TO: Fellow P&Fers
SUBJECT: BROAD MARKET BUY AND SELL SIGNALS
In my quest to find additional TA indicators that I'm comfortable using with my P&F charts, I have discovered some very interesting individuals. Perhaps none more iconoclastic (at least towards conventional TA) than Laszlo Birinyi. Mr. Birinyi is a regular writer at Forbes, and he shook up the old TA community with this little ditty back in December of 97 forbes.com. Why the very president of TA heaven wrote an indignant reply to Forbes about that damn Birinyi article which can be viewed at mta-usa.org.
Frankly, I get a big fat kick out of Mr. Birinyi and I think some of his points are right on the money. His firm's primary indicator is cash flow, and a brief story about that subject can be viewed at Message 4795734.
So anyway, I recently got my hands on a cassette of Laszlo speaking to the New York Society of Security Analysts in August of 97, titled the Failure of Technical Analysis. A friend who owed me has transcribed the tape. I think the beginning of the tape, and especially the part dealing with market turns and buy/sell decisions, is very relevant to us P&Fers and our use of the NYSE Bullish Percent Index. I'll paste a dab of the speech and then relate how the NYSEBP was on the money.
BEGINNING OF TAPE:
The best place to begin is a little bit of background. I was first of all a history major at Chapel Hill where I spent most of my time playing poker. Which gave me a better understanding of the stock market than any MBA course I ever took. I started out on Wall Street in the computer department and when I got my MBA I became a trader and for some year's I was a trader. . In 1976 Mike Bloomberg asked me to join Solomon Bros., at the help desk to develop a role between research, between sales and between trading. I worked for them for over 12 years. I was responsible for writing their weekly publications.
I should say today that most of my comments are not limited to technical analysis. It can also be an inditement of fundamental, quantitative and other approaches. It's just that we're always associated with numbers so we titled our piece the Failure of Technical Analysis.
I didn't start out with that view when I started at the trading desk. I was agnostic and I had an MBA and I was looking at things in a different way than most people. And I was willing to accept anything that was likely to help me. And I started out in the mid 1970's by subscribing to a lot of newsletters that appeared in Barons. Barons had a lot of active newsletters, like Communicator.
I was willing to learn and take whatever advice I could get, to help me along in my career as a trader. I was soon disappointed in the newsletters which I saved (again, having a history background). I saved all these letters, would read them, and people who I thought were very, very positive, would suddenly applaud themselves for calling not market down turns. And people who had been recommending certain stocks, when the stocks went down, would talk about some other stocks. And it wasn't very long before I became disenchanted with many of the approaches, and maybe it's wrong to indite technical analysis, and maybe it's just the individual newsletters.
One of my duties at Solomon was to work the trading desk and help the trading desk make money. But they didn't especially care how I came up with ideas or what approaches I used as long as they were able to profit from my input. From all this and the analysis we did over the years I pretty much came to the conclusion that technical analysis, like many other forms of analysis, really doesn't work. When it gets down full cross trader, where you're really trying to make money, really trying to add value, and you're not just looking for entertainment, technical analysis fails, I think unfortunately, on several levels. First of all I'm disturbed with the fact, that technicians do not have a very good record of a catching turns in the market. This hasn't always been so. We like a lot of information, lots of data. In the 70's and early 80's there was some pretty good technical calls. Not as many as some people would like to think there were, but I really have to admit that there was some people who did catch the turns in the market. Since 1982, I think technicians have generally not fared well in catching the turns. To me, too many technicians are like doctors, who tell you that you are healthy, which is always fine, but what I really want is a doctor who is going to tell me when I'm not healthy. He can be right 90% of the time, but its the other 5% that I am really counting on him for. I think that unfortunately, too many times, we have had turns that have just plain been missed, or confirmed much after the fact.
I prepared a handout for you today, and as you can see at the market bottom in 1990, the week of the market bottom, Business week had a long detailed story. It was entitled "Analysists are reading their charts and weeping." And the story went through and detailed all the reasons why all the technical tools were negative. Again it was the week the market hit bottom.
And then in December of 1991, once again, almost to the day, another Business Week article came out and said "Watch out, we're going down". Right here again, right at the bottom. The 1990 bottom is especially interesting because in addition to the Business Week Story in October, there was a lot of other stories at the very same time. On page 2 for example, there was a story 11 days after market bottomed, where the article talked about "Is it over. No it is not over." A number of technicians and fundamentalists said, "There is no way." There was another story a couple of days later, also in the Journal, suggesting that the rally was only a bear market bounce, and any number of stories were couched with time, and I think everybody generally missed the entire bottom.
Now it's very easy for me to sit here and talk about this, when we've engaged in this thing ourselves and trying to catch turns and I think we've done a fairly good job. For example 1994, in November & December 1994, after a year when the market was up and down 1% depending upon how you looked at it. The Wall Street Week Elves indicator, as you may know, in November & December that year, there were several weeks where the Elves Indicator, of which I was one, only had one or two bolts. And once again, as it had been in the past, right at the bottom when you really needed somebody to tell you to buy, everybody was saying sell. I also suggest that the Elves Indicator again showed that conventional technical approaches didn't work.
The old indicator, as some of you may know, involved 10 market analysts, 7 or 8 of whom were technical of nature, a couple of us who were more market timers but not necessarily technical. In the first year of that exercise in 1990, the contest then had four categories. And in the first year of the contest I won three of the four categories and had the best overall record. And the people who followed the conventional charts for the regular things that go under the rung of technical analysis, really didn't fare very well. And over time I would suggest that not catching turns has really been one of the things that they should have done but didn't do. And, I think that our record shows that there are some approaches that you can use to help you catch the turns. This is where you really need people. I think to outline trends and say they're going to go on and on and on is helpful. But again, I want the doctors to tell me when I'm sick, not when I' m well.
END OF THIS SECTION OF TAPE:
Gee - who is it that guy I occasionally see on CNBC who continually suggests that one should do the exact opposite of what's on the front of a magazine or newspaper? Hmmmmmmm? What is his name?
Now let's look at some dates.
Laszlo said most missed the bottom (October) in 1990. Well look at what the NYSEBP chart was saying in Oct of 1990 www3.techstocks.com. The reversal up from 18 put us in Bull Alert. P&Fers laughed all the way to the bank on this one. No miss here. One point for us!
Next he references December of 91. I see a reversal up from 46 back to Bull Confirmed. Two points!
Then he references Nov and Dec of 94. Well, the reversal up from 36 put us in Bear Correction (which I refer to as "Buy with Caution"). Again, P&Fers where on the money. Three points and we win a picture of Jan climbing out of the mail box and she's got a -----Oh! I'll stop there.
Bottom line: Broad market buy and sell signals as telegraphed via the NYSEBP appear to be very reliable. One takes great risk in betting against this powerful (my favorite) indicator.
Take care,
Eric
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