Using Technical Analysis to Augment Performance in … - How technical... · Using Technical...

CFA South Africa Investment Conference10 September 2009

Johannesburg, South Africa

Using Technical Analysis to AugmentPerformance in the Secular Bear Market

Philip J. Roth, CMTChief Technical Market Analyst, Miller Tabak + Co., LLCDirector, MTA Educational Foundation

Copyright 2009. Market Technicians Association Educational Foundation, Inc. All Rights Reserved.

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Technical Analysis Consists of 4 Types of Indicators

1. Trend and Momentum2. Sentiment (Psychology, or what fundamentalists

call Behavioral Finance)3. Supply/Demand (also called Flow of Funds)4. Intermarket Analysis (Equity Alternatives)

This discussion will focus on points 3 and 4


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S&P 500 - The Third Secular Correction1926 - January 13, 2009

Bloomberg Financial, LP


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Dow Theory of “Confirmation”Weekly DJIA and DJTA – May 2002-May 2005

StockCharts.com

Confirmationof New High

in Transports

New High

DJ Industrials - Weekly

DJ Transports - Weekly

StockCharts.com


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Viewing the Company versus the Stock

StockCharts.com


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Stock Market Cycles

StockCharts.com

Schematic model intended to Indicate trend and cyclical rhythm

time frames and not absolute levels of price magnitudeAccumulation Zone

Distribution Zone Intermediate-Term Trend Structure

Schematic model intended to Indicate trend and cyclical rhythm

time frames and not absolute levels of price magnitude

Distribution Zone

Long-Term Trend Structure

Short-Term Trend Structure

Intermediate-Term Trend Structure

Accumulation Zone


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Kitchin Wave

TradeStation

DJIA Quarterly Hi-Lo, illustrating 4-4 /1/2 Year Cycle.Avg. Duration: Last 8 cycles 1949-1982 is 49.8 months.Avg. Bull Phase Skew is 35.4 months;Avg. Bear Phase Skew is 14.4 months.


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StockCharts.com

Schumpeter’s ModelThe 19th Century Business Model


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The Stock Cycle versus The Bond Cycle

Two cycles out of phase with one another


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In terms of prices, bond prices seem to lead stock prices


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But, stocks lead interest rates.

Remember: interest rates = the inverse of bond prices


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It is easiest to understand the relationship referringto stock prices and bond prices


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Phase 1: Bonds up, stocks down

When the economy is weak, bonds usually do better thanstocks for a while because the earnings environment ispoor.

Phase 2: Bonds up, stocks up

Then stocks start to move up because lower interest ratesget investors to buy in anticipation of an improvedeconomy and, therefore, better earnings.


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Phase 3: Bonds down, stocks up

Later the economy is actually strengthening, withincreased credit demand and improved pricing, andearnings are rising.

Phase 4: Bonds down, stocks down

Eventually, higher interest rates cause investors to beconcerned that economic activity and, therefore, earningswill soon weaken.


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Hypothetical Business Cycle Showing Peaks & Troughs

Source: “Technical Analysis Explained” Martin Pring

*Gold - used as a proxy for all commodities

B

B

S

S

G

G

ExpansionRecession

B = BondsS = StocksG = Gold*


17Interaction of Financial MarketsDuring a Typical Business Cycle

Bond MarketStock MarketGold*

Business cycle trough

Business cycle peak

Source: “Technical Analysis Explained,” Martin Pring

*Gold - used as a proxy for all commodities


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Flow of Funds:Net Change in Supply of Stock

Dec-80

Dec-82

Dec-84

Dec-86

Dec-88

Dec-90

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

4 Quarter MovingAverage

$Bill

ions


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Flow of Funds:Households


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Flow of Funds:State & Local Government Employee Retirement Funds


21Net Purchase of U.S. Equities by Foreign Investors minusNet Purchases of Foreign Equities by U.S. Investors


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Net Purchases of U.S. Equities by Foreign Investors


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Net Purchases of Foreign Equities by U.S. Investors


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New Equity Financing


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Secondary Distributions: Value

52-Week Moving Average

2/15

/81

2/15

/83

2/15

/85

2/15

/87

2/15

/89

2/15

/91

2/15

/93

2/15

/95

2/15

/97

2/15

/99

2/15

/01

2/15

/03

2/15

/05

2/15

/07

2/15

/09


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Margin Debt versus % of Market Value


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Insider Sell/Buy Ratio

Inde

xBearish

Bullish

8-Week Moving Average

S&P 500


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Equity Mutual Funds: Cash Percentage of Net Assets


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Sales (Including Reinvested Dividends) andRedemptions of Equity Mutual Funds


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Net Sales of Equity Mutual Funds (Including Reinvested Dividends)


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Net Exchanges into Equity Mutual Funds


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Equity Mutual Funds: Total Flows


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Equity Mutual Funds: Net Purchases of Common Stock


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S&P 500 Dividend Yield vs. Price/Earnings Ratio


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ISE 10-Day Put/Call Ratio

Inde

x

S&P 500

10-Day Ratio


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Options Clearing Corp. (OCC) Equity Option PremiumPut/Call Ratio vs. NYSE Composite


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Options Clearing Corp. (OCC) Index Options PremiumPut/Call Ratio vs. NYSE Composite


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Consensus Inc. Bullish Percentage: Equities


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Bulls as a % of Bulls + Bears from Investor’s Intelligence


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Bulls as a % of Bulls + Bears from the AmericanAssociation of Individual Investors (AAII)


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NYSE Total Short Interest vs. Short Interest Ratio

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