Journal of Technical Analysis (JOTA). Issue 13 (1982, May)

MWET- TECHNICIANS ASSOCIATION JOURNAL

Issue 13

May, 1982

Published by : Market Technicians Association 70 Pine Street

New York, New York 10005

Copyright 1982 by Market. Technicians .Association

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Market Technicians Association Journal

Editor:

Anthony W. Tabell Delafield , Harvey, Tabell 909 State Road Princeton, New Jersey 08540

Associate Editor:

Roslyn Schwartz Delafield , Harvey, Tabell

Thanks to the following MTA members and subscribers for their part in the creation of this issue:

Ralph J. Acampora Richard Arms, Jr. Frederick H. Dickson Robert Farrell Fred R. Gruber David Holt Charles D . Kirkpatrick, II Ian McAvity John R. McGinley, Jr. G. Edward Noonan Robert R. Prechter , Jr. Martin Pring Thomas Roginski

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THE PlTA JOURNAL

EDITORIAL 9

SOME CONTRARY THOUGHTS Robert Farrell

11

“Contrary Opinion! has been a much-abused term ever since the redoubtable Humphrey Neil1 first coined-it. As Bob Farrell points out, with justified asperity, in. this piece, it is often used as a code-word for any opinion which is at variance with that of the user. What is, in fact, true contrary opinion? Finding out often requires a fair amount of both thought and effort, as the first president of the Market Technicians Association here discusses.

RELATIVE STRENGTH DIVERGENCE ANALYSIS Frederick H. Dickson

The redoubtable Fred Dickson, in addition to chairing the 1982 seminar, has found time to moderate a panel on relative strength for that seminar and even to provide this article outlining his own approach. It focuses, uniquely, on divergence, issues that show superior or inferior relative action in a direction opposite to that of the market. Here he outlines the results of extensive application and testing of this approach.

INTERNATIONAL PERSPECTIVES: THE CANADA VS. U.S. MARKET CYCLE

Ian McAvity

International inter-market analysis is a field by and large neglected by technicians. There is perhaps no one better qualified to discuss this subject than Ian McAvity, long-time MTA member and 1982 seminar sneaker. He is the editor of a market letter, nreoared in Canada, but with a maior focus on the U .S . stock market. Here he presents an outline of what may be the definitive work on the relationship between financial markets in New York and Toronto.

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Issue No, I3

GLOBAL FINANCIAL MARKETS AND THE BUSINESS CYCLE Martin Pring

31

Martin Pring is a long-time practitioner of quantitative analysis of all major financial markets, the ‘fixed-income as well as the equity market, and his comments in the respected Bank Credit Analyst have had a deservedly wide following. Here he comments on the typical rela- tationship between the stock, bond --- and- gold --- markets, suggesting, perhaps not surprisingly, that the action of each of these markets may offer some valuable indications to students of another one of the trio.

THE STORY OF THE SHEEP AND THE SHEPHERDS, Or HOW THE STOCK MARKET REALLY WORKS

Thomas M. Roginski

The stock market moves as investors process information, and technical analysis can be defined as the study of precisely how they react to such prbcessing. In this peice , the author explores the various sorts of information available, comments on how it is processed and attempts to draw some formal conclusions as to ensuing stock market behavior. Mr. Roginski, a speaker at the 1982 MTA Seminar, is a Vice-President of Autranet, Inc.

THE STREAM OF TRADING Richard W. Arms, Jr.

Dick Arms, a frequent seminar speaker and Journal contributor, is best known for his invention of the Short-Term Trading Index perhaps currently one of the most widely followed of all indicators. Not being I content to rest on those laurels, he has originated the “E q uivolume” concept, the basic principles of which he outlines in this article. Dick’ is Director of Institutional Research for Quinn & Co. and is the author of Profits in Volume (Investors Intelligence, 1971). He aL5o has in preparation a forthcoming book, tentatively entitled Volume Cycles, from which this article is excerpted.

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Index Kontinued)

FIBONACCI IN THE DOW - SOME EXAMPLES Robert R. Prechter, Jr.

49

Why should a concept in theoretical mathematics discovered by an Italian Mathematician in the 12th Century be applic- able to today’s stock market? Starting with the late R.N. Elliott, many analysts have become convinced that it is. Bob Prechter, an MTA member ,along with A.J. Frost, with whom he wrot-e Elliott Wave Principle, is the leading contemporary interpreter of Elliott’s work. In this article he explores the Fibonacci or “Golden” ratio and applies it to recent trading. Bob is the editor of the Elliott Wave Theorist Financial letter .

THE STOCK AND THE COMPANY Ralph J. Acampora

55

Ralph Acamoora is a past president of the MTA and has nerhaps been more active in the teaching of technical analvsis to the novice user than anvone among our membership. He draws upon this experience in this discussion of the integration of technical and fundamental analvsis, a subiect on which he chairs a 1982 seminar panel. Interest in technical work, he notes, has been growing. Is this a permanent developmenf? Perhaps not. The reasons are outlined in this article.

INTEGRATING TECHNICAL ANALYSIS WITH FUNDAMENTAL ANALYSIS

Fred R. Cruber 57

How should technical and fundamental analysis be integrated? Fred Gruber is a technician by training and inclindation and an early MTA member. He is now the major investment-decision- maker in a typical money-management organization. Here he outlines his own approach to combining two disciplines, a subject he discusses at further length at a 1982 seminar panel.

TECHNlCAL ANALYSIS, AN OBJECTIVE DISCIPLINE FOR FUNDAMENTAL INVESTORS

G. Edward Noonan 61

The technician lives in the real world, and, like it or not, he must, in that real world, coordinate with the practitioners of other disciplines -- notably the fundamental analyst. This task is often difficult -- for both parties involved -- so much so that the 1982 seminar features a panel on that subject.

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Index Kontinued)

One of the speakers on that panel is Ed Noonan, who, as President of Contravisory Inc. , is involved in assisting fundamentally oriented clients with technical work. Here he discusses how technical work should be “packaged” in order to make the fundamental-technical relationship a smooth one.

COMPUTER DON’T!3 (ALL COMPUTERS HAVE LOTS OF THEM)

John R. McGinley, Jr.

Time marches on, and the technician -- often kicking and screaming -- has been dragged into the realm of the personal computer. Here he finds himself in a world as difficult and hostile as the stock market and one - which is, in addition, unfamiliar, peopled with sweat- shirted, sneakered Star-Wars freaks. John McGinley , one of the earlv I) .c. users among the MTA member- shin, has been through this maze and. as he relates here, has made all the mistakes. He tries to help the novice to avoid a few of them in this article.

THE ENIGMATIC STOCK OPTION, A CONSTANT CHALLENGE David Holt

Since the emergence of listed options on the financial scene, technicians have adapted various approaches to this new vehicle. In general, one such approach has assumed very little difference between options and other instruments that trade in the marketplace and has tried to apply to them the conventional rules of technical analysis. David Holt, of Trade Levels, a 1982 seminar speaker, rejects this approach. Options, he feels, have unique qualities, which make conventional analysis difficult -- or even useless. Here he focuses on a unique aspect of options, time value, as a proper target for the technician’s effort.

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LETTERS TO THE EDITOR

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91

MARKET TECHNICIANS ASSOCIATION

MEMBERSHIP AND SUBSCRIPTION INFORMATION

REGULAR MEMBERSHIP - $50 per year plus $10 one-time application fee.

Receives the Journal, the monthly MTA Newsletter, invitations to all meetings, voting member status and a discount on the Annual Seminar Fee. Eligibility requires that the emphasis of the applicant’s professional work involve technical analysis.

SUBSCRIBER STATUS - $50 per year plus $10 one-time application fee.

Receives the Journal and the MTA Newsletter, which contains shorter articles on technical analysis, and the subscriber receives special announcements of the MTA meetings open to The New York Society of Security Analysts and/or the public, plus a discount on the Annual Seminar Fee.

ANNUAL SUBSCRIPTION TO THE MTA JOURNAL - $35 per year.

SINGLE ISSUES OF THE MTA JOURNAL (including back issues)

are available for $15.

The Market Technicians Association Journal is scheduled to be published three times each fiscal year, in approximately November, February and May.

An Annual Seminar is held each Spring.

Inquiries for Regular Membership and Subscriber Status whould be directed to:

John Greeley Greeley Securities, Inc. 120 Broadway New York, New York 10005

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Editorial

The reader is assured that editorial comment in this issue is not only brief, but eminently skippable, in order that he can get on to the meat of the issue’s contents.

We are fairly proud of those contents. The 92 pages here produced 1 willing Journal contributors is an all-time record. This being the Seminar issue, another fact should be noted. Each and every article herein has been authored by a seminar speaker and 13 of the 18 featured seminar speakers have been able to contribute. (The above tally does not count- Dr. de Lambert, who is busy meditating in a cave near the Matterhorn .)

In order to achieve the goal of a lOO%-seminar issue a number of articles by worthy contributors had to be reserved. These articles will appear in our next issue.

Which brings us to the subject of the next issue. The page opposite states that the Journal is published in “approximately November, February, and May”. “Approximately” is the operative word in this case, since some subscribers, at least, have noted that the February issue was conspicuous by its absence. The excuse is, quite simply, lack of time on the part of your editor who, like all other MTA officers, is a volunteer and whose services are worth every bit of his salary. It is not our intent, however, to shortchange our readers. The third of the requisite three issues will be published some time this Summer with the aforementioned articles as a nucleus. Other contributions from all and sundry will, needless to say, be welcome.

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SmE CONTRARY THOUGHTS

ROBERT FARRELL Vice President, Chief Market Analyst

Merrill Lynch, Pierce, Fenner & Smith Inc.

“Contrary Opinion” has been a much-abused term ever since the redoubtable Humphrey Neil1 first coined it. As Bob Farrell points out, with justified asperity, in this piece, it is often used as a code-word for any opinion which is at variance with that of the user. What is, in fact, true contrary opinion? Finding out often requires a fair amount of both thought and effort, as the first president of the Market Technicians Association here discusses.

Contrary opinion was advanced as a stock market theory by Humphrey N eill . It was the subject of a classic study by Gustav LeBon in his book, The Crowd. It was described in further detail by Irving Janis in his book Victims of Group Think. Over the years many perceptive observers have noted that opinions about the future course of events are most often wrong when an involved majority thinks and acts alike. It was Gustav LeBon who said’ that a normal intelligent individual at once becomes a “blockhead” when he becomes part of a crowd. Psychologists have described the herd instinct in group or crowd thinking as growing out of our needs for reinforcement or the need to be stroked. We feel more secure if others agree with us. In fact, we tend to seek out those who reinforce our opinions rather than those who disagree with us. The bottom line, therefore, is that crowd thinking is the absence of thought. “If everyone, agrees, how can it not be so?” goes the line of reasoning. But, as a matter of fact, if everyone agrees, nobody is thinking and the crowd will likely be wrong.

Today, however, it has become almost fashionable to assert that one’s belief about the future is contrary to the consensus. Contrary opinion is

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cited by all manner of market observers. The typical observer today starts off by saying, “Everyone else is bullish (or bearish), so my bullish (or bearish) opinion is unique, contrary and, by inference, therefore, more correct. ” Most such observers, however, fail to make an accurate or detailed assessment of prevailing opinion and fail to discern who is the involved majority to whom to be contrary. It is very easy to read a few comments in the newspaper or some market letters and then, if the opinions are similar, say everybody agrees, and there is consensus. This super- ficial approach tarnishes the name of good contrarianism and is another ’ substitute for real thinking.

The important usefulness in being contrary is first to establish who is the involved majority and then to determine if the majority is acting in a consensus manner. The sample should be broad and the opinion should be reflected in the actions as well as the words of the consensus thinker.

Some examples may serve to make this clearer. The man on the street is not the dominant force in the stock market today. If a cross-section of individual investors says it does not think stocks will do well in the future, is it an opinion that matters? Certainly it does not matter much if those investors do not own stocks. If they do, it is more important to determine if their actions back up their words. Are they buying stocks because they look cheap while voicing negative opinions about the future? This would hardly be a bearish opinion.

The biggest factor in the stock market today is the institutional investor. Institutional consensus therefore does matter. But does one take opinion as stated or as indicated by actions? Once again, actions speak louder than words. Big cash reserves, low common-stock holdings as a percentage of assets and intentions to sell rallies are evidence of a bearish consensus. Such evidence can be helpful in identifying market bottoms and is far more meaningful than limited samples of “what they are saying.”

The important consideration in looking for a consensus to which to go contrary is to relate it to the extremes in market price behavior that have gone before. The oil stocks are a good case in point. In the last half of 1979 and early 1980, almost everyone had oils on their buy lists. The institutional crowd was starting to load up. The key word, however, was starting. The stocks generally had been in trading ranges for 10 years or more and had only just emerged in 1979. The early endorsement was yet to be reflected in runaway price. By late 1980, though, the signs of an extreme, indicating a “contrarian” situation, were manyfold. Prices were going straight up on top of an already-long advance, the price of oil was said to be going to double or triple in the next five years, analysts could see no adversities, and speculation in the lowest quality, “penny” shares was rampant. Price and market behavior must be integrated into any assessment of contrary opinion in the stock market.

As spokesman for the largest brokerage house in the country, many have asked me how I can be contrary. My opinion is telexed all over the world and can, theoretically, quickly become consensus. Yet I have found, over

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the years, the opinions I have held which were most correct were those I had evolved by making a correct assessment of consensus. Two things have contributed to this success. One is that I concentrate on what the institutional majority is doing and saying rather than on public opinion. Then I relate this consensus to price performance or the message of the market. In late 1980, institutional opinion had clearly turned very bullish. Cash was being reduced to buy more stocks. Prices had already risen sharply in the prior three years and, amidst all the enthusiasm, prices began to churn at the top on record high volume. The consensus was to buy reactions for long-term holding. My reaction to this was to sell rallies. It was a simple consensus t0 Spot.

The other factor is that, if I am able to identify a true consensus, my opinion will not change the way the majority atits. A true consensus has the majority so convinced that it tends not to listen to contrary advice. I am most uncomfortable when I give a speech and see mostly nodding heads indicating everyone is agreeing with me. I feel I am on the right track when my views are generally questioned or I see a large proportion of blank stares in my audience. {The blank stare, means the listener had already tuned out my negative or contrary thoughts .)

Humphrey Neill called it the Art of Contrary Thinking. It is an art. Here again the important word must be singled out, i.e. , thinking. Most people would rather not think. They want short cuts. They are always looking for correlations and models to compare’ the present to the past as a substitute for thinking. My approach is the opposite. Ask first what is different. Then see what the markets are discounting and finally check to see where the majority are placing their bets. The picture is not always clear as a bell, but, when it is, it can be exceptionally rewarding.

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RELATIVE STRENGTH DIVERGENCE ANALYSIS

FREDERICK l-l. DICKSON Director of Research, Shareinvest Co.

The redoubtable Fred Dickson, in addition to chairing the 1982 seminar, has found time to moderate a panel on relative strength for that seminar and even to provide this article outlining his own approach. It focuses, uniquely, on divergence, issues that show superior or inferior relative action in a direction opposite to that of the market. Here he outlines the results of extensive application and testing of this approach.

Introduction

Relative-strength analysis is a technical tool used by many investors as an aid in the process of security selection. In its most traditional form, this analysis involves comparing the price movement of a particular security to a market index, such as the S&P 500 or the Dow Jones Industrial Average. Normally the investor follows one or more of a series of trading rules which combine the behavior of the relative-strength index over time with the price action of the security. Some of the more widely followed systems involve:

1. Following the direction of the relative strength indexes. e.g. : Buy- ing the strongest stocks.’ in a strong market and selling the weakest stocks in a weak market;

2. Identifying turning points of smoothed relative strength indices which are calculated using moving averages of different lengths;

3. Looking for periods when the price index of the security is moving in a different direction from its relative strength index (divergence behavior) .

The focus of this paper is twofold: First, to introduce a market timing

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indicator based on the observation of relative strength divergences for a universe of companies and second, to evaluate the utility of using relative strength divergence analysis for specific stock selection.

Definition of Relative Strenath Diveraence

A stock showing positive relative strength divergence characteristics is one that in a down market, after a period of underperforming the market, begins to move up or slows down its rate of decline as the market continues to move down. See Figure One. The arrow indicates the point where the divergence begins in the context of a down market (shaded area).

FIGURE ONE

I

Price POSITIVE DIVERGENCE

Conversely, a stock showing negative relative strength divergence characteristics is one that, in a rising market, after a period of outperforming the averages, begins to reverse down or slow its rate of increase relative to the market as the market continues to advance. See Figure Two. The arrow indicates the point where the negative divergence begins in the context of a rising market.

FIGURE TWO I Price NEGATIVE DIVERGENCE

Time-)

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Specific examples of relative strength divergence analysis as applied to the charts of Datapoint and Digital Equipment are shown below. A “B” or buy is written on each chart at points of positive divergence and an “S” is shown where negative divergences occur.

Application of Relative Strength Divergence Analysis--- (Charts Courtesy of the Wm. O’Neill Company)

FIGURE TIIREE

HistorIcal Analysis of Relative Strength Divergences, April 19770March 1982

WJ !..on

so’&

Is4 15%

rDc “Y.

Posltlvo olvorgoncos (% Unlvor;o)

A’u’JIJ’*‘s ‘O’N’D ‘J’F’U’AiMrJ ~J’A*s ‘O’~J’D’J’F’H ‘A’M’J ‘J’A’6’ O~N’D~,~F~M~A~M~J~J~A,‘~~O’N’D’J’F’U’A’~’J’J~AJ~JN~~JJ ifl~n I

1t77 101) 1070 1880 lM1 1x1~

Historical Analysis of Relative Strength Divergences

Using the universe of 280 listed call-option stocks as a basis for reference, a market indicator was developed from an extensive analysis of relative strength divergences on a stock-by-stock basis over the last five years. On a weekly basis, during periods of falling markets (defined using a 5% filter rlule for the S&P 500)) the number of stocks showing positive divergence patterns were counted and displayed as a percent of the options universe. This data is shown by the rising vertical lines plotted from the bottom on Figure 3. As ,Wwn on the graph, this indicator correlates closely with market bottoms. During periods of rising markets (also defined using a 5% filter rule for the S& P 500)) the absolute number of negative divergence patterns were observed each week and displayed as a percent of the options universe. This data is shown by the falling vertical lines plotted from the top on Figure 3. From Figure 3, one can observe a buildup of significant negative divergence behavior in the late stages of each cycle, although the patterns do not correlate as closely as those observed near market bottoms.

Table One presents a more detailed analysis of how positive and negative relative strength divergences build up prior to cyclical turning points. Using a simple cutoff value of 25% to determine buy signals, we have observed over the previous 11 cycles that, on average, the market reaches a trough approximately two weeks after the signal date at a level 2.9% below that observed at the time of the signal. Using a buildup of positive relative strength divergences as a signal for a market top; we observed that, on average, the market achieved cyclical peak levels four weeks after the positive divergence index moved above 25%. The average advance for the Dow Jones Industrials from the signal level to the market peak was 3.5%.

TABLE ONE

Date

Analysis of Positive Relative Strength Divergences, September 1977-January 1982

Jun 24, 1977 Nov. 18, 1977 May 19, 1978 Aug. 11, 1978 Dec. 22, 1978 Apr. 6, 1979 Aug. 24, 1979 Dec. 14, 1979 June 13, 1980 Nov. 28, 1980 Jan. 2, 1981 Mar. 27, 1981 Nov. 6. 1981

Average

Date

Sept. 30, 1977 Feb. 10, 1978 Jul. 7, 1978 Nov. 3, 1978 Mar. 2, 1979 May 4, 1979 Oct. 26, 1979 Mar. 14, 1980 Feb. 13, 1981 Sept. 25, 1981 Jan. 22, 1982

% Universe Weeks with Positive Until Divergences Market Low

26 3 26 4 25 0 32 2 29 0 29 2 30 2 30 2 29 0 26 0 26 6

Decline in DJIA from

Market Bottom

5.5 3.7 0.8 4.6 1.1 2.7 1.6 6.4 0.0 0.0 6.0

Weeks from First

Divergences to Low

9 11 3 4 4 4 2 5 6 5 13

Average 28 1.9 2.9 6.0

Analysis of Negative Relative Strength Divergences, April 1977-January 1982

% Universe with Negative

Divergences

25 28 43 40 26 29 36 35 33 34 30 27 25

Weeks until Market Top

-1 1 4 4 5 1 6 9

18 0 1 4 4

% Advance DJIA from

Signal to Top

1.9 1.0 2.3 1.9 6.3 0.2 1.9 7.2

10.9 1.1 3.3 2.5 4.6

32 4.3 3.5

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ADDlvina Relative Strenath Analvsis to Stock Selection

It appears that relative strength divergence analysis can be helpful in individual stock selection. Shown in Table Two is the compositeperform- ante of portfolios including stocks showing positive divergence characteristics. As indicated in the table, the positive divergence stock portfolios outperformed the S&P 500 and the Dow Jones Industrial Average in every holding period and the percentage of positive divergence stocks outperforming the market was above 60% in all periods. Thus, this consideration may be useful for evaluating potential stock purchase candidates.

TABLE TWO

Composite Performance for Ten Cycles, 1977-1982

Price Appreciation 1 2 3 4 5 6

Month Months Months Months Months Months

Positive divergence 4.7% 9.0% 11.3% 10.1% 9.7% 12.4% port folios

s & P 500 1.8 3.9 5.6 4.8 4.5 5.8 DJIA 0.9 2.6 3.9 3.3 2.6 3.4

% of portfolio outperforming DJIA 67 69 67 61 61 63

In the analysis above, the focus was on identifying intermediate cycle turning points. Shown below are the results of specific signals measured near several of the more important market troughs between 1974 and 1981. As indicated in Table Three, the positive divergence portfolios performed superby as measured in absolute and relative terms.

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TABLE THREE ’

Relative Strength Divergence Analysis

Historical Analysis - Major Buy Signals Universe = 279 Option Stocks

# cos. Signal Positive Date Div. 9/13/74 51 AVG

DJIA SP 500

1215175

1114177

2110178

11/10/78

10/19/79

3/21/80

9/10/81

Composite Average:

1M 14.9

4.9 9.1

24.3 16.7 5.1 -5.5

12.5 2.8

55 AVG 6.6 19.5 20.0 DJIA 7.2 17.8 18.8 SP 500 6.7 15.6 14.2

25 AVG 9.5 8.9 6.1 DJIA 1.7 0.5 -4.8 SP 500 3.4 2.1 -2.1

33 AVG 1.1 3.2 14.2 DJIA -2.2 -0.3 6.0 SP 500 -1.3 0.4 6.5

120 AVG 4.5 7.7 6.0 DJIA 0.6 2.2 1.9 SP 500 2.0 4.2 3.2

52 AVG 5.0 11.6 15.3 DJIA 0.2 3.0 9.3 SP 500 1.9 6.5 6.4

71 AVG 4.1 15.0 18.7 DJIA -3.2 5.5 10.2 SP 500 -3.5 3.4 9.7

47 AVG 5.3 8.7 12.2 DJIA 1.1 -1.0 3.4 SP 500 1.2 2.1 4.6

AVG 6.4 DJIA 1.3 SP 500 2.4

12.4 4.7 5.9

7.1

13.7 17.2 4.9 7.5 5.7 8.9

Performance Next 2M 3M 4M 5M

VS DJ/SP AVG +4.6

30.2 n-9 4.3 15.9

10.9 24.3

24.0 21.2 22.6 20.5 19.2 16.2

4.4 8.4 -7.7 -6.7 -4.5 -3.0

22.8 16.1 10.7 5.3 10.9 5.8

9.4 18.6 4.4 8.9 5.0 9.0

15.1 4.3 7.5 -1.7

12.8 2.7

25.1 27.0 18.0 19.8 17.1 20.4

6.8 0.5

-0.5

8.4 9.0

46.2 21.7 28.4

21..5 17.7 14.2

14.9 1.8 4.8

32.2 14.1 15.1

10.8 2.7 4.0

4.0 -6.3 -1.0

32.7 22.8 26.3

*M=Mont hs

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INTERNATIONAL PERSPECTIVES: ME CANADA VS r U n S a M4RKl3 CYCLE

IAN MC AVITY Editor & Publisher of Deliberations

International inter-market analysis is a field by and large neglected by technicians. There is perhaps no one better qualified to discuss this subject than Ian McAvity, Zong- time MTA member and 1982 seminar speaker. He is the editor of a market letter, prepared in Canada, but with a major focus on the U.S. stock market. Here he presents an outline of what may be the definitive work on the relationship between financial markets in New York and Toron to.

By the first week of April 1976, the new bull market which soared from the ashes of 1973/74, had carried the Dow Jones Industrials back up to the 1000 level (from 575), while the broader S&P Industrials had recorded a gain of 85 percent from the bear market lows. A spectacular recovery . . . which also was to turn out to have been the peak for that market cycle, which went into a long bear phase that bottomed in March 1978.

While New York was posting that 85% rise in 17 months, the markets north of the border had lifted off their lows, and posted a gain or 29% which was extremely frustrating to money managers who were limited by law as to the extent of their foreign investment. Psychologically, the Canadian investment community was not at al,l optimistic.

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In that first week of April 1976, I wrote an article for BARRON'S which was titled: BAY STREET VS WALL STREET, CANADIAN STOCKS MAY BE POISED TO CATCH UP. The argument was based on a study of inter-market relative performance over the 1953 to 1974 period. Many managers in Canada were loosely aware of the phenomenon which had so frequently seen the Canadian market lag New York in the early stages of a newly born bull market, only to come on like a power-house in the late stages, and significantly out- perform New York. That article appeared six months before the election of the Separatist government in Quebec, and in retrospect it was six months early. But what an amazing period of superior relative performance that followed. From late 1976 through January 1980, the Toronto Composite Index soared from 925 to 2200 - 2.38 times, while the New York Stock Exchange Composite Index gained 29%. Toronto out-gained New York by a factor of 4.7 times over that three-year period.

Was it just chance? I doubt it....and on the following pages, the chart history of this cycle is portrayed back to 1934, which is the earliest date for which Canadian index data is available.

Based on my earlier study of the 1953/1974 period, in which there were five completed cycles in the popular "Four Year Cycle" in the markets, my findings had been that Toronto tended to UNDER-perform New York for the first 16 to 18 months of the new bull market; and then Toronto would turn around and OUT-perform New York for the next 26 to 28 months. (That superior performance often meant that Toronto made its actual peak months after New York had posted the cycle peak, and Toronto would tend to fall less than New York in the early stages of the ensuing bear cycle). In that 21-year study period , it had been a consistent fact that the turning point in Canada's relative strength cycle was essentially concurrent with the subsequent bear market bottom.

The cycle form was to repeat in the 1976 to 1982 period, but, as with all newly published theories, the "normal" experience wouldn't quite accom- modate. In many respects, looking back from the vantage point of 1982, it now seems that the bull market born in late 1974 turned out to be a "Double-Length" Cycle, or as others might label it....a nine-year cycle. The Canadian market dynamically out-performed New York for 38 months; peaked on a relative basis in February 1980, and as of April 1982, Canada has significantly under-performed New York for the latest 27 months. Both time spans are much longer than those of the 1953/1974 study period... but the form of the cycle has been consistent. In spite of the dim outlook, a period of Canadian superior performance is likely to evolve within the next year or so, and run for an exploitable span. But first, the history.

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First, some definition of what

the charts followincl actua1l.y portray. Each chart presents a snapshot of one

market cycle, with the years before

and after. The New York Market is at

the top (based on the S&P 425 Indust-

rials) ; the old Toronto Industrials

Index is in the middle; and across

the bottom is a relative strength

value (RSV) which is derived from

dividing the Toronto Index bytheNew ‘i York Index. This measure w

from one point to the next

has gone up more, or down

New York. The converse app

Toronto goes down more, or

the RSV will trend down.

11 rise

if Toronto

ess than

ies when

up less...

On the charts I have appl ied the labels “Inferior” and “Superior”

to identify the Canadian relative

strength trend.

Look at the upper left corner, to the market cycle of 1934/1938. It

is useful to go beyond recent memory in search of objectivity. The dotted

lines indicate the start and finish

of the particular cycle, and it can

be readily seen that New York posted

much stronger gains than Toronto in

the early stages of the rise (to”A”)

which might loosely be called the “first half” of the bull market; and then on the

“second ha 1 f” of the move, Toronto posted

greater gains than New York, to the actual

peak at “B”, before the 1937 Crash set in.

Looking at the RSV at the bottom of that sequence, the Canada Inferior and

Canada Superior phases are 1 abel led. This

is the methodology to explain the series

of charts that follow.

It is not my intent to review each of

the cycles that followed...they speak for

themselves. But it is important to point

out that the War Years (1938-1942) did not

show the cycle. And, in the immediate Post

War(1946/49)period, most analysts identify

the 1949 lows as the cycle bottom; but it

could have been any of the four lowson the

S&P Index from late 1946 on. Canada showed

inferior performance throughout that span,

but appears to deviate by out-performing

New York from the start of the 1949 bull.

I do not believe in burying the exceptions

to an otherwise powerful history. Study

each of them closely !

Below, a trend profile of the Relative Strength Values shown opposite. The method

here is a front-weighted moving average of

the 12 month rates of change in the RSV.

(Also known as a ‘Coppock’ curve). It shows

the alternating periods of Superior and

Inferior Relative Strength of Toronto vs New York, with a bias towards increasingly

wider extremes in recent years.

) TORONTO RELATIVE TO NEW YORK ~ 12 Month Rates of Change in the

j Relative Strength Value derived

j by dividing TSE by NYSE. Smoothed

with a front-weighted mov.average

(Not adjusted for CS swings) / I

I

r

1965 i366 :967 11968 1 1169 1 1373 1971 I 1968 I1969 1 19701 1971 I 19721 1973 I i974. I1975 I

THE 196611970 CYCLE ;

if 1‘1 ,L -

S6P INDLISTRIALS

!OO -

: ii

!8(1 _

170 _

160 - 15n -

ia _

TSE INDUSTRIALq

I.3 -

1.8 _

I.?

!.a

CANADA RELATIVE : TO NEW YORK

1965 1966 1967 1968 1969 1970 1971

Before discussing those increasingly wider swings further, permit me to bring the earlier history studies up to the current time.

The charts above show the 1966/70 and 1970/74 market cycles. In both cases the Canadian market made its actual lows concurrently with New York. The first leg up from those 1 ows saw New ‘York much stronger than Canada (the “I NFERI OR” phase of Canada’s cycle). In late 1967, and mid 1971, the bull market gave way to an intermediate correction, in which the Canadian market showed greater downside losses; but from those intermediate

THE 1970/1974 CYCLE ’

S6P INDUSTRIALS

TSE INDUSTRIALS :

L40 - ’ 2.1- .CANADA RELATIVE

2.0,

1.9,

lows, the transition to Canada's "SUPERIOR" phase evolved, and for the balance of the ensuing bull market, through the actual top in New York, to the first major bear market rally top... the Canadian market kept going. In both Bear market phases, Canada recorded its actual peak on New York’s first bear rally peak.... which by some definitions, is the first point at which the bear trend can be identified formally, once the market has shown it is incapable of exceeding the prior highs. As the bear market progressed down, Canada declined at a slower rate until the terminal stages -prolonging the ‘superior’ t rend ; until bottom was reached, and then a repeat, with Canada under-performing on the

first leg of the next bull market.

-27-

Which brings me to the current case. The extended period which might be referred to as the four year cycle that ran for eight (or wi 11 it be g?) years.

The previous history has shown that in almost every case, the switch from Canada Superior to Canada inferior had tended to occur coincidently with a regular cycle bottom in both markets, which almost always has been concurrent

(often the same day).

The period of 1975/1977 was one of great frustration in the Canadian market.... and at the time it might have been argued that Canada was going to fail to participate in the 1974/78 cycle. But the downward slide in 1977, down to the bottom in March 1978 lacked many of the characteristics of the Bear markets of recent cycles, which should have prompted more consideration of the possibility of a larger cycle (more than I, or other analysts gave it at the time).

That 1977/78 decline occurred against a backdrop in which Margin Debt (as a measure of public speculation in the market) continued to rise - which is NOT bear market behaviour. Interest rates were accelerating upwards towards the inversion stage (in which short term rates rise above long term rates) which is pre-Bear market behaviour, not

new bull market material. So too with the Canadian market moving into a fast rising phase of superior relative performance versus New York.

Looking back at the eight year span with 20/20 hindsight, it now seems

that the “first half” of the normal bull sequence, in wh i ch Canada under-performs New York, ran to late 1976 - 25 months from the 1974 bottom, which was 50% more in terms of time and extent, than the previous five cycles. The subsequent run of Superior strength also ran much longer

than earlier cycles, with substantially greater than average gains.

Adding to the deviation from the simple patterns of behaviour in recent cycles, the “Superior” phase peaked out sharply in February 1980, to usher in

-‘28-

iH(E 1374 j l ? ' ' CYCLE

5- ‘I’ NEW YORK NW COWOSITE

D-

26 - ; CANADA RELA

24 - nrln T 0 NEW YORK

TO us DOLLIRS)

17 - -I . 1972 11973 1 197; I1975 11976?1 1977 I1978 1 19791 ,980 I1981 1 1982

the trend of inferior performance, which went on for the next two years. Unlike the

past, the transition did not occur around a major cyclical bottom in both markets.

From late 1976 to early 1979, the Canadian Dollar plummeted from USSl.04 to ~~$0.83. The impact of this devaluation is illustrated by the dotted line below the relative strength value. In essence it does not alter the shape of the cycle, and it supports my earlier findings that market volatility is vastly greater than that of the currency (until this time)...and that the Inferior/Superior phases have never appeared to be a function of currency moves.

The most obvious connection in

a Canada/U.S.A. cycle relationship stems from the geographic proximity,

and relatively open border policy.

Each is the others major trading

partner.

“(Qfiy y ” i.5 a.balcl5j~ ittile $4X6-t quest&12 I doubt that few would quarrel with

~JLLS ed Lq non- be.Liecem in cyclic . this overly simplistic view of “WHY ?” the

Canadian economy should lag the U.S. which

in turn should account for lagging stock

market swings. A popular analogy has it

that Canada catches pneumonia when the U.S.

sneeze5.

In the three decades into the early

1970’5, I suspect this was the ‘cause’ of

a lagging cycle. But since the early 1970’s,

accelerating global inflation brought a new

focus on the notion of buying resources that

were sti 11 in the ground - which for many

seemed a more conservative approach than to

just buy gold - and I believe this trend is i 1 lustrated on the chart below. The chart

is semi-log (ratio) scaled, and shows the

Canadian, Australian and South African

market indices from 1976 through 1981 which

spans the start, peak and decl ine of the

inflation wave. The three markets show an

almost identical profile, in spite of the

vast differences between their resource and

The U.S. economy is more of a

finished goods economy, while Canada

is more of a raw materials producer,

subject to the lag effect of swings

in U.S. economic trends.

The economic chain of events

from the timeachicago consumer has

decided not to buy a ref.rigerator ,

thorugh the time the refrigerator manufacturer feeIs the slow-down in

orders, and cuts back his steel

purchases, which in turn leads the

steel-maker to call northern Canada

and tell them to cut back on the

iron ore shipments*, which idles the industrial orientation.

miners.... can be a process of many, many months. This, in my view is the

(For South Africa, that is the Rand

traditional causative relationship. Daily Mail Index of Industrials - it’s not

THE RESOURCE BASED MARKETS

(Scales not shown, semi-log for visual comparability)

VI - 1976 1977 1978 1979 1980 1981

just an index of gold mines, even though gold mining activity is obviously one of the major contributors to South African

economic activity).

Harking back to the earlier chart which showed that the magnitude of the

Canadian swings of inferior and superior

relative strength against New York have

been progressively swinging to greater

extremes in both directions, I believe

this is the result of global inflation having an increasing role as a causative

factor.

An unfortunate cause as well, must

point to the fact that the Toronto Stock

Exchange changed indices in 1976...with the new T.S.E. 300 incorporating many

more i ssues, including a host of smaller

oil and mining companies which tend to

show far greater volati 1 ty than the more major companies which used to makeup the

old TSE Industrial Index. Thus the main

proxy for the market is a slightly diff-

erent beast, with greater volat i 1 i ty.

(The fact that the new index was worked

back to ‘rewrite’ history, and provide

continuity -supposedly- doesn’t hold up well in my book, since the history did

not in fact include all 300 companies,

since many of them had not even been

born back then. Worse still, many stocks

that had big runs, but then burst -such

as Revenue Properties, Atlantic Accept-

ante , etc - were excluded from the new

history, even though they should have

been included, to reflect the spirits of

the day -before they went bust).

The basic business cycle is often

considered to be approximately a four year

rhythm; while inflation cycles seem to run

on a slightly longer rhythm of five to six

years. I say this based on observed cycles

in the stock market on the one hand, and

cycles in gold and gold shares as a proxy

for inflation, on the other. In sum, t do

not accept the oft-quoted premise that

gold and the stock market are contra-cyclic

to each other.

Combining the increased inflation

hedge ro 1 e , with the change of make-up in

the TSE Index which has permitted Oils in

particular to achieve a disproportionately

heavy weighting.. . and adding in the histor-

ical observation that ‘hot groups’ which

tend to post excesses in one cycle, rarely

come back to post excesses again in the

next.... leads me to suspect that the next

wave of Canadian Superior Performance may

not prove as exciting, or profitable as

the last one.

The chart below shows a smoothedview of the average daily trading in Toronto on

the basis of Dollar Value of Volume. The

peak reached at the previous cycle highwas

$30 million/day. The peak in early 198Ogot up to $140/million/day....and has been on

a well defined downtrend ever since. It is

sadly ironic that the Stock Exchange itself made plans in 1980 to move into fancy new

premises in 1983. To a chartist, the trend

shown below suggests a return to $30/million

dollar days in 1983....and huge losses for

the industry. When the blood flows, the next

“Canada Super ior” cycle should be imminent.

I 1 - :6c

, II- I TORONTO STOCK EXCHANGE /

““‘- AVERAGE DOLLAR VALUE OF DAILY TRADING i -

!Mlllton $$/Dayl 4 Month EXD. Averacae /

GLOBAL FINANCIAL Pl4RKl3S AND THE BUSINESS CYCLE

MARTIN PRING The International Institute for Economic Research, Inc.

Martin Pring is a Zong-time practitioner of quantitative analysis of all major financial markets, the fixed-income as well as the equity market, and his comments in the respected Bank Credit Analyst have had a deservedly wide following. Here he comments on the typical relationship between the stock, bond--- and gold--- markets, suggesting, perhaps not surprisingly, that the action of each of these markets may offer some valuable indications to students of another one of the trio.

When attempting to forecast the future course of the U.S. stock market, it is the normal practice of technicians to analyze the technical structure of the market itself without resort to the technical position of other financial markets. A more comprehensive approach is to look at the U .S . market both from the point of view of the global equity cycle and from its position vis a vis the other financial markets, i.e. debt markets and gold. In this way it is possible to build an overall framework which makes it easier to pinpoint the position of U .S. equities within a far wider context e

For this purpose it is assumed that the primary trend of all financial markets is determined by investor expectations and attitude towards movements in the economy and the effect those changes are likely to have on the price of the asset in which a specific market is dealing. Since an expanding level of economic activity is bullish for bond prices,

normally favorable for stock prices, a weak economy and an inflationary economy favorable for gol~d and

gold-related, assets, these markets are often moving in different directions at the same time.

Since an economy is rarely stable but is either expanding or contracting, financial markets are in a continuous state of flux. A hypothetical economy,

- 31-

as shown in Figure 1, revolves around a point of balance known as equilibrium. Roughly speaking equilibrium can be thought of as a period of zero growth, when the economy is neither expanding nor con- B~SIYSS cyitt peak tracting . Periods of economic expansion are represented by the sine curve above the horizontal equilibrium level and vice versa. Thus, after the peak in the sine curve has been reached, the economy continues to grow, but at a decelerating rate,

Busmess cycle ‘rough

FIGURE l l Hypothetical business cycle.

until the line crosses below equilibrium, and an actual contraction in business activity takes place.

Periods of expansion generally last longer than those of contraction, so, for this reason, bull markets in equities and gold and bear markets in bond prices generally last longer than bear markets in equities and gold and bull markets in bonds.

Figure 2 shows. hew the three main financial markets -- interest rates, gold, F:Sl-.eli fb’lF wok and equities --- relate to the

./’ example interest rates have been plotted inversely to cor-

,.~ ~~~~~n~~~~stbn(-”

bonds is represented by a rising

- 2 ..- -,;.,I..: ._ - - -- I:(E.b: -:;rlE, -.-.- GOlC rnCIkP1

de&ending one. The bond market is the first financial

FIGURE 2# market to begin a bull phase.

“f-55 cycle

The ini~rdCl!OC Of fin;?ncia~ Tld:kel5 duri’lg 2. :jpmiZl busi- This usudly OCCUrS after the

growth rate in the economy has slowed down considerably from its peak rate and is quite often delayed until the initial stages of the recession. Generally speaking, the sharper the economic contraction, the greater will be the potential for a rise in bond prices (i.e., fall in interest rates). Alternatively, the stronger the period of expansion, the smaller the amount of economic and financial slack, and the greater will be the potential for a decline in bond prices (and rise in interest rates).

Following the bear-market low in bond prices, economic activity begins to contract more sharply. At this point participants in the equity market are able to “look through I’ the valley in corporate profits, which are now declining sharply because of the recession, and begin accumulating stocks. Thus, because the equity market discounts developments ahead of time, it bottoms out ahead of the trough in business.

During the relatively early stage of a business-cycle expansion, the economic and financial slack that developed as a result of the prior recession

- 32-

is gradually absorbed, putting upward pressure on the price of money, i.e., interest rates. Since rising interest rates mean falling bond prices, the bond market peaks out and begins its bear phase. On the other hand, since a substantial amojnt of excess plant and labor capacity still exists, rising business activity results in improved productivity. Consequently, the outlook for profits remains favorabe.

Since the stock market discounts trends in corporate profits,it continues to advance until participants sense that the business expansion is suffici- ently mature to develop distortions and curtail the potential for improvements in profits. At this point there is less reason to hold equities, since their price potential has been realized and they in turn enter into a bear phase. s

Chart 1 shows the relationship between The International Bank Credit An- alst World Stock Index and the rate of change of 0 .E .C .D . Industrial Pro- duction between 1959 and 1980. While both series do not always move ex- actly in tandem, the overall correlation between the global equity market and changes in the growth rate of industrial production is extremely close. This relationship becomes even closer if the Industrial Production series is compared to the diffusion index of the stock market as shown at the bottom of the chart, where the turning points are almost identical.

The price of gold is determined basically by the interaction of two types of market participants. The first group deals in gold as an industrial commodity affected by supply and demand relationships; the second invests in gold for its own sake or as a hedge against inflation. Essentially, the level of business activity has a more or less identical effect on both types of market participants, since the level of industrial demand and the growth rate of price inflation are both normally rising during a business cycle expansion, and falling during a contraction. The price of gold and gold-related assets, therefore, discounts trends in business activity, but lags equity prices. This is because both forms of market demand for gold, i.e. , commodity and investment demand, are oriented to lagging indicators of an economic cycle. For example, since gold is considered to be a good store of value, its investment demand depends substantially on the rate of price inflation. Since the peak rate of price inflation is typically experienced around the beginning of the recessionary stage of the business cycle, the peak in the price of gold should theoretically be achieved six to nine months ahead of the point where the rate of price inflation turns down. For its part, the stock market discounts trends in corporate profits which are a leading indicator of the economic cyle, so the stock-market peak would naturally be expected well before the peak in gold prices. The same relationship should hold at market bottoms with equities bottoming out well before gold.

On the other hand, gold shares discount profits of gold mines, and, since earnings of these companies are determined by factors other than the price of gold, their cycle falls betweenthat of industrial equities and the gold price itself.

-33-

z CHART e World Sfock Index vcrsu~ Global Indurtrhi Production

100

90

83

70

60

‘..

l 125 c

.:c!o I

193 - I83 -

170 - 160 - 150 - 140 - 130 -

,K) - World Stock loder-

l 75

+

. 25

50 F

0

- 25

r - 50

- 75 F -1cc -or

v i i !

- +loD

-- 75

-+5c

-*25

- 0

-34-

Since bullish factors for gold (i.e., rising business activity) are bearish for interest rates, the gold and gold assets markets are generally moving in the opposite direction to the bond market. This interaction

- is seen more clearly in Figure 3 which shows the peaks and troughs of the various financial markets as they would appear on the theoretical business cycle sine curve, while Figure 4 shows how these turning

- ._-_.. ~.- points actually developed during the F!GURE>-8 li)i~othP~~cA Lusiness cycle >howr>g pe.~ks and 1964-1982 period. troughs of fi;:.+vc’~l rrxrkets

It should be stressed that an actual cycle in the market place will not necessarily correspond to the conceptual outline described above, in view of the fact that special circumstances can affect a particular market and cause it to reverse at an earlier or later point than might be expected from a study of the business cycle. For example, in the 1970-74 cycle, most commodities (including most gold shares) peaked by the spring of 1974, but the U .S . dollar price of gold buillion made its cyclical high later in the year because the legalization of gold purchases for American residents in December, 1974 had the effect of de- laying the bearish phase of the cycle.

In recent years the brevity and volatility of the business cycle has compli- cated what was previously a relatively simple process. As a result the stock and bond markets bottomed out almost simultaneously in March, 1980 while gold started to rally before the recovery got underway.

Clearly, if this approach is looked at as an exact science, it is doomed to failure. Its intention is to serve as a framework or a road map. Thus, if the technical position is identifying a major low in the price of gold bullion and this has been preceeded several months earlier by a similar position in the equity and debt markets, then there is a very good chance that the economy has just crossed above the business cycle equilibrium line. At that point the bull market in gold has just started. The upward trend in 1 equities is already in its early stages while the bull market in bonds is rapidly maturing. This framework also expains why stocks and gold can rise at the same time or why gold can rise in the face of rising interest rates, yet, at another time, falling interest rates (which reflect deflation- ary conditions) adversely affect the price of gold. This factor also gives us an additional check on where we are in terms of the overall cycle, for not only can the identification of primary peaks and troughs serve as reference points, but we can also note the direction of the trend of the other two markets to see if they are acting consistently with where we think we are in the cycle. If everything fits, one can be relatively confident that his analysis is correct. On the other hand, if some markets are not acting consistently, the position should be re-examined far more carefully.

- 35-

FIGURE 4 B = prices of 6 month T Bills S = Bank Credit Analyst Weekly NYSE A/D Line G = Toronto Stock Exchange Gold Share Index

THE STORY OF THE SHE$P ANI ME SHEPHEFDS,

How THE STOCK M4FN3 REALL.Y WORKS

THOMAS M. ROGINSKI Autranet , Inc.

The stock market moves as investors process information, and technical analysis can be defined as the study of precisely how they react to such processing. In this piece, the author expEores the various sorts of information avai’lable, comments on how it is processed and attempts to draw some formaZ conclusions as to ensuing stock market behavior. Mr. Roginskj , a speaker at the 1982 MTA Seminar, is’a Vice-President of Autranet, Inc.

In 1520, Machiavelli wrote to Lorenzo Medici the following lines:

“I hope it may not be considered presumptuous if a man of low and humble condition dare to discuss and lay down rules for the government of princes, for, just as a landscape artist stands in the plains to survey the nature of the mountains and hills and, to study the character of the low- lands, takes up his stand on the hills, so, to know well the nature of people one must be a prince and to know the nature of princes one must be of the people.”

To draw a parallel between Machiavelli’s comments and the securities market, it can be said that if one is to know the nature of the major brokerage houses, one has to have been on what is called the buy side, or a member of the community that purchases services from those major brokerage houses. By the same token, to know the buyers of the brokerage house services -- the banks, insurance companies, mutual funds and various money managers -- one has to have been a member of the brokerage house community. I have been a member of both communities; or, to draw another analogy, I have wandered with the sheep and sat with the shepherds.

-37-

It is common practice in the brokerage industry to describe the investment community as a whole, both institutions and individuals, as a herd of sheep wandering in a valley. Around the herd there are a number of sheep dogs, the salesmen and security analysts from the major brokerage houses. They constantly bark at the sheep, trying to drive them in various directions -- toward growth stocks, or cyclical industries, or bonds, or other investments. And behind the sheep dogs are the shepherds, the portfolio strategists at the major brokerage houses. They tell the sheep dogs how and where to drive the sheep.

At. the head of the herd of sheep are a number of what might be called Judas goats. These are the institutions recognized as leaders in the industry, the big New York City banks, or the best known mutual funds. The institutions in the rear of the herd always want to know what the institutions at the front of the herd are doing, and they’re always willing to follow. This is why we have cycles in the stock market -- the two-tier market, the growth-stock mania or, now, the cyclical industry indexation craze. The herd always wants to do what the leaders are doing.

Behind the herd leaders, these Judas goats, one finds a special class of shepherd -- the shepherd who, having knowledge of where the Judas goats have gone, expects the sheep to follow. The knowledge of where the Judas goats have gone is based on either shorter grass or a lot of droppings on the ground. In our fundamental interpretation, perhaps uncharitably, the examiner of short grass or goat droppings is the technician.

All this is happening in a valley surrounded by mountains, and on each mountain peak is an individual we will call a weatherman. The weathermen are leaders of economic opinion, the Milton Friedmans, Paul Samuelsons, George Schult zes , Otto Ecksteins of the world. Their primary chore is to look to the horizon, view the clouds and forecast the weather outlook. The clouds represent Federal Reserve policy, fiscal policy, organized labor activity , international monetary flows, all those little harbingers of future weather conditions, fair or foul.

Now, the weathermen constantly report their analyses of the clouds to the shepherds, but the shepherds can see the clouds, too, and there are times when they decide to act independently of their advisers. When all the weathermen are saying the same thing -- that there’s rain ahead (higher inflation), or snow (higher taxes) -- then the herd anticipates what the event is because everyone has knowledge of it ; this is called “discounting.” When the weathermen cannot agree on what the future holds, the shepherds act independently: they begin to look at the length of the grass, or the corporate earnings that exist right now, and we say that the market ‘has shrunk its time horizon. I’ They tell their sheep dogs to drive their particular section of the herd in a certain direction.

When all the sheep start going in different directions, we have a “disruptive market condition. ” The technicians first say the herd is going one way, then they say it’s going another. In our interpretation, this is what’s happening right now: With no clear consensus on what the economic future holds, the

- 3%

market is discounting a coincident time horizon and not bothering to look into the future.

Beating the Herd

The average of all the weathermen’s forecasts is “the consensus outlook.” For the purposes of our analysis, we track the differences between the high and the low extremes and this mean or consensus outlook. When the extremes are expanding, we say that the market has a high degree of un- certainty. The weathermen cannot agree. When the extremes are contracting, we say that certainty is building in the market and that, in fact, the weathermen are beginning to agree on a forecast. When the weathermen agree, the market moves its time horizon into the future. When they disagree, the market shortens its time horizon.

Besides tracking what the various weathermen, or economic forecasters, are saying, we do our own economic forecast, our own interpretation of where the economic thinking may possibly be wrong. The left-hand part of Chart 1 shows the clouds on the horizon. In technical language, these are called “exogenous variables .” Each of the various economic forecasters must decide, using his own contacts, his own analysis and judgment, what Fed- eral Reserve policy is likely to be, what fiscal or government policy is likely to be, and what the various inputs into ‘his forecast are. - ’

Many of our consensus economic forecasters have very elaborate mathematical models that are supposed to take the judgmental aspects out of economic forecasting. But, as the old saying goes, “garbage in, garba@ out. ” And even with the mathematical models, one still has to exercise judgment on each of the exogenous variables. Once those judgments are made, however, one can derive very precise mathematical definitions of the relationships between variables ; these can tell us where the rain is likely to fall, and how much of it might fall there.

One of the most important applicationsof this economic determination is to interest rate forecasting. The interest rate forecast is the focal point of economic activity. Interest rates occupy the central point primarily because they represent alternative opportunity costs -- the opportunity one forgoes in choosing one asset mix rather than another. The holding of cash or diamonds or real estate, or any other hard asset has to be defined in terms of what’s being given up to hold it.

In judging alternative opportunity costs, the level or risk involved is a prime consideration. The determination of a client’s risk-bearing ability is one of the most difficult challenges facing an asset manager. One’s degree of risk tolerance is a function of both recent experience and level of wealth. If a client -- corporate treasurer, bank or other investor -- has recently suffered losses, his ability to tolerate a high degree of risk or to afford a high-risk investment is diminished, even if a high return is offered. In trying to qualify the risk in equity investment, we combine our economic analysis with technical analysis to try to see where the herd is going before

-39-

CHART I

CHART II

- 40-

we make initial commitments. The choice between stocks and alternative assets, and the percentage of each that we will put into a portfolio, is the focus of all analysis.

In essence, information flows from the top down. In the information processing procedure, the weathermen’s forecast is distilled to an outlook by economic sector, or industry, or concept. The precise distillation process may differ from firm to firm, but once a consensus is reached concerning the direction opinion leaders will take, the herd will begin to move. If an individual investor arrives at the place toward which the herd is moving more quickly that the rest of the herd, then he can benefit disproportionately from market or herd movement.

One system which has been computerized to take advantage of the information flow depicted by our sheep and shepherds story is shown in Chart II.

Information processed through the combination of methods shown in Charts I and II should give an investor a complete picture of what the rest of the world is thinking and should enable him to be there when the herd arrives.

In the words of John Maynard Keynes, the stock market -- professional investing -- is like a beauty contest in which “each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of other competitors, all of whom are looking at the contest from the same point of view. “*

*The General Theory of Employment, Interest and Money (New York: Harcourt, Brace and World, 1964), p. 156.

-41-

intentionaliy blank

- 42-

l-/E STF?.EAY OF TRADING

RICHARD W. ARMS, JR. Quinn and Co.

Dick Arms, Q frequent seminar speaker and Journal contributor, is best known for his invention of the Short-Term Trading Index perhaps currently one of the most wideZy folZowed of aZl indicators. Not being content to rest on those laurels, he has originated the lfEquivolumetf concept, the basic principles of which he outlines in this article. Dick is Di- rector of Institutional Research for Quinn & Co. and is the author of Profits in Volume (Investors Intelligence, 1971). He also has in preparation a forthcoming book, tentatively entitled VoZume Cycles, from which this article is excerpted.

To the bar chartist every day is a small vertical line. To the point-and- figure chartist every day is a series of X’s . To the Equivolume chartist every day is a rectangle. Maybe we become so involved in the distinct- ness of each day that we lose track of the fact that trading is a steady flow that knows no days or weeks. The battle between supply and demand is a constant give and take, where the buyers sometimes have the upper hand, and, at other times, the sellers are in control.

Supply and demand are not always in balance, and the amount by which they are out of balance determines the type of formations we see on our charts. In our close scrutiny of each day we may be getting lost in the details and missing the broader overview. Each day is telling a part of a story, but to understand the whole story we must combine the details and recognize the plot.

Figure one is an Equivolume chart of Aetna over a six-month period during last year (1981). For the uninitiated an Equivolume chart plots price spread on the vertical axis and volume on the horizontal axis. Each rectangle represents one day of trading. This chart is giving us a day-by-day picture of the supply and demand for Aetna. Tall thin boxes show ease of movement, while short wide boxes represent diffi- culty of movement. It gives us a good picture of the forces effecting the stock each day. It would be nice, however, to combine the boxes into a “stream” of trading, so that we do not become mesmerized by single boxes .

-43-

AETNA - DAILY CHART

VOLUME INTERVAL - 50,000 SHARES

LIGHT

h

HEAVY VOLUME - WIDE SPREAD

movlng easily

U

d 40

AN EQUIVOLUME CHART

VOLUME -NARROW SPR

HEAVY VOLUME -NARROW SPREAD

LIGHT VOLUME - WIDE SPREAD

volume leas than 50.000 shares

FIGURE ONE

AETNA- DAILY .’

‘.

Mib!OR WAVE PATTERN OUTLIF\;‘ED.

FIGURE .-l-w0

‘- --_-.

On Figure two we have done just that by connecting the upper right corners of descending boxes and the upper left corners of ascending boxes with a dotted line. In addition, we have connected the bottom right corners of ascending boxes and the bottom left corners of descending boxes in the same way. Now the individual boxes have become a continuous flow.

We have defined a curvilinear pattern, with the many trading days merged into a “stream” of trading; a volume-based stream of trading. We are seeing the variation in supply and demand for the stock, as depicted by the Equivolume boxes, but they have now gained continuity and become a running pattern across the page.

The “stream” analogy can, in fact, be carried further, and can help us to better visualize the forces that are acting on a stock. A declining stock can be thought of as a river. As the water rushes downhill and cuts its streambed, it tends to accelerate on the steeper slopes, cutting a straight and narrow channel. The volume of water is moving faster, and, therefore, needs a narrower channel to carry the same amount of water. Consequently, the banks are close together and the channel has few twists or turns. Two forces are acting on the plunging water; one is gravity; the other is friction. On a steep slope the gravitational force is much more powerful than the friction as the water rushes over the bottom and sides of the channel. Sometimes there are boulders, large enough to turn the water aside temporarily, but their effect is only fleeting. Sometimes a very resistant shelf of rock will slow the water, only to produce a waterfall once the river gets past the obstruction. Above where the shelf occurs the river will widen out into a pool, but below the waterfall the narrow channel will continue, as long as the slope is still steep.

So too with a stock as it is influenced by its two forces, supply and demand. A declining stock is being pushed downward by the “gravity” of supply, and being held back by the “friction” of demand. The supply

’ is predominant, however, and consequently, the slope is downward on our charts. With many heavy sellers and a few hesitant buyers the stock cuts a steep narrow channel. Pockets of heavier buying, like the boulders in our river, can only slightly deflect the plunge. Even larger buyers, like our shelves of resistant rock, can only cause a pool, a sideways area, but, - once the buying is out of the way, we often encounter a waterfall.

There comes a time, however, when our river comes out of the mountains and reaches the plains. The terrain levels out and the two forces, gravity and friction, are more in equilibrium. Now, instead of a straight narrow channel, we have a much more twisting pattern. It takes less powerful forces to turn the water aside, so it meanders over the landscape. Usually, it follows a rather rhythmic course of twists and turns as the two nearly equal forces vie for control of the flow. Isn’t this much like a stock in a sideways move? We get rhythmic patterns as first the buyers and then the sellers establish temporary control. Neither can maintain longer-term control, so the stock moves slowly back and forth. The streambed becomes wider also. The slower water flow necessitates more area to hold the water.

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On our Equivolume chart we are seeing much more than just price change and direction; we are also seeing volume. A stock under heavy selling pressure will move downward in a narrow channel, with only moderate volume. As the sideways areas we see congestion, the widening of the channel, as supply and demand are in equilibrium, consequently volume will tend to increase.

In order to finish our analogy and look at rising stocks, we are going to have to postulate anti-gravity; then our stream can run uphill, as well as downhill. The restraining force is still friction, but now the friction in our stock is caused by supply while the anti-gravity force is demand. In all other ways the action is the same. We have upside waterfalls, pools, cataracts, boulders. We are still dealing with forces, where one force is considerably stronger than the other.

In this chart it should be noticed that the lines are not parallel. There are wider areas and narrow areas just as in our stream analogy. Areas marked (1) indicate ease of movement. The stock is in a narrow channel, finding little to hinder the progress. The dotted lines are very close to parallel. We see this to a lesser extent at area (2). Although the lines are parallel, they are further apart because volume has been heavier. This is due to the fact that the stock was at this point in the final stages of an up move. It was taking more buying pressure to overcome the selling pressure. At the two points marked (3) we see a waterfall, and an “anti-gravity” waterfall.

It can be seen that the wave patterns are much more pronounced toward the left and right margins of the chart when the stock was close to equilibrium . In both sections the buyers and sellers were battling for control, so the stock meandered considerably. In the central section of the chart, during both the dramatic rise and the subsequent decline, there were strong forces at work. There was a large imbalance in these forces so the waves became only hesitations, boulders in the stream.

It should also be apparent that there is, throughout the chart, a very regular sort of cyclicality. The tops and bottoms appear to be quite regular, giving the impression that there is a repetitive pattern. It is this repetitive pattern, it’s definition and interpretation, that lead to volume waves.

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intentionally blank

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FIEDNACCI IN THE DOW - SCP’lE WJ’LES

ROBERT R. PRECHTER, JR. Editor, Elliott Wave Theorist Financial Letter

Whv should a concept in theoretical mathematics discovered by an Italian mathematician in the 12th Century be appZicabZe to today’s stock market? Starting with the Iate R.N. EZZiott, many anaZysts have become convinced that it is. Bob Prechter, an MTA member, aZong with A.J. Frost, with whom he wrote Elliott Wave PrincipZe, is the leading contemporary interpreter of Elliott’s work. In this article, he explores the Fibonacci or “GoZden” ratio and applies it to recent trading. Bob is the editor of the EZZiott Wave Theorist Financial Letter.

When approaching the discovery of mathematical relationships in the markets, the Wave Principle offers a mental foothold for the practical thinker. If studied carefully, it can satisfy even the most cynical researcher. A side element of the Wave Principle is the recognition that the Fibonacci ratio= one of the primary governors of the price movements in the averages.

Some of the advantages of Elliott’s use of Fibonacci ratios as compared to currently popular numerological studies are as follows:

1. Fibonacci ratios are independent of the unit of price measurement, the unit of time measurement, and chart scale.

2. Fibonacci ratios are few. The only ratio which occurs often enough in markets to be of practical importance is 1.618. Of secondary importance are .50, 1.00 (equality) , and 2.618, which are all ratios faux iae Fibonacci sequence. Thenverses of these ratios are alternate expressions of the same relationships.

3. The Fibonacci ratio’s occurrence in markets may have mystical

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connotations, * but it’s expectation is not based upon mystical assertions. The Wave Principle is based on empirical evidence, which led to a working model, which subsequently led to a tentatively developed theory. In a nutshell, the portion of the theory which applies to anticipating the occurrence of Fibonacci ratios in the market can be stated this way:

(a) The Wave Principle describes the movement of markets. (b) The numbers of waves in each degree of trend corre-

spond to the Fibonacci sequence. (c) The Fibonacci ratio is the governor of the Fibonacci

sequence. (d) The Fibonacci ratio has reason to be evident in the

market.

Obviously, the intellectual acceptance that Fibonacci ratios should be expected to appear in markets is based upon satisfaction that point “a” above is a valid statement. Two books have been published on the subject, and an interested analyst can learn the model quickly. As for satisfying oneself that the Wave Principle is valid, some effort must be spent attack- ing the charts. The bulk of that task must be left up to you. The purpose of this article is merely to present evidence that the Fibonacci ratio expresses itself often enough in the averages to make it clear that it is indeed a governing force on aggregate stock prices. These examples are presented in hopes that interest in the Wave Principle will be stimulated and that new research may be undertaken in this field.

“Orthodox” Turnina Points

One concept that must be mentioned at the outset is that of the “orthodox” top or bottom of a move in the averages. According to the Wave Principle, a wave which should be composed of five waves officially ends when the fifth wave has been completed, preceding or ensuing minor new highs/lows notwithstanding. Similarly, corrective patterns are measured from the beginning of the pattern to the ‘end to calculate the orthodox r’distance’l covered by the pattern, intervening minor new highs /lows notwithstanding. While most of the following examples were chosen to avoid the concept, the August-December 1980 pattern does involve it. If a measuring point appears to ignore what looks like a higher or lower price point, in fact it is taken at an orthodox turning point. If anything, the fact that calculations are accurate when measured from the ends of the textbook wave patterns serves further to validate the theory of the Wave Principle.

*This ratio describes the only price relationship whereby the length of the shorter wave under consideration is to the length of the longer wave as the length of the longer wave is to the length of the entire distance traveled, thus creating an interlocking wholeness to the price structure. It was this propery that led early mathematicians to dub 1.618 the “Golden Ratio.”

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When the Ratio Occurs

A Fibonacci relationship between‘ adjacent waves occurs more often within corrective patterns. A Fibonacci relationship between unconnected waves which are nevertheless part of a single pattern occurs more often within five wave patterns when the third wave is the longest. Relationships are calculated only with reference to vertical points traveled.

Past Examples

Other publications have pointed out, sometimes in advance for forecasting purposes, the 1.618 relaiionships found in the 1921-November 1928 period, where the final wave (1926-1928) of the sequence is 1.618 times as long as the first three (1921-i925), the -1932-1937 period, where the final wave (1934-1937) is 1.618 times as long as the first three (1932-1922)) the 1930- 1939 period, which contains four swings, each of which is related to the ensuing swing by 1.618, the 1949-1966 period, where 1957-1966 is 1.618 times 1949-1956, and the 1966-1974 period where the distance from 1966 to 1974 is 1.618 times the length of the 1966 decline

The period from 1974 to the present has been less documented, but de- serves mention for the frequent occurrence of the 1.618 ratio during this period. All such relationships in aII the interlocking waves during this time span could not possibly be mentioned in a short article. In order to give an overview of’ recent Fibonacci history and bring us to the present, I have outlined both the bigger picture, 1974-1981, and on a closer basis, the period from August 1980 to December 1981.

The Fibonacci Ratio in the Dow From 1974

1021.86 1024.05

lOOO-

900-

aoo-

600 - Hourly Turning Points TbfECLIOT r WAM TFEORIST

~.O.Sox IhI9 (I indicates deviation

572.20 Cmn.vlll.. CA ~lJ%ll from ideal length.

’ 1975 ’ 1976 ’ 1977 ’ 1978 ’ 1979 ’ 1980 ’ 1981 ’

Chart 1

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1974-1981 (Charts 1 & 2) - Each wave in this pattern is related to an adjacent wave by 1.618 (or in the center of the pattern by equality), within the percentage errors listed. The only large deviation is the “overshoot” in the 1978 October massacre. During the October-December 1978 period, the first ideal retracement level at 806 was penetrated eight times in whipsaw action. All of these penetra- tions were extremely volatile, so much so that five of them left intraday gaps in the Dow. Among the three that did not leave gaps were a 9-point “up” opening hour and a l7-point “down” op&nig hour. That kind of action my indicate that the market sensed the importance of the exact Fibonacci retracement level despite the overshoot. The next largest deviation occurred because of the mild overshoot at the November 1979 low, which was again due to a “massacrefV type market.

Although not a forecast, if the down wave which began in 1981 were to fall 1.618 times the length of ne preceding advance, it would bottom at 563.79, and create a symmetrical pattern from 1974.

The Fibonacci Ratio Using Average Turning Points

1000 -

900-

800-

700 -

600-

1012 (avg.)

entire pattern (7921 740 (avg.]

entire pattern (792

I 572

I ’ 1975 ’ 1976 ’ 1977 ’ 1978 ’ 1979 ’

I 1980 ’ 1981 ’

Chart 2

A second way of looking at this period is to average the tops in 1976, producing 1013.08, and the tops in 1980-81, producing 1011.51. It so happens that a rounded average of the two, which gives a central peak point of 1012, is the exact point which provides 0% error for the Fibonacci relationships involved. Similarly, the average of the tops in 1978-1980 is 908 and the average of the bottoms in 19’78-1979 is 789. The three average 7 price points makes the Fibonacci ratio relationships perfect except for the average of the 1978-1979 bottoms, which is 15 points below the ideal low of 804.

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August 12, 1980 - December 11, 1980 (Chart 3) This sideways pattern began from the point at which the orthodox top of five waves from April 21 to August 12, 1980 ended. The height of each A-B-C pattern in this sequence is related to the preceding A-B-C pattern by 1.618 (with 1% error and 6% error respectively). The height of the final A-B-C is 2.618 times the height of the first. IF the December low ( 899.57) had been 905.84, the second calculation would have had 0% error. If we label the first pattern “X1’, the second “Yrr and the third “Z”, note that X:Y as Y”Z; X:Y as Y :(X+Y); Y :Z as Z”(Y+Z).

Triple Three -Aug.- Dec. 1980

I X10-00.26 I

2nd ABC = 1.618 x 1st ABC (1% error). 3rd ABC = 1.618 x 2nd ABC (6% error). 3rd ABC = 2.618 x 1st ABC (5% erro’r).

Chart 3

With division at 894.37, all calculations have 0% error. December 1980 low at 899.57 is a compromise between an ideal 905.84 for the XV pattern and an ideal 894.37 for the PQR pattern.

/ Chart 4

December 11, 1980 - December 4, 1981 (Chart 4) The April-September decline is 1.618 times the December-April advance (4% error), and the December-April advance is 1.618 times the September- December advance (3% error). The April-September decline is 2.618 times

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the September-December advance (1% error). Each calculation would have had 0% error if both the December 1980 low (899.57) and the December 1981 high (893.55) had been 894.37. In other words, the entire height of the pattern is divided into a Golden Section at 894. If we label these lengths P, Q and R, note that R:P as P :Q; R:P as P: (R+P) ; P:Q as Q:(P+Q).

The 792 level may provide support and/or resistance for the current decline since it is the halfway level for the entire pattern and since it has acted as end-of-decline support for three declines since 1974. It also happens to be the level at which the decline from December 1981 would be 1.618 times the length of the April-May 1981 decline. These two declines can be labeled as fifth and first waves respectively. To see another example of this type of relationship, see the 1980 five-wave advance on Chart 4, where wave 5 = 1.618 x wave 1.

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MESTOCKAMITHECU'IPANY

RALPH J. ACAMPORA Vice President, Kidder, Peabody & Co. , Inc.

Ralph Acampora is a past president of the MTA and has perhaps been more active in the teaching of technical analysis to the novice user than anyone among our membership. He draws upon this experience in this discussion of the integration of technical and fundamental analysis, a subject on which he chairs a 1982 seminar panel. Interest in technical work, he notes, has been growing. Is this a permanent development? Perhaps not. The reasons are outlined in this article.

Our diagram at right says it all: Ibr a well-rounded approach, one should inte- grate technical and fundamental analysis ; when joined together, they create the whole picture. The perennial battle between supply and demand is what makes markets, but unfortunately there is still ferment in the investment community. Some make it their sworn duty to pit the technicians against the fundamentalists.. . . .

As moderator of the panel entitled “Integrating Technical Analysis with Other Research Disciplines, ” the author of this article feels that his experience as an educator and a professional technician may provide some fresh insights into the meshing of these two investment disciplines.

As an instructor in the basic tenets of technical analysis at the New York Institute of Finance for the last 12 years, I have noticed a steady increase in interest for the subject. Through some very difficult bear markets in the past dozen years, the NYIF had to temporarily cancel some classes in various aspects of finance because of a drop in attendance. This has

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not happened with technical analysis classes; in fact, the student mix over the years has broadened considerably, from public attendees (including professionals such as doctors, engineers, etc. > to investment professionals, research directors, block traders, floor traders, bond traders, option traders, portfolio managers and, more and more, fundamental analysts.

Perhaps it is the sign of the times -- this past semester, the NYIF had its largest enrollment for the technical-analysis class in approximately 10 years. One could take this as a negative and conclude that the technical approach is becoming too popular and will self-destruct because “everyone is doing the same thing.” Well, I’ve heard that song many times before and disagree with -the conclusion. Yes, technical analysis is receiving more than just lip service in many corners of the investment community, but we feel its recent surge in popularity is due primariliy to the fact that other inputs just didn’t help in the past two years. Once the market commences that long-sought-after major bull trend, and everyone, regardless of investment approach, is making money, the love affair for technical analysis will wane once again, simply because it will be “easy to make money in the stock market. ” Remember the old adage: “Never confuse brains with a bull market. ” It is only in times of real need that technicians are sought after; the recent market has been no exception.

The rise in popularity of technical analysis shouldn’t obscure the importance of other inputs. In fact, one should become more aware of other research disciplines simply because technical work has been so useful and so many have embraced it recently. When reflecting on the subject of investments and all that it incorporates, it only seems logical that one would want to fill his quiver with as many arrows as possible; if most of these (the technical arrow, of course, being one) hit the same target, then the evidence suggests which road to take.

As a professional technician, who has recently joined Kidder Peabody & Co., Inc. and established its first formal technical department, I have encount- ered many pleasant experiences and some old prejudices. After being on board for a couple of months, one salesman called and admitted that he had very little use for technicians. After discussing philosophies, it really boiled down to his final statement, “I don’t dislike technicians; I just never learned anything about technical analysis while in grad school. ” The biggest problem is a lack of understanding -- once the mystique of technical analysis is eliminated, it is quickly assimilated into the decision- making process.

The one big drawback I see in introducing technical analysis to a new audience is vocabulary. Technicians speak a foreign language: flags, pennants, etc. -- you’d think we were at a parade; “head & shoulders is a dandruff shampoo. . . ” If you are serious about developing a working relationship with non-technicians or presenting an opinion regarding the market, groups or stocks, downplay the technical jargon. Most people are willing to Iisten, but honestly, they get turned off when flooded with terms that can easily be translated into English.

Like any conflict or area of opposing opinions, both sides must communicate; once we understand each other, surprisingly we all probably agree more often than not.

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INTEGPATING TECHMICAL ANALYSIS ‘i!ITli FUNDmAL ANALYSIS

FRED R. GRUBER, C.F.A. Manager, Investment Department

United Jersey Bank

How should technical and fundamental analysis be integrated? Fred Gruber is a technician by training and inclination and an early MTA member. He is now the major investment-decision-maker in a typical money-management organization. Here he outlines his own approach to combining the two disciplines, a subject he discusses at further length at a 1982-seminar panel.

I should like to highlight, in this article, one particular approach to the development of an investment process that actively combines two analyti- cal disciplines, using technical analysis as a supportive, checks-and-bal- ances tool alongside traditional fundamental investment policy, strategy, and tactical equity management routines.

One need not defend the use of technical analysis. However, there are several simple logical reasons for its use that are worth noting. First, today’s difficult investment environment demands all the valid tools that can be applied, and studies, in this Journal and elsewhere, have documented the utility of technical analysis disciplines. Secondly, no research tool is perfect, and funadmental analysis can stand to be supplemented, if only for the reason that cheap stocks can get cheaper or markets distorted, etc., and, to keep a performance edge, timing techniques will help. Lastly I find the KISS-Rule, “Keep it Simple, Stupid” explanation most readily addresses the question with our prospects and clients; if your objective in buying stocks is to have them go up in price, it behooves you to watch the price, and, if it’s not going up, don’t buy, etc.

In a moderate-sized money-management organization, there is only so much that can be accomplished, given the relative limitations of staff, research

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budget, and most significantly, time. As Chief Investment Officer of such an institution, (six investment professionals plus support personnel) , I have fortunately had the opportunity to design a research process I truly believe in, and, as this process has evolved over the years, many cross checks have been structured into the system. Ways have been found to organize “sell-side”, “Street” information or subscription research services, both fundamental and technical, not just to augment our knowledge, but importantly to serve as external screening and cross-check disciplines to be compared with our ongoing internal research findings. Let me address, then, why we do what we do, explaining the process from the bottom up, for the technical analysis disciplines wilI more apparently build on one another in that order. In practice, though, what we do is influenced by the sum of our knowledge and ‘develops normally from the top down - Policy, Strategy, Tactics. I shall cover here only the esuitv process.

T attics (Stock Selection)

Fundamental analysis is applied to determine a Value Rating on each stock we follow. That Value Rating comprises our comparison of our outlook for the stock 12-15 months hence with our upside stock-market forecast for the same timeframe. The valuation model is based largely on historical relative P/E and future earnings. The Value Rating has five gradations, and is allowed to prohibit purchase or, at its worst rating, require sale. Ranking all of the stocks on our list against the stock market also serves to rank all the stocks against one another.

A Timing Rating is also maintained, derived entirely from technical analysis, and is reviewed weekly on each stock. It expresses a judgment on the pro- spective price action of the stock for the 2-6 month period ahead, an intermediate time frame as opposed to our longer time frame for the Value Rating. Our Timing Rating, in five gradations, can range from encouraging purchase to prohibiting purchase /encouraging sale. Technical analysis of stocks does not result in required sales in our system. At its most negative, its impact on the portfolio manager can force him not to. buy until he can convince the technician that the worst phase of a price decline is over.

A weekly computer run then can rank our list of stocks by rating prefer- ences , driven first by the Timing Rating - resulting in rankings from double positive ratings, where the analysis of purchase candidates becomes acceler- ated, through to mixed ratings, where holdings are potentially questioned, down to double negatives, where the viewpoint becomes “Why should the stock not be sold?“. The 25 possible combinations of ratings have proven to be effective guides to our equity activity and yet allow flexibility within uur chosen 125-stock universe for the portfolio manager to exercise discre- tion in meeing client needs and objectives. And, yes, when the DJIA was above 1000 last year, the ratings approach, on a “market-of-stocks” basis, was a good guide to building defensive positions.

Hopefully, the “Why. 9” of our tactical Timing Ratings is apparent above. As longer-term investors, they help us to avoid buying cheap, declining stocks too early, and periodically to add to positions in stocks that are

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in risinrr long-term trends. They allow us to maintain positions in stocks that are somewhat overvalued, as long as they remain in positive technical trends, and, finally they produce sell recommendations. I believe that each of those capabilities add, in various ways, to performance over time,

The “How ” of our Timing Ratings comes about as I apply technical analysis to each stock, with weekly cross-check alerting mechanisms, obtained from “the Street”, serving to flag issues for mandatory review. If I have not already assessed a technical shift, the alert should do so, and it can also serve to cause me to question my own rating judgment. n9y personal ap- Droach involves Dredominantly bar charting, with- an overlay of relative strength data. Neither alone is sufficient. In rising markets we need relative performance, but, in declining situations, we don’t want to settle for losing less ; we should be out of the stock. If there are no positive replacements, the result fosters cash-reserve creation.

.

The external cross-checks applied are various. The main weekly compon- ents are a point-and-figure review reported via a computer run, a per- centile relative strength data set (also computerized) that can be logged by an administrative aide and then reviewed by the technician in less than 15 minutes a week, and thirdly, a form of momentum analysis which serves to rank stocks and categorize them by deciles enabling buy/sell review emphasis. A 52-week, new high/new low analysis is a final step to ensure that no significant move in a stock goes unrecognized. There is more that could be done, but at this point, unless it can be organized for objective automatic review, preferably by computer, time does not allow much more subjective evaluation of issues monitored.

Strategy (Industry & Sector Emphasis)

Volumes have been written on fundamental approaches to determining strategy. Clearly, economic and industry trends can be discerned, if not early, at least not too late, and translated into stock-group judgments. The persistence of vogues, both positive and negative in the stock market, allows considerable time for fundamental reactions to group phenomena, even if the abundantly clear fundamentals only come into focus well after the fact; recent cases: Energy (-> and Utilities (+> .

Technical analysis can alert one to evolving trends, and help accelerate the fundamental-research emphasis. No group action can occur, by definition, without a sufficient majority of component issues getting in gear technically, so the first approach we use on the technical side of strategy work is to build our Timing Ratings into industry scores. Secondly, we watch Standard & Poor’s industry indices in a manner similar to the way we monitor individual stocks. Many groups are discarded due to lack of fit with our universe, but those that remain provide important signals.

Once again, external cross checks from “the Street” are emoloved. In technical straten work; those external alerts generallv do not inform us of unnoticed trend shifts; trends here are more obvious due to cohesive grout action. In the stratew sense thev are effective, however, as continuing reminders, asking in essense, “Have you done anything about

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these nositive or, more imoortantlv , negative shifts?“.

Industry-group work is harder to organize in that there are fewer stati- stical manipulations that an administrative aicb can assemble to present trend reviews to the technician. On the other hand, there is enough valuable information available that we can log in technical data on industries and quickly have it emphasize what must be reviewed.

This strategy work is’imnortant since. clearlv. market oerformance can be influenced bv vogues. and one wishes to be invested in issues with oositive trends. where orooer value exists. and. vice versa, be out of a declining groups, regardless of the degree of value perceived.

Policy (Market Timing)

I shall not attempt here to suggest how a technician should make his market timing decisions. However, I would recommend that the fundamental analyst supplement investment-policy considerations with a disciplined consideration of what technical analysis can add to the forecasting of stock market moves (less reliable) or the’ interpretation of what is happening and what trends may persist (more reliable). I preach that forecasting is folly; one should interpret rather than predict. However, when the future must be fore- casted as we must occasionally do, the crystal ball is perhaps less ‘r%g in the technicians’ camp than in the fundamentalists’ camp.

Our own approach to Value Ratings requires a degree of market forecasting. Further, our conscious policy decisions, actively varying investment reserve levels (at least in more flexible, employee-benefit type accounts) leads us to attempt market timing. The results may be mixed ) but I cannot escape the logic behind the rationale for trying -- there is no reason to be fully invested at all times, especially if you have experienced more than one bear market.

We do not construct a market-timing model, and I don’t believe in static models. Perhaps one could say we attempt a dynamic model unofficially, but the reality is we look at any shred of evidence we can find, both fundamental and technical, to interpret the stock market’s action and set our policv decisions. There are, in mv mind, degrees of reliabilitv to indicators (witness articles in this Journal) , and vogues as well, so I structure accordinplv. And, once again, there are respected “Street” sources we wish to monitor and have discussions with.

How much integration of various research disciplines is evidenced above? I’d ask the reader tf, tell me. The discipline of the disciplines is as important as the integration, and when the final efforts are tabulated, the results are readable at the bottom line, and that I am proud of too.

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TECHNICAL ANALYSIS

AN OBJECTIVE DISCIPLINE FOR FUND/VlENTAL INVESTORS

G. EDWARD NOONAN Contravisory Incorporated

The technician lives in the real world, and, like it or not, he must, in that real world, coordinate with the practitioners of other disciplines -- notably the fundamental analyst. This task is often difficult -- for both parties involved -- so much so that the 1982 seminar features a panel on that subject. One of the speakers on that panel is Ed Noonan, who, as President of Contravisory Inc., is involved in assisting fundamentally oriented clients with technical work. Here he discusses how technical work should be “packaged” in order to make the fundamental- technical relationship a smooth one.

Humphrey B. Neill, the father of contrary opinion, in his excellent book entitled “Tape Reading and Market Tactics”, states :

“Therefore, it seems to me, all three factors - fundamentals, technical action, and market psychology - can, and should be, taken into account in the instance of each commitment. A complete analysis of the fundamental situation will tell us what should be expected, in our opinion. We shall thus find out what stocks appear attractive for investment.

Turning to a study of the past and of the current action of the stock under scrutiny (or the general market), we learn whether the intelligent agree with our opinion. We do not have to trust to personal judgment.

Technical signals likewise will advise us when to buy and when to sell. There certainly is a common meeting-ground

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here. One cannot know too much about any investment situation. It was definitely proved in the fall of 1929 that conditions within the market itself -- technical conditions -- had as much to do with the extent of the crash as did fundamentals. However, from an unbiased study of both, it was evident that stock prices were riding for a severe spill.

Market-action is a reflection of fundamentals and of speculative and investment sentiment. How, then, can they be separated?”

It is the purpose of this paper to review our experience in combining fundamental and technical analysis for the management of equity portfolios. Insofar as the fundamental investor separates himself from an analysis of technical signals he runs the risk of losing the battle, in particular where his opinion is in conflict with the opinion of the market. In summary, we feel that technical analysis should be presented to the fundamental invest- or as a support system which will guide him through the turbulent and emotional stock market periods of change.

I

A useful comparison can be made between the instrumentation system used by an aircraft pilot and a technical system used by the fundamental invest- or. When the weather is clear, no clouds in sight, wind conditions are modest, the pilot can maneuver his aircraft without instruments. When the winds pick up, stormy weather emerges, his instruments become critical for his survival and for the survival of the aircraft. In the stormy environment , the pilot loses his outside frame of reference.

In a similar vein, the fundamental investor may be in complete control of his portfolio when overall conditions are favorable, the economy is moving ahead, corporate earnings are advancing, and stock-market prices are in a bull trend. It is a period when one can hardly be a loser. When the winds appear, the storm clouds of economic change come in, corporate- earnings disappointments surface, stock market character changes, and the fundamental investor often loses his sense of reference. His emotions begin to grab hold. He is exposed to embarrassment to his ego and capital by turning his portfolio in the wrong direction. Our experience suggests that it is during the periods of major change in fundamental background and stock market character when the fundamental investor is in critical need of an instrumentation system, a discipline. Technical analysis provides hin with this discipline. We certainly have all experienced the tugs of emotion, the tendencies towards wishful thinking, when the stock market moves into a period of character change. It is not easy for the technician to adjust to such an environment. It is less easy for most fundamental investors to adjust.

The aircraft instrumentation system guides and assists the pilot. It does not replace the pilot. In a like manner, a technical system guides and assists the fundamental investor. It does not replace him. As Humphrey Neil1 suggested, “How can they be separated?”

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II

Based upon our experience over the past ten years, which has been to work with fundamental investors toward the integration of our technical signals with their fundamental disciplines, there are several important features which we have found to be important. First of all, the fundamental investor should choose his own stock universe. He knows best what his investment objectives should be, what the characteristics of his stocks should be, and, of course, he bases his selection on his extensive fundamental information. The technician should offer him the timing signal, telling him when to act, not what to act upon. In addition, the technician should demonstrate to hi.hat the market’s action is in this stock- and-industry universe. Where the market’s opinion is in conflict with his opinion, the investor should be encouraged not to take a position. We have found that the performance results are superior where the fundamental opinion and the market opinion are in concert.

Secondly, we have found that the fundamental investor feels more comfort- able with, and can work more closely with, a technical system which focuses on long-term trend analysis. Technical systems that are short-term oriented are very difficult for the fundamental investor to understand and to accept. A twelve-to twenty-four-month objective seems to fit more closely with his fundamental viewpoint.

Thirdly, the focus on group and stock-trend analysis is more useful for the fundamentalist. The fundamental investor does not perceive himself as needing to know what the dominant trend of the market may be. While many may recognize that market trend is a major factor in equity perform- ante, the fundamentalist mentality is to focus on group and stock selection. Hence, a technical approach which does the same thing is more understand- able and useful for the fundamentally-oriented person.

Fourt hly , we have found that a system which combines an analysis of price trends with earnings trends is more acceptable to the fundamentalist. For the past several years we have developed some relative earnings-per- share trends on individual stocks and have related to them to relative price trends. The fundamental person more readily accepts an approach which combines earnings and price momentum.

Lastly, the technican, we feel, should deal with the fundamental portfolio manager on a personal face-to-face basis. This should include a format highlighting the current indications of a technical system and encourage him to apply those signals to his list of stocks which he has chosen for fundamental reasons.

There are four specific aids which technical analysis can provide to the fundamental investor. They are :

1. Preventing major price damage not currently reflected in fundamentals.

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2. Limiting premature buying. 3. Encouraging staying power. 4. Identifying stock-market character changes.

Discussing point number one first, there is a tendency for the fundamental investor to be slow in recognizing, certainly to admitting, a change in his fundamental outlook toward a stock or a group. Yet we know clearly, based upon stock market behavior in the past decade, that there have been many outstanding investment gains that were subsequently washed away by major price weakness. Two current examples would be Boeing and Schlumberger. Notice from chart 1 (which combines the absolute price, the relative price and the relative earnings of Boeing) that market opinion turned negative on the stock during 1980. Yet relative earnings momentum, as reflected in the third line, remained positive. It wasn’t until the stock had fallen substantially from its 1980 high, that the earnings momentum trend turned down. Chart 2, Schlumberger , shows an what an outstanding investment Schlumberger was during most of the past decade. However, Schlumberger has been in a steady descent since peaking in late 1980 along with other oil-related stocks. You can see from Chart 2 that both absolute and relative price trends of Schlumberger have been in a downward phase for more than a year. Yet, notice how its earnings momentum remains in a positive trend. In this case, the market opinion as reflected in the technical instruments has given a very negative signal in the face of continuing positive fundamental input.

There are many examples that could be drawn from the 1973-1974 bear market which lead to a similar conclusion. Chart 3 on Schering Plough provides a like picture - market opinion turning down despite a largely positive fundamental view. Chart 4 - Avon Products - is similar.

We have found that it is of major benefit to the fundamental investor to be sensitive to such major changes in price trend based upon technical discipline. Waiting for a clear confirmation by fundament&+pinion would involve sacrificing substantial prior capital gains.

The second area to consider is that of limiting premature buying. We have found that there is a tendency among all of us, somewhat more among the fundamental investor, to want to anticipate positive changes in the fundamental outlook. Chart 5 on the automobile group provides an example of the hazards of premature buying. This group reversed to a downtrend in early 1977. We know that a number of fundamental investors have engaged in buying programs in the group at times during the past five years of decline, although the dominant or long-term trend in the auto group has remained down. Another example would be that of McDonald’s displayed in Chart 6. McDonald’s has not suffered from the same fundamental or technical hazards as the automobile group, but it has gone through several periods of market distress during the past several years. Notice specific- ally how earnings momentum turned positive during 1980, yet technical instruments did not turn positive until early 1981.

The third area to review is that of staying power. How often have all of us failed to exercise patience and accept the “action” of no action by

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staying with positions which were moving ahead nicely? Two examples would be Marriott Corporation and Warner Communication. Chart 7 of Marriott Corporation reflects a postive trend reversal in February, 1975. Notice how the stock has maintained its uptrend since that time while it has gone through a few periods of consolidation or resting. It is important that both the fundamental investor and the technician refrain from anticipating trend changes where the dominant trend is positioned so firmly upward. Chart 8 displays a trend pattern for Warner Communica- tion . We. know, this particular issue has been one of the most outstanding in the NYSE during the past four years. Notice again, how, somewhat like Marriott, it has moved through consolidation periods during the uptrend phase but has not turned down. Staying power is a critical element for successful investing. A technical system can be used to strengthen resolve to remain with our investments that are enjoying price strength.

Fourthly, technical insturments can be used to help the fundamental investor in identifying character, or leadership changes in the stock market. There have been two striking examples of such opportunities in the past decade. The first was 1972 to 1974 - the period when “onedecision” stocks were riding high, but had a painful spill. Technical analysis, beginning in 1972 and continuing in 1973, began to flash warning signals that the character was changing. The “nifty fifty” were losing their appeal to an expanding number of market investors and speculators due to psychological and eventual fundamental reasons. They were turning down as expressed in Charts 3 and 4 on Schering Plough and Avon Prod- ucts. At the same time basic industrial stocks were turning positive. I am sure you will recall the positive changes in relative and eventual absolute price performance that occurred. Stocks such as Atlantic Rich- field, International Paper, Pittston, Staley Manufacturing, U . S . Steel, and many others during the 1973 to 1976 period, advanced.

Most recent, of course, has been the character change that began to surface in 1981 and continues. Many negative trend reversals surfaced in the first quarter of 1981 among the Aerospace, Natural Resource, and Technology stocks. Positive reversals began to emerge among many consumer-defensive and financial-related groups and stocks. In both cases, 1972-1974 and 1981-?, these periods of character change can be signalled handily by technical worth. The periods where the signals occured were periods of “storm”, the 1973-1974 bear market, the 1981-1982 bear market. Typically, under such conditions, the fundamentalist is puzzled and dis- oriented. Earnings momentum appears to remain positive. He is slow in reducing his earnings and economic forecasts. The stocks in which he maintains positions have done very well prior to the recent peak, yet market opinion is turning against him. His stocks are collapsing. Negative earnings surprises begin. What does he do? He engages in wishful thinking. He needs the guidance of a technical discipline. The fundamental investor who uses the technical signals has been the successful investor during such periods of character change.

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In summary, a technical discipline should be combined with a fundamental system in investment management. To be effective, technical discipline should be applied as an instrumentation system which guides the fundamental investor. It should not be presented as a system which replaces fundamental analysis. The fundamentalist should choose his stock uni- - verse. The technical system should provide the timing signals and the market opinion signals for him. Presented in this way, the instrumentation system will help him deal effectively with the human emotions of fear, euphoria, wishful thinking, and pride of personal opinion. Technical discipline will help him to control and restrict the tendency of his emotions and his fundamental view to pull him in the wrong direction at critical moments of change.

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CUIPUTER DON'TS (all caters have lots of them>

JOHN R. McGINLEY, JR. Van Cleef, Jordan and Wood, Inc.

Time marches on, and the technician -- often kicking and screaming -- has been dragged in to the realm of the personal computer. Here he finds himself in a world as difficult and hostile as the stock market and one which is, in addition, unfamiliar, peopled with sweat-shirted, sneakered Star-Wars freaks. John McGinley, one of the earZy p. c. users among the MTA membership, has been through this maze and, as he relates here, has made all the mistakes. He tries to help the novice to avoid a few of them in this article.

I am often asked, “John, what’s the best computer for me to buy?” My best answer? “Don’t. ” You should buy a program first. Buying a computer without a program is like buying a Buick without a Chevvy engine, like being up the creek without a paddle. You’d have done it backwards - but you’d not be alone. Most computers are bought for the wrong reasons. And there is no “best” computer any more than there’s a best house to buy.

Computer-Types

Two extreme types of computer buyers exist today, many shades of grey in between. At one end, we have the computer hacker who wants to fiddle with the machine, get inside it, make it do things for the sheer pleasure of making it do things. At the other extreme, there’s the “bottom-liner”. He wants the machine only for what it will do for him, what it can put up there on the screen, or on the printer. A big calculator, a data manipulator. He doesn’t care how it’s done, just THAT it’s done. Personally, I fall somewhere in between, maybe a little closer to the latter. If the machine can’t do something I want done, I want to know just enough to make it do so. If you’re one of the first type, though, all of the above doesn’t apply to you; go ahead and buy a machine first, but just keep in mind, the computer is a tool, not an end in itself. In either case, please read on. It may save you $$$$.

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Programs

This article is about computer don’ts. We’ve seen the first, don’t buy a computer; buy a program that will do what you want. Then buy the best machine, for you, that it will run on. Let’s add another don’t, Don’t(! ) buy a program unless you’ve read a critical review of it, you know someone who has it and can critique it for you (see computer groups below), or you’ve gone somewhere to try it yourself, hands-on, exhaustively. Try to make it crash. Give it garbage, make mistakes, see what it does. You can find reviews in back issues of several of the computer magazines you should be subscribing to (Byte, 80-Microcomputing, 80-US, Creative Computing, Microcomputing/Kilobaud, Interface Age, InfoWorld - which has the best reviews). Bottom line? Trust God, but test everything else.

Research

But, you ask, what kind of a program should I buy? Another reason not to buy a computer first. Until you have looked at what you want from a program (and the computer it will run on), you should leave your margin account alone. When you do buy a computer, ask yourself, will I want to hit the deck running, or will I just want to hack around, get my hands a little dirty while I learn to program and use it? I urge you not to buy anything until you have talked this out with someone, in detail. Discuss your interests, your intentions, inclinations, knowledge (or lack thereof), roughly what you want it to do and how soon. In big systems this part amounts to 20-30% of the total cost. ‘Nuf said?

Help

Next rrDonttr’ . Don: t buy any computer unless you have someone at your beck and call to help out when you get stuck. And you will get stuck -- often! The computer store you got your system from will give you little or no help. Every additional minute they spend with you cuts into their profit from your machine. Imagine how much technical help you’d get from your auto salesman.. . . You’re already sold. And he probably doesn’t know that much! Ditto computer salesmen. There are isolated exceptions, but how would you know in advance?

Computer Groups

The first step is to identify as many friends as you can who have the same machine. That will help. But the single most important step you can take is to locate and join your local amateur computer group and its sub-group for your machine. This is a must. Get “wired-in” to these people. They’re all hobbyists like yourself; many are engineers. All just love to bear down on someone’s problem and won’t leave until the solution is found and implemented, free ! You may have seen Hi-Fi nuts do this for each other. Computer people are the same. Your problem is their problem, a puzzle to be solved. Not touching base with these great people is like being up the creek without that paddle. Who’ll help when you can’t get your machine out of a crash? And think of all that data in there.. . .

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.

Service

I said buying a computer is not unlike buying a house. You have to learn at least something about it. You don’t want to be dependent on the enemy --- salesmen, service centers, Murphy’s Laws . . . . unless you’re Rockefeller. While we’re on service, you should find out in advance - and accept - where you’ll have to go and how much time it generally takes. This might dictate what machine you buy. “Sorry, sir, this warranty is only good in South Succotash, but service is not available there. ”

Can’t Do It

We haven’t even gotten to buying a program yet, much less a machine. Gives you an idea of how much preparation is really necessary before step- ping up to bat. Here’s another don’t. Don’t assume a computer can do everything faster, simpler, easier, and better - and all at the same time! One rule of thumb: if a card file will do just as well, use it ; i.e. looking up an address, a recipe, a check. Don’t believe me? Remember, you have to turn the machine on, wait for the CRT to warm up, load the nrogram, load the data (vawn), tell it what you want, wait for it to be found, write it down, and take it over to where you will use the info. No, a card file is much faster. For screens, sorting, moving masses of data across your &sk though, computers are great. Anything repetitive, i.e. , looking UP

earnings estimates, is best done by hand, until vou want only those over a certain P/E with certain debt restrictions, i.e. , a screen. Hard to do that with a card file.

Time Guestimates

Don’t believe it when people teIl you, “This is just the machine/program for you. ” How can they know if they - or you - don’t know your exact needs? Check the lead out, but don’t just take it for gospel. And don’tieve time estimates, even your own. Experience will teach you, as it has others before, to double any time estimate - and be prepared to triple it! Where you will save time is on the second repetition of the task, and all the rest after that. Your first effort will be the best Murphy’s-Law workout you have ever seen. I promise.

Extant Programs

Don’t think you won’t have to learn some programming. Even if you’re a bottom-liner, the chances of finding just the program you want, already written, in this business, are slim. We’re all individuals, doing our own thing in our own way. There will be a program that does part of what you want, but you’ll have to add the rest yourself, maybe taking a part of another program to do it. Or you can have someone do it for you ($$$I. And just because it’s written for another machine than yours, in BASIC, does not mean that it will easily translate over to your machine without much sweat. It can always be done, but you have to know programming to do it. And much about both computers. Interchangability is something as built out of computers as obsolescence was built into GM cars. that, but there’s another whole article.

CP /M is helping

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Buy a System

Let’s get into hardware for a minute. Don’t buy anything but a system unless you really want to get your hands dirty. To buy Apple’s computer and Diablo’s daisy-wheel printer is to ask for trouble. Apple doesn’t support their own printer for nothing. It is made to go with the computer, and they know what’s wrong when it doesn’t work. The Diablo printer will have to be jury-rigged for the Apple and, when it doesn’t work, Apple will tell you it’s the Diablo causing the problem. IllI let you guess what Diablo will say. Buy Apple, Atari, Radio Shack, IBM across the board, unless you are, or have access to, a hardware type. Heinz-type systems work fine, when they work. Again, know where you’re going to get it all - serviced and you’ll be OK.

Environment

Don’t overlook the importance of setting up a good environment for your computer. Where it won’t be bumped or knocked, where it won’t be dusty (smoking is definitely out! > , where it’s the right height off the floor, the light doesn’t glare on the screen, you have room to spread out, where the noise of the fans (if any) won’t disturb, where the printer can work un- restricted. Don’t forget to mark the fuse on the electric line so someone doesn’t unknowingly disconnect you from your data. Make sure to get an anti-static mat and to ground yourself always before touching the computer. One spark can blow a literal hole in several of your chips and the worst part is you might not know it until it starts to make impossible-to-find random errors. Keeping the humidity up is the best way; 40 to 50% is good. Finally, don’t take a chain saw to it, though you’ll often be sore tempted. Most computers have a little sensor in them to monitor operator frustration; the more exasperation they sense, the more obstinate they become.

Dead-End Machines

Next to last word about hardware. Don’t buy a dead-end machine. That’s a machine for which no one is writing programs or designing new circuit boards because it’s new, buggy & there’s no large installed base of computers already out there. If you buy a dead-end machine, you’ll be almost alone - for a while anyway. You really need company now and in the future. That company will save you re-inventing the wheel many times over and wiIl keep you on the forefront of the technology for your machine. If it’s missing this or that bell or whistle, surely someone will soon design one for it. Not so on a dead-end machine. Some machines have sub-groups in the clubs, magazines devoted to them, newsletters, etc. You11 need this support. .

Run Your House?

Finally, one last myth; don’t expect your computer to run your house. There are a few programs for it, but it’s a hardware and wiring nightmare. Besides, when you want to play Space Invaders, what are you going to do --- turn off the house?

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Promises, Promises

Don’t take anyone’s promise. “Oh, they’re working on that modification. They’ll have all the bugs out of it shortly. I’ll let you know when it’s finished. ” Don’t buy that package until you see it running, on your machine ! Don’t assume it will do this or that as well; it probably won’t. You are enough of an expert to know something is needed. Can you be sure the programmer is equally expert? Could be a big assumption. And if the salesman says he will make the change, definitely don’t buy from him. No salesperson is a good programmer; otherwise they’d be programming and earning a lot more money!

Back-up

Don’t forget to back up both your programs and your data. You are definitely going to blow the program disk. I can tell you that right up front. It’s going to happen; so have a back up - even two. When you are writing a program or entering data, save it every ten lines or so. Sooner or later you’re going to lose a whole morning’s work. You’ll never do it again, but why do it the first time?

User-Friendly Programs

Don’t , buy any program that isn’t “user-friendly”. They should be easy for you to use, or you won’t use them. It’s that simple. A well-engineered program should require almost no cognitive effort on the user’s part at all, while a bad one will leave the operator staring at the screen in frustrated silence, wondering what to do. They should use menus, not require you to remember the number of the various commands (they should understand English), and should not keep asking you the same question over and over if not necessary. There are many $$ of programs sitting on people’s shelves unused because they are not user-friendly. Try it out, you’ll thank yourself. If the store won’t let you, walk out. And let me repeat the warning about reviews : don’t buy any substantial package without reading a review. An expert can find a problem faster than you can, so use his experience if you can. Order and read the manual. It will speak volumes.

Word Processing

My final don’t is a generality. Don’t expect a micro-computer to be a word processor. They were not designed with that inmind. Text-editing they’ll do (barely), but full word processing is not really possible. For that you need full-screen cursor control of a very sophisticated sort. Good WP machines have the ability to edit, search, move, and control files and have specific keys dedicated to those tasks. Microcomputers have to be adapted and, as yet, do not do WP easily, quickly, or anything but minimally. If you’re a writer, you’ll be frustrated with a micro. OK for small jobs only.

Conclusion

This article has a negative premise. It might even talk you out of buying a computer. But at least you’ll refrain for good reason. On the other hand, if the benefits you see for the machine’s use outweigh the problems (look-

-7%

alikes for landmines), you’ve a lot of fun ahead. Set aside much time. Computers gobble up man-years --- without even being on! You’ll be playing (yes, many think they’re playing) with the world’s biggest toy. Becoming its master provides a certain status that most people enjoy in- ordinately . I think it’s well deserved. These days, anyone who can master a machine is due much credit. seriously.

But above all, don’t take the thing Remember, it’s only a game -- damn it!

-8O-

ME ENIGPRTIC STOCK OPTION A coF\iSTANT CHALLENGE

DAVID HOLT Trade Levels

Since the emergence of listed options on the financial scene, technicians have adapted various approaches to this new vehicZe. In general, one such approach has assumed very little difference between options and other instruments that trade in the marketplace and has tried to apply to them the conventional rules of technical analysis. David Halt, of Trade Levels, a 1982 seminar speaker, rejects this approach. Options, he feels, have unique qualities, which make conventional analysis difficult -- or even useless. Here he focuses on a unique aspect of options, time value, as a proper target for the technician’s effort.

Preface

Rather than answers, this paper is designed to present questions, not only to MTA members but to technicians everywhere who have experienced frustration, disappointment, and outright anguish along with successes in their dealings with listed stock options.

The theme of this year’s MTA seminar, “CHALLENGES FOR THE 80’s”, is especially apropos for stock options. We hope the following will, in some small way encourage technicians to accept the unique challenges presented by stock options. If so, there is no doubt these challenges will be met and conquered just as those before them.

It’s been almost ten years since listed stock options came into being, so you would, naturally, assume they have been thoroughly understood as far as technical analysis is concerned, and yet, in a lot of ways, there are as many questions as there are answers. This is due more to the idiosyncrasies of listed stock options than to a lack of aggressiveness by the many professionals who have poured hundreds of computer-assisted hours into dissecting this relatively new investment vehicle.

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I I % TIME VALUE BY EXPIRATION SERIES I

FIGURE A

Perhaps the best way to start this discussion is to touch on several of the unique features of stock options that severely restrict conventional technical analysis techniques.

Volume

Unlike equity securities, the volume of stock option contracts is all but useless as raw data for the application of conventional technical analysis. More correctly stated, it’s the unique aspect of option volume as well as the method used in reporting option volume that stymies the technician.

One of the primary objectives of analyzing volume is to determine the ampli- tude and bias of any imbalance between demand and supply. With equities, this is a rather straightforward analysis and has been quite useful for a number of years. However, options are another story because of the unique situation where a transaction can either be supply, demand, or both. When an “opening” trade takes place between two incoming parties you have a legitimate form of demand. When a “closing” trade occurs between two parties who are both exiting, you have supply. However, when one side of either transaction is opposite to the other you have both supply and demand which tends to neutralize their pressures. To compound the problem, the option exchanges have decided it would be to their detrement to identify trades, other than public orders, as opening or closing transactions. Be- cause public orders are currently running less than 40% of the total, a big void is left in the area of volume. We most certainly understand why market makers etc. would not want their tickets identified as to whether they are opening or closing transactions; why public orders, which are marked, are not segregated and reported to the public is harder to understand. It would be a big help in determining where the pressures of supply and demand really stand if this vital data were available.

As it is now, with far more than half of the total transactions being created by the “internal” functions of the market (hedging, boxing, etc.), the use of volume is not only questionable as to viability but it could be outright misleading to the relatively unsophisticated public.

Breadth

Because of having a set life span, which, in the spectrum of investments, is relatively short-term, options naturally have a built-in downside bias as their time value evaporates. This if you are attempting to work with advance/decline data in the conventional sense, you must first eliminate the downside bias. But that is easier to say than do. Our organization literally spent hundreds of man hours and computer hours analyzing various option series in an effort to find a consistant pattern of erosion. When we first started we felt it would be a task easily and quickly disposed of, because we had such a tremendous amount of data banked in our computer and the severe downside bias should be in the weeks immediately prior to the expiration of a major series. However, we were doomed to experience both disappointment and frustration.

We started with the hypothesis that a set of option series would adopt a pattern of eroding time value dictated by the characteristics of the under-

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AUG SERIES

TOSCO CP AUG 20 9.37 9.75 -so -3.8 U N C RESO AUG lo 6.50 3.25 -35 -3.8 TEXAS INTL AUG 35 14.00 20.50 -60 -3.6 TEXAS INTL AUG 40 14.00 25.50 -65 -3.6 TFXAS INTL AUG 45 14.00 30.50 -68 -3.6 TIGER INTL AUG 15 7.62 7.12 -49 -3.3 TOSCO CP AUG 15 9.87 4.87 -34 -2.6 SIGNAL COS AUG 30 19.75 9.87 -34 -1.9

AYOAHL CP AUG 35 2G.12 14.50 -42 -1.9 OCCI PETRO AUC 25 20.25 4.37 -19 -1.9

LOUEST X TIME VALUE (PUTS)

OPTION

x STOCK OPT'N 'IN

PRICE PRICE OUT

x TM

VL

APR SERIES

aANKAMERCA APR 25 18.25 I.25 -27 -8.2 3ANKAYERCA APR 30 la.25 10.25 -39 -8.2 INTL HARVS APR 10 5.12 4.50 -48 -7.3 YESA PETRO APR 30 15.75 13.7s -47. -3.2 YESA PETRO APR 35 15.75 la.75 -5s -3.2 GEORGIA PA APR 30 17.12 12.37 -42 -2.9 YALLIJURTC APR 60 34.62 24.37 -42 -2.9 HALLI3URTO APR ?o 34.42 34.37 -50 -2.9 tiALLiSUQT0 APR 55 34.62 19.37 -37 -2.9 HALLI=URTO d APR 65 34.62 29.37 -46 -2.9

SEP SERIES

COHP SC1 SEP 20 12.87 6.75 -35 .-2.9 NATOtiAS CO SEP 30 17.37 12.25 -42 -2.2

CYARTR CO SEP IO 7.12 2.7s -28 -1.8

'JLOSAL MAR SEP 20 13.75 6.00 -31 -1.8

GLOBAL MAR SEP 25 13.75 11.00 -45 -1.8 APACHE CP SEP 20 13.75 6.00 -31 -1.8

APACHE CP SEP 25 13.75 11.00 -45 -1.8 COASTAL CP SEP 35 22.37 12.25 -36 -1.7 COASTAL CP SEP 40 22.37 17.25 -44 -1.7 KANE3 SRVC SEP 20 15.87 3.87 -20 -1.6

MAY SERIES

TOSCO CP MAY 20 9.87 9.75 -50 -3.8 TOSCO CP MAY 30 9.87 19.75 -67 -3.8 U hi C RESO YAY 10 6.50 3.25 -35 -3.8 U N C GESO MAY 15 6.50 6.25 -56 -3.8 TEXAS INTL MAY 45 14.00 30.50 -68 -3.6 TEXAS INTL MAY 35 14.00 20.50 -60 -3.6 TEXAS INTL YAY 40 14.00 25.50 -65 -3.6 TIGER INTL MAY 15 7.62 7.12 -49 -3.3 TIGER INTL MAY 20 7.62 12.12 -61 -3.3 SIGNAL COS MAY 35 13.75 14.62 -43 -3.2

OCT SERIES

INTL HARVS OCT IO 5.12 4.50 -48 -7.3 BANKAMERCA OCT 25 18.25 5.75 -27 -5.5 YALLIBURTO OCT 45 34.62 9.50 -23 -2.5 HALLI3URTO OCT 50 34.62 14.50 -30 -2.5 CRT WN FCL OCT ls 11.37 3.37 -24 -2.2 VA ELEC PW OCT 15 12.75 2.00 -1s -2.0 HSHLO INTL OCT 20 15.50 4.25 -22 -1.6 FST CHARTR Otf 15 9.12 5.75 -39 -1.4 INTL SUS M OCT 65 61.00 3.25 -6 -1.2 DUKE POWER OCT 25 22.50 2.25 -10 -1.1

JUN SERIES

V G M GRN3 JUN lo 7.87 1.75 -21 -4.E PRIME CMPR JUN 30 20.37 9.00 -32 -3.1 COMP SC1 JUN 20 12.87 6.75 -35 -2.9 YANE3 SQVC JUN 20 15.87 3.75 -20 -2.4 SANE3 SRVC JUN 25 15.37 8.75 -36 -2.4 SANE3 SRVC JUN 30 15.87 13.75 -47 -2.4 NATOFIAS CO JUN 30 17.37 12.25 -42 -2.2 CYARTR CO JUN 15 7.12 7.75 -52 -1.3 GLC3AL YAR JUN 30 13.75 16.00 -54 -1.8

SLOBAL MAR JUN 20 13.75 6.00 -31 -1.8

NOV SERIES

TOSCO CP NOV 15

OCCI PETRO NOV 2S TEXAS INTL NOV 25

IFJEXCO OIL NOV 20

YCOER'dOTT NOV 30

MCDERMOTT NOV 35 A M F CORP NOV 25

CoflY EOISO NOV 25 RAYTHEON NOV 40

JOEING CO NOV 25

9.37 4.87 -34 -2.6 20.25 4.25 -19 -2.5 14.00 10.75 -44 -1.8

lS.12 4.62 -24 -1.7 23.12 6.56 -22 -1.6 23.12 11.50 -33 -1.6

17.75 7.00 -29 -1.4

21.C0 3.75 -16 -1.2 32.25 7.50 -19 -0.8 17.37 7.50 -30 -0.7

JUL SERIES

3ANKA'IERCA JUL 25 18.25 6.00 -27 -4.1 i INTL BUS H JUL 65 61.00 1.87 -6 -3.5 PCLAROID JUL 25 18.87 5.62 -24 -2.7 ;a1 AH FCL JUL 1s 11.37 3.37 -24 -2.2 iRT kN FCL JUL 20 11.37 a.37 -43 -2.2 AVON PROD JUL 35 23.50 11.00 -32 -2.1 AVON PRO0 JUL 40 23.50 16.00 -41 -2.1 VA ELEC PU JUL IS 12.75 2.00 -15 -2.0 INTL MINER JUL 40 28.25 11.25 -29 -1.8 INTL MINER JUL 35 28.25 6.25 -19 -1.8

OEC SERIES

ARCHER OAN OEC 20 16.00 OWENS CORN oic 2s 19.00 INTL TEL T 3EC 30 25.30 WiO SO UT CEC IS 13.12 ;ULFlwSTRN OEC 20 15.12 AVCO CORP occ 20 IS.37 KANE3 SRVC OEC 20 IS.87 CHHPN INTL 3EC 20 16.12 ZILLETTZ DEC 40 34.50 RALSTN PUR DEC 15 12.62

3.75 -20 -1.6 6.75 -28 -1.4

4.7s -16 -1.0

1.75 -12 -1 .o 4.7s -24 -0.8 4.so -i3 -0.8 4.00 -20 -0.8

3.7s -19 -0.a 5.25 -13 -0.7 2.37 -1s -0.0

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LOuEST X TIYE VALUE (CALLS) AUG SERIES

ENSEaCH CP AU; 15 21.12 5.87 40 -1.2 YANV1l.l.E AUG 10 14.12 4.00 41 -0.9 30RCH GAS AUG 10 16.37 6.25 63 -0.8 STRLNG ORG AUG 15 24.87 9.75 65 -0.5 SAFEUAY ST AUG 25 29.37 4.25 17 -0.4

OPTION

X

STOCK O?T’N IN

PRICE PRICE OUT

x

TM

VL

APR SERIES

RESORTS IN APR 10 19.00 8.50 90 -2.6

N W AIRLN APR 20 30.75 10.00 53 -2.4

;RT UN FCL APR 10 11.37 1.12 13 -2.2

=OSTR YtiLR Ai'R !O 12.75 2.50 27 -2.0

sITYEY lGW APR 25 27.62 2.12 10 -1.8

AM EXPRESS APR 40 cs.75 8.00 21 -1.5

- AM EXPaESS APR 45 48.75 3.00 8 -1.5

AY CYANA'II APR 20 27.12 6.75 35 -1.4

JCdNSON JH APR 25 37.50 12.00 50 -1.3

PITtrEY 3ow APR 20 27.62 7.25 38 --1 . 4

SEP SERIES

JOW CHEH SE? 15 23.37 3.12 55 CHHPN INTL SEP 10 16.12 6.00 61

-1.1 -0.8

OCT SERIES

HSHLD INTL OCT 10 15.50 5.37 55 -0.8

'4AY SERIES

NOV SERIES YANVILLE MAY 10 14.12 3.75 41 -2.7

VTL YE3 EN HAY 10 14.37 4.00 43 -2.6

JS7CH GAS YAY 10 16.37 6.00 63 -2.3

SKYLINE CO '4AY 10 13.75 3.50 37 -1 .e

NORTON S!M IAY 1G 21.50 11.12 115 -1.8

ZNSfRCrf CP YAY 15 21.12 5.75 40 -1.8

3ALLY HFG MAY 20 29.87 8.37 44 -1.7

'-lATTEL TNC YAY 10 17.CO 6.75 70 -1.5

RCYNLC) HTL MAY 15 20.50 5.25 36 -1.2

TRAVELERS MAY 40 51.00 10.50 27 -1.0

ENSERCH CP NOV 15 21.12 5.87 GO -1.2 YANVILLE NOV 10 14.12 4.00 41 -0.9 REYNLO HTL Ir;OV 15 20.50 5.37 36 CEN FOODS

-0.6 NOV 25 33.87 8.87 35 -0.0

DEC SERIES

TEKTRONIX DEC 43 49.37 9.00 24 -1.8

JUN SERIES

JOW CHCH JUN 15 23.37 8.00 55 -1 .6

dEN3YS INT JUN 10 15.87 5.62 59 -1.6

CITiES SRV JUH 23 32.00 11.50 60 -1.6

;iLLETTE JUN 25 34.50 9.00 38 -1.4

COM3ST ENG JUN 23 26.75 6.50 33 -0.9

A?Cr(52 DAN JUN 10 16.00 5.a7 60 -0.8

3ROWN FERR JUN 20 31.00 10.75 55 -0.8

AVCO CORP JUN 10 15.37 5.25 53 -0.8

3RUNSWICK JUN 13 16.50 6.37 65 -0.8

CHHPN INTL JUN 10 16.12 6.00 61 -0.8

JUL SERIES

LEVI STRSS JUL 15 23.00 7.62 53 -1.7

+iSHLD INTL JUL 10 15.50 5.37 5s -0.8

'd ;I AIRLN JUL 20 30.75 10.50 53 -0.8

1TL R;CtiFL JUL 30 39.25 9.00 30 -0.6

LILLY ELI JUL 45 57.SC 12.25 27 -0.4

?ITti:Y 3CW JIJL 20 27.62 7.50 38 -0.5

JELTA AiRL JUL 20 31.62 11.5C 58 -0.4

-85-

lying stock and general-market psychological” pressures. Perhaps it was merely a case of being extremely naive, but we felt, as long as the logic was there, the reality of it would follow. What we failed to anticipate was a change in the basic forces brought about by proliferation, put expansion, and external pressures, such as straight and reverse conversions. In our early work we did not allow for the almost unbelievably high level of so- phistication that would be achieved by the market professionals on the floor(s) that would in turn create an unprecedented level of efficiency. Fortunately, our learning curve allowed us to adjust to the highly efficient market that evolved, even though, in the process, we had to scrap reams and reams of computer printout.

The erosion of time value, which produces the downside bias in breadth indicators, is stilI fairly consistant for CALLS when monitored as a group (i.e., expiration series, exchange, in /out-of-money, etc. > . However, PUTS are relatively erratic even when smoothed by the use of large universes (See figure A).

The one thing PUTS and CALLS do have in common in this area is the almost total unpredictability of individual contracts, even on the same stock, and same cycles. On the surface, it would appear that the erosion patterns are “controlled” to a large degree by the dictates of the market professionals based on what part that particular contract plays in their overall position/ hedge strategy.

Even though none of the foregoing, either separately or collectively, represent an insurmountable hurdle in achieving penetrating technical analysis of the .options market, they do present challenges worth responding to.

One of the unique features of listed stock options that may well end up being the foundation of a truly historic breakthrough in technical analysis is---

Remainina Time Value

In the interest of brevity, we will summarize our conclusions on time value by saying, it is the sum and total of all supply and demand pressures that are at work on the price structure of an option contract at any particular point in time. It is the bottom line of an options’ financial statement reveal- ing which pressure is in excess and to what degree.

If you are a writer, you want all the time value you can get, because it represents your potential gain. If you are a buyer, you don’t want to pay anything over intrinsic value if you don’t have to. As a matter of fact you would like to be able to buy the contract you want at a discount, if you could, and quite often can if it is far enough in-the-money (NOTE : In- the-money options do not necessarily go “point-for-point” with their underlying stocks as the foregoingtabulations for April 1, 1982 show).

As a consequence of this, we use time value as one of the primary screening devices for the selection of options both for writing (primary) and purchase (secondary) .

- 86-

It, therefore, seems logical that time value would be an excellent base for constructing timing indexes for the overall options market.

The application of logic tells you time value for CALLS should increase during a market uptrend as enthusiastic buyers in their exuberance, bid up the prices. Conversely, the time value for CALLS should decrease as a market correction unfolds andbuyers become more and more reluctant to be on the long side. The opposite to the above should be the pattern of time value for PUTS.

Apparently, this logic is faulty, because that is not how time value equates to overall price structures, at least not consistantly enough to be of value. In a very loose interpretation the time value for PUTS does go in opposite direction of their underlying stocks, but time value for CALLS does not correlate with its stocks even loosely. (See figure B)

Getting back to logic for a minute, it would seem that comparing time value of PUTS to CALLS (on a percentage basis so you have a common denomina- tor) you would have a very meaningful ratio. When the ratio gets high, the price structure of the stocks should be overextended and thus a top could be expected to form. When the value is low, prices should be in the process of bottoming as the corrective process comes to a conclusion.

Based on the above, we programmed our computer to calculate this data so we could construct a PUT /CALL ratio of % time value. We only used stocks that had both PUTS and CALLS (starting in the summer of 1977 with 25) so there would not be any distortion in the ratio with only one side of the equation (i.e. , CALLS only). Our thoughts were that it would be a superior indicator to one using volume (we couldn’t factor in opening and closing volume), prices (distorted by the imbalance of in or out-of-the-money contracts) or other criteria.

The resultant PUT/CALL RATIO is depicted on FIGURE C. We have indicated most of the intermediate-term tops and bottoms in price with tie-lines. The PUT /CALL RATIO, at the best, could be labeled interesting, provoca- tive, or enigmatic. It most certainly is not the historic breakthrough we were looking for, even though we still feel quite strongly time value reflects all internal and external pressures being brought to bear on prices.

In conclusion, we must confess we have experienced a great deal of success in applying proven technical analysis techniques, such as first and second derivitives of price, to stock options and are not in the least deterred in our efforts. We are, however, intrigued by the challenges presented by the items mentioned in this article and will continue to pursue them, even though the successful conclusion is reached by someone other than ourselves. Indeed, we would be extremely thrilled to learn these challenges have already been overcome, if the conquerors are willing to share the results.

-87-

60

CALL STOCKS

40 j

6%

5%

4%

3%

2%

--. _ _ _ _ _ ._

I

1% .-.--I_-- .----. --- -1 .._ .- .-----.

I 1980

- 1 I. I 1 1. I 1 I I I. .A

! .

---_ . --. .---.-.. - __.~_ i --

1981 1982

1 I I- u-1 .-.I -c

j

1 ..A .- I . ..L !.- !-I FIGURE B

-88-

c - k--------------------

---_--___

-89-

__.

x

1 --

.

._.: 1

--

.

?a

ri

--

--

Y LL L I- * d - -

.-

--

-

--

--

_-

--

--

--

--

-- 4 --

- > 5;

-=c

--

--2

--

--

3- f -.

3

intentionally blank

-9o-

LElTERS TO ME EDITOR

To the Editor, MTA Journal:

The recent edition of the Journal addressed the question of whether to have a certification program for technicians. I wish to voice my object- ion to such a program.

Back in the early, formative days of the Association, I resisted becoming one of the original members, partially because of an ornery nature, but mostly because of an aversion to mutual-admiration societies, the likes of which I was afraid the Association would become. Mutual-admiration societies are self-righteous, self-gratifying, self-admiring societies, formed us.ually because of a common feeling among their members of inferiority which must be assuaged by mutual admiration. Often you see such organizations on “Real People” or “That’s Incredible” and wonder what the world is coming to. Technicians are a small cult of mutuallv oersecuted analvsts who could easilv succumb to the temotation of becoming a mutual- admiration society, and I wanted no part of it. I was wrong, however.

The Association, after initial organizational problems, developed into a viable society devoted to the promulgation of its particular philosophy by encouraging and supporting useful research in stock-price performance through its Journal, its seminars and conventions. It has not, so far, become a mutual admiration society (although I do note a certain familiar ring of individual names attached to articles written in the Journal and officers elected to the Association).

I am afraid that a certification program will transform the Association into the type of society which I feared initially.

The MTA’s battle for recognition has been long and hard. The Associa- tion has been built, however, not on a strict discipline but on a philosophy which permits new ideas, attracts improvisation, and encourages original thought. We would still be reading our “Graham & Dodd” and playing

I with our quick ratios if we each had not had that little spark of dissatis- faction with conventional thought. As members of the MTA, we are renega&s to an extent. We have done, individually and collectively, some remarkable analysis as well as some garbage. Importantly, however, our work does not stem from a strict discipline. It arises from a lack of a discipline which is necessary to produce that elusive notion of “creativity.” Our work is widely diversified, often emotionally tinged, not always quanti- fiable, but at least we attempt to be objective and scientific. Scientific developments, however, are inspired by freedom of thought, by diversity, by the ability to reorganize from abstractions. How many great discoveries have been made by the minds of groups? Groups have the dangerous tendency to restrict their number by restricting their membership. We must

- 91-

keep our group, of course, but not restrict the inventiveness of its members or we shall stifle the objectives upon which the group was originally formed.

Certification, by its very nature, requires a test. A test, in turn, must reflect the bias of the giver and will produce the inevitable effect of screening out those takers with a different bent. (Unless, of course, the test is a sham, as are so many.) But are we really to subject the vast scope of technical analysis to the multiple-choice question? Are we to allow members to determine not just the suitability of membership (as is done rightly now) but some arbitrary standard of thought? Is not this contradictory to the purpose of our organization? Is not the Association attempting to encourage original thought rather than to bridle it? Are we, by requiring acquiescence to our test questions only satisfying our egos at the expense of this individualism which sponsored the formation of the Association?

Certification requires a series of tests which, no matter how well thought out, will reflect the will of its creators. No matter who designs the course of study, whether an outsider (God forbid) or an insider, the result will include bias, predetermination, and prejudice. It will detract from the artistic /creative and personal-experience aspect of our profession by attempting to quantify that which I’m not sure is ready for quantification. It would make mechanical (will there be three or five possible answers to each question?) a subject which is not strictly mechanical and will, therefore, attract only those minds so adapted, to the unforgivable exclusion of those who might contribute spontaneity. I certainly object to the im- position of structured thought upon me. I pride myself on my ability to accept many diverse areas of thought and to chose, rightly or wrongly, those which I, not the Association, decide are appropriate. Certification satisfies the group, perhaps, and identifies further its constituency, but might it not also restrict those who could be outstanding contributors to its furtherance. Are we falling prey to the human tendency to desire an identification (how about Master Technician or Super Chartist or perhaps a special badge - Distinguished in Pattern Peeping “DIPP” with oakleaf clusters for bear markets survived) at the expense of our intellectual honesty?

On July 1, 1858, the Linnean Society permitted Charles Darwin to speak upon a subject which was in total opposition to the legal, religious, and intellectual conventions of the time. They did not require him to first take an exam. I am sure he would have flunked. Is the MTA to become a “royal” society or one devoted only to mutual-admiration?

Very truly yours,

CHARLES D. KIRKPATRICK II

- 92-

Journal of Technical Analysis (JOTA). Issue 13 (1982, May)

Economy & Finance

equity market

market letter

stock market moves

major financial markets

dickson robert farrell

new jersey

tabell delafield

martin pring thomas