, and it meant the world to me! Three years later, Brett is now a dear friend, guide, and mentor. With his term as President and Director concluding this June, I would like to take the opportunity to thank him for his dedication towards the Association and his support in every new endeavor towards advancing the discourse of technical analysis. I know I have benefitted immensely from my regular interactions with him, and I am confident I will continue doing so.
With that, I’d also like to welcome the new Directors and Officers of the CMT Association. Congratulations to the newly elected leaders! Onwards and Upwards!
Until we meet again,
President's Letterby Brett Villaume, CMT, CAIA
Hello Members. Here are some important announcements you’ll want to take note of. Be on the lookout for an email asking you to participate in a survey of how you use Technical Analysis. We REALLY...
Why Strong Stock Returns on Friday is Bullishby Ryan Detrick, CMT
One of the most hated and despised rallies continued last week, with the S&P now up nearly 12% on the year and officially up more than 20% from the October lows. If you’ve been reading or...
The Stock Market Got Overbought. What Happens Next?by Austin Harrison, CFA, CMT
Stocks here in the U.S. are on pace for one of their best years ever. After a rough time for investors in 2022, the hot start is a welcome sight. The only question is, how long can it last? Last...
Is it the beginning of a New Bull Phase for Bitcoin (BTC/USD)by Jigar Mehta, CMT
With Time, everything changes! This is not only true for Humans but for markets also. After all, Markets are driven by Human emotions! That is where the Technical analysis arrives to help...
Make Your Voice Heard for the Future of the CMT Charterby Stanley Dash, CMT
The CMT Association has begun a Jobs Analysis (also known as a Jobs Task Analysis, or Practice Analysis). This is a periodic review of the content of the CMT Program. The results will be...
Assistant Director Positionby Stanley Dash, CMT
The CMT Association seeks to fill a newly created position for an Assistant Director of the CMT Program to work directly with the CMT Program Director on all aspects of the CMT Program. The person to...
In Case You Missed it!
The May edition of Technically Speaking didn’t reach some of our subscriber’s inboxes. Click HERE to see what you...
Stocks here in the U.S. are on pace for one of their best years ever. After a rough time for investors in 2022, the hot start is a welcome sight. The only question is, how long can it last?
Last week, a popular momentum indicator rose into ‘overbought’ territory for the S&P 500, causing many bearishly-inclined forecasters to sound the alarm. I can’t really blame them – the word overbought certainly sounds bad. But what does an overbought RSI actually mean?
The RSI, or relative strength index, is a momentum measure created by J. Welles Wilder Jr. and unveiled in his 1978 book, New Concepts in Technical Trading Systems. In short, it’s an oscillator ranging from 0 to 100 that tracks the speed and magnitude of a security’s recent price changes. You’ll see me regularly use a 14-period RSI on charts in these publications, most commonly to point out divergences between the directions of momentum and price.
A more common interpretation of RSI, though, is to look not at the RSI’s direction, but at its level: a reading greater than 70 is called ‘overbought’, signaling prices may be primed for a pullback. A reading below 30, on the other hand, is called ‘oversold’, and hints at a possible bounce.
This interpretation has a mixed historical record for timing reversals – overbought readings can get even more overbought, and vice versa. In fact, when we compared the level of RSI to the future performance of major stock indexes, we found the two had a correlation of roughly zero. Even when excluding the ‘middles’ of the oscillator and focusing only on returns that follow overbought or oversold readings, we were met with inconclusive results.
The S&P 500 shows the strongest 1-week and 1-month forward returns after oversold readings, but overbought levels result in the best returns over 3-month, 6-month, and 1-year periods. That data supports a narrative that overbought readings indicate both that a near-term pullback is at hand, but also that a strong, longer-term uptrend is in place (and vice versa for oversold readings).
The only problem is, data from the NASDAQ Composite says the exact opposite. Its best 1-week and 1-month returns follow overbought readings for the RSI, while oversold periods have been the best time to buy for 6-month and 1-year time horizons.
No, the level of RSI isn’t too useful when it comes to predicting the direction of future returns. But it does provide valuable information about the dispersion of future returns.
Thanks to Charlie Dow, daily prices for his trademark Industrial Average are available as far back as the late 1800s. A review of that data shows that RSI exhibits a strong negative correlation with the standard deviation of future return distributions. The distribution of forward returns is widest following oversold levels, and most narrow when RSI is the highest. That’s true for all future time horizons, be it 1 week, 3 months, or a year.
Here’s another way to visualize the relationship. We plotted forward 3-month returns following each overbought or oversold reading for the RSI and compared the two. The distribution curve for Overbought readings is narrow and steep. On the other hand, the ‘fat tails’ of the distribution curve are dominated by the Oversold category. A greater number of both great and terrible returns follow oversold conditions.
What’s striking about the data is not only the strong relationship, but also the consistency. No indicator is perfect, and even widely used factors fall out of favor for extended periods. This relationship, though, was quite consistent over rolling 10-year periods since 1900, especially over 1-week and 1-month horizons. And while RSI’s predictive value for dispersion clearly declines with time, it still offers insights into returns as far as 2 years in the future.
Moreover, this relationship doesn’t apply to just the Dow Jones Industrial Average. It holds for the S&P 500 and NASDAQ Composite, too. Here’s how those two stack up:
So while momentum is at extremes for some of the major indexes today, don’t fret. We can’t ever know for sure the future direction of prices, but overbought conditions tend to be followed by the most consistently positive returns we can ask for.
The CMT Association has begun a Jobs Analysis (also known as a Jobs Task Analysis, or Practice Analysis). This is a periodic review of the content of the CMT Program. The results will be used to set the knowledge areas and tasks, and their importance, for the CMT exams.
The Institute for Credentialing Excellence (I.C.E.), a recognized association of testing and credentialing groups, has defined a Jobs Analysis as:
Any of several methods used singly or in combination to identify the performance domains and associated tasks, knowledge, and/or skills relating to the purpose of the credential and to provide the foundation for examination validation. Also known as “practice analysis” or “role delineation study.”
The first phase was a series of meetings with a panel of 12-14 expert CMT charter holders, completed in late April. This group developed a “Content Outline” for the exams. The Content Outline identified 18 knowledge and task statements organized into four Knowledge and Task Domains.
The next phase of the Jobs Analysis will be a membership-wide survey. The survey will solicit rankings on “importance” and “frequency” for each of the 18 knowledge and task statements in the Content Outline. The survey will also solicit open responses and demographic information. Completing the survey should take about 20 minutes and will not have to be completed in one session.
The survey is organized to make it as straightforward and efficient as possible, while allowing open responses in the areas you feel require them. All the data will be aggregated by our third-party facilitator; you and your specific responses will not be identified. (The CMT Association has retained Meazure Learning to facilitate this project.)
The survey emails were sent to members on June 20. The survey will remain open for your response until July 16. Please check your email inbox, or spam folder, for the survey from CMTProgram@CMTAssociation.org via SurveyMonkey. (The survey was sent to the email address you have in your CMT membership profile. Please make sure it is up to date!)
Your response to the survey is critical to the success of the Jobs Analysis project and the future of the CMT Program. Please take the time to respond.