It seems that technical analysis is a great second career for many successful people. Arthur Merrill is a well known example of someone who spent a lifetime succeeding as an engineer and finding possibly even greater success in his second career as a market technician. Dr. Humphrey Lloyd presents a similar story, with success in two professions and valuable contributions to the field of technical analysis.
Born and raised in the United Kingdom, Dr. Lloyd studied medicine there before he immigrated to the United States in 1958. He worked as a pathologist in Beverly MA from 1960 until he retired in 1997. For almost this entire time, he studied and traded the markets. In Dr. Lloyd’s own words:
I became attracted to the problems associated with investing in the stock market in the early 60s, as I identified that many similarities existed between the mental act of making a diagnosis as a pathologist, and that of making a decision to invest in a particular stock or mutual fund. In pathology, one has to be correct close to 100% of the time if one wishes to avoid malpractice litigation. It is this need for certainty that is the undoing of the performance results of many physicians including me when they tackle the stock market.
Since my results were distinctly mediocre, I decided to learn everything I could about the whole process of investing to see if I could achieve any degree of mastery. I had embarked upon an adventure which has captured and help my interest ever since. I have been a student of the market for 45 years and have immersed myself in its voluminous literature.
Elsewhere in this issue, we present a summary of some of Dr. Lloyd’s market wisdom. In those two paragraphs we see the critical elements that led to his success in the markets. A passion for the markets, a strong desire to succeed, and a humility to acknowledge mistakes led to an enviable career for any market technician, let alone one who enters the field on a part-time basis.
The voluminous literature of technical analysis is richer because of Dr. Lloyd. He has written books on market systems, options strategies, trading S&P futures and options, and managing your IRA. These books are:
Spread Trading in Listed Options (Windsor Books, 1975)
The Moving Balance System: A New technique for Stock and Option Trading (Windsor Books, 1976)
High-Profit/Low-Risk Options Strategies (Windsor Books, 1984)
The RSL Market Timing System (Windsor books, 1991)
Trading S&P Futures and Options. A Survival Manual and Study Guide (Traders Press, 1997)
Taking Your IRA to the Next Level (Traders Press, 2007)
Dr. Lloyd’s work is noteworthy for his meticulous attention to detail. This may be related to the fact that he created winning market systems before the widespread availability of software programs made backtesting a painless process. He developed ideas visually, crafted formulas on pencil and pencil, and then manually verified that they worked. Looking back at this accomplishment, one wonders if most modern-day technicians would have the discipline and drive to undertake such a study.
Among his most significant accomplishments is the development of the Moving Balance Indicator (MBI). This indicator is designed to identify extreme overbought or oversold market conditions. It incorporates three breadth measures:
- The A/D Component: 10-day moving average of advancing issues divided by the 10-day moving average of declining issues. This figure is multiplied by ten.
- The Advancing Volume Component: 10-day moving average of the percentage of advancing volume is of the sum of advancing and declining volume. This is multiplied by three.
- The TRIN Component: A value derived from the 10-day moving average of the TRIN. The values are shown in the table below.
MBI is the sum of the three components multiplied by 1.5.
This powerful indicator incorporates various measures of breadth to confirm the market action. It is considered to be an invaluable tool by those who use it.
Charts showing examples of this indicator can be found in the article, “MetaStock code for the MBI.”
Matthew N. Xiarhos, CFP, Founder & Chief Investment Officer of Absolute Return Portfolio Management LLC, is a proponent of this indicator. He recently wrote:
As far as analysis of the indicator goes, the simplest explanation is that you would use it like any other OB/OS indicator; particularly those like the McClellan Oscillator. Let’s take an idealized bottoming to topping process and how the indicator “might” act.
- The extreme low value of the MBI will occur, usually, before the actual bottom
- This creates the possibility for a bullish/positive divergence in the indicator as prices either re-test recent lows or even move to lower lows.
- As the market bottoms it usually is accompanied by a large move upward in the indicator. This shouldn’t be viewed as a negative in a bull market but indicates strong underlying internal market strength.
- In a bear market such a surge in the indicator should be viewed with caution as such bear market rallies are shorter-lived and most OB/OS indicators will spend little time in the OB region during a bear market
- Here’s where things get tricky…as the market rally continues the MBI will begin losing momentum as the rally
thins out and volume dries up.
- This starts to create some bearish/negative divergences.
- I have used a THREE STRIKES rule which mean to ignore the first two divergences. This presumes you are in a strong bull market.
- Usually by a THIRD divergence the market has lost all momentum and has been retesting a recent top.
- At this point, I am usually looking from confirmation from either a longer-term computation of the MBI and/or indications of excessive bullish sentiment.
I realize this is quite a short summary but there is no way to easily cover every situation. I have found that simplifying one’s system to the fewest possible indicators is paramount. Too many indicators will ultimately lead to analysis paralysis.
After 20+ years of trading I am down to simple breadth indicators and sentiment. That’s it. The only thing that alters my use of my indicators if how the broad averages are positioned relative to their long-term 50 week/200 day moving averages. If we are in a bear market, as now, I assume that rallies will be short lived, sentiment won’t become nearly so elevated and my breadth indicators will barely get to OB, if at all, and these are times to lighten positions and/or short. I don’t look too hard to pick a bottom using divergences as there are many false positives. Sentiment will remain very bearish even after rallies.
In a bull market, it’s the symmetric opposite; expect excursions into OS areas to be very short-lived if reached at all, bearish divergences have much less meaning unless they recur and sentiment will remain at elevated levels even during corrections.
Dr. Lloyd brings a diverse education and a lifetime of experience to his analysis. One of his recent pieces summarizes his approach to the markets. Writing in late-February 2009, he said:
In Canto X of Dante Alighieri’s Inferno we meet an unforgettable character, Farinata degli Uberti. He is described by Dante as looking “as if he entertained great scorn of Hell.” Come avesse lo inferno in gran dispitto.
We are presently sitting at the entrance to the next circle of Hell. The weekly chart of SPY, which I am using as a substitute for $SPX, demonstrates rather conclusively that when the action camps out on the lower Bollinger Band, the next movement, when the averages are moving down, is very likely to continue to the downside, (note down arrows).
Unfortunately the market cares not one whit about being held in scorn and will endeavor to inflict maximum pain on those who have not learnt to listen to its message.
In Canto X of Dante Alighieri’s Inferno we meet an unforgettable character, Farinata degli Uberti. He is described by Dante as looking “as if he entertained great scorn of Hell.” Come avesse lo inferno in gran dispitto.
We are presently sitting at the entrance to the next circle of Hell. The weekly chart of SPY, which I am using as a substitute for $SPX, demonstrates rather conclusively that when the action camps out on the lower Bollinger Band, the next movement, when the averages are moving down, is very likely to continue to the downside, (note down arrows).
Unfortunately the market cares not one whit about being held in scorn and will endeavor to inflict maximum pain on those who have not learnt to listen to its message.
In June 1984 I remember going to a standing room only presentation given by a now discredited market guru, who made a very cogent observation. There was a piano on stage with him. He sat down, talking as he played.
“All you have to do is determine from listening to the music and its rhythms where the next notes are going.” It was at this meeting that I heard him say that he felt he would never again make a serious mistake in the market. This was just before the great bull market move which began at the end of the following month. The guru started yelling “sell” to all who would listen. A good friend of mine was a broker at Merrill Lynch at the time, and on advice from our guru’s market letter, persuaded many of his clients to go short. He had to find another occupation.
There is a time and a place for everything, but going short at that time was certainly not the preferred action. Further I do not believe that going long now is either. A strictly defensive posture hedging one’s bets until the market has definitely turned would seem to be the best way to handle our present situation. We are certainly due for some sort of relief rally but notice that the next time the Squeeze fires it will probably be to the short side.
This type of analysis demonstrates the insight that a well-trained mind can bring to the markets. By the quality and quantity of his work, Dr. Lloyd sets the standard for technicians.
Letter from the Editor
