A Guilty Pleasure: The Buff Technician « naked capitalism

Saturday, August 22, 2009

A Guilty Pleasure: The Buff Technician

I have set you up to misinterpret that headline, but that’s OK.

I know that sophisticated modern finance people are not supposed to believe in technical trading. It’s sort of like believing in astrology. Yet pretty much every serious investor I know pays attention to it, even if it is not a major factor in their trading decisions. And I did briefly have my money with one brilliant obsessive technical trader who does not have a fund, just manages money for a very few people he knows. He is known among traders rather than among real people. He trades only technically, waits for a bunch of signals to converge. That means he watches the markets as intently as any trader and does 4-8 trades a year, big bets only on extreme signals. He missed a trade thanks a screw up at the firm I was using, and straightening that out made him miss executing the trade for others, and given how few trades he does, that made him very unhappy, so that was the end of that.

So I have been trained not to believe in technical trading, and it looks like a ton of work, and you have to really like trading, which I don’t particularly. But I do have a few technically oriented types in my RSS reader, an admittedly idiosyncratic selection. I like Jesse’s S&P charts because I can understand them (show major resistance and support, always useful to keep in mind) and then there is Ben Bitroff who is colorful and to the point, and Ariel at Unbiased Trading, who looks at quite a few approaches and is very measured.

And then there is the Buff Technician. Tom Chechatka of The Risk Averse Alert. He even said something snarky about NC quite a while ago (and I was reading him before that), so it was a bit disappointing, but this isn’t an investment site, so I can see why it might not be his taste.

The reason I give him credit is his sometimes oracular stance, he does clearly weigh the risks, and tells readers when he puts positions on. He was early in calling the March rally, but also was very clear in saying it would be a monster (I recall “melt up” was his turn of phrase), I will admit I have not been able to check in as often, but he went short a little while ago and I have not seen him reverse his position (but I could have missed it). He seems to think a top is nigh, but today’s action says it might not be as imminent as he believed.

As Taleb loves to rant, any effort to predict the future from the past is flawed, but it seems to be human nature to try regardless.

18 Comments:

Anonymous says:

August 22, 2009 at 7:46 am

You left out the Delineator Journal, written by veteran investor SG Hammer. This site supports the analytical and trading software he sells. It's pretty darn good, has been for me, http://www.sghammer.com/delineator/journal.htm .

Bob

Anonymous Monetarist says:

August 22, 2009 at 8:25 am

Any list should include the prolific Jeff Cooper at Minyanville.

squanto says:

August 22, 2009 at 9:09 am

Yves,
Re: TC's snarky comment about NC…
He retracted the snark: "TC said…
I thought someone might call me out! I was in fact considering clarifying that remark. I meant it in a good way, because quite often I am a windbag too. It's that the posts at naked capitalism typically are so long and they are quite academic. Sometimes it's like reading university-level textbooks. Truly, I meant no offense."
http://stock-index-options-alert.blogspot.com/2009/06/stock-index-options-alert-6-29-09.html (scroll down to the comments)

Siggy says:

August 22, 2009 at 9:43 am

Technical analysis; i.e., chart reading is helpful but not deterministic. I use technical anaylsis to understand where I am. From that platform I develop my expectations for the future and finally, I set a course to follow. Thus, my view is that Taleb is half right.

As to the market today, it strikes me as being pricey and very vulnerable to a sell-off. This is still very much a trading market and the critical point is that inflection points will come up like mushrooms and from their point of occrance the market will change in direction with great velocity.

"DoctoRx" says:

August 22, 2009 at 9:59 am

Technical considerations led me to sell out of financial stocks in Q1-2 2007. (Fundamentalists got creamed!) Fundamental analysis led me to exit the stock market more or less in toto at Dow 13,000 in the summer of 2007.

I can't think of any better construction than Marty Zweig's from 25 years (or more) ago: Don't fight the tape (technicals) or the Fed (fundamentals).

Yves: typo of some importance in the last sentence: "form" should be "from".

Stevie b. says:

August 22, 2009 at 10:15 am

"So I have been trained not to believe in technical trading"

Sorry Yves, but charts are an essential adjunct to fundamental analysis. In my whole career I never made 1 final investment decision without looking at a chart (or 2) first. I truly believe your blog is the best of the lot and this is not a criticism as you are not a money manager, but IMHO any money manager who ignores charts completely is basically being negligent.

Jesse says:

August 22, 2009 at 10:22 am

One of the best technicians on any timeframe is Brian Shannon at alphatrends.net.

I was a fundamentals investor most of my life, since I did not trade but took only longer term positions.

I started using technical analysis to select entry and exit points on trades, and as I began to trade more actively I found myself using technical analysis more agressively and with more 'sophistication.'

In the short term, and particularly in markets like these where stocks trade like commodities, the technicals tend to be dominant because the market is a cynical game of supply and demand, squeezes in both directions, divorced from the underlying economic fundamentals.

This is a known phenomenon, stocks trading like commodities. I had a set of good quotations about it from various economists and marketeers, but they were lost when the louts at Yahoo precipitously shut down a site with storage I had with them for years, and for which I was even paying (a nominal amount)! lol.

One quotation I had was from Greenspan as I recall, which I have since not been able to find. He indicated, from his earlier days, that when stocks start trading like commodities, you know the fiat domestic currency is at fault, losing its foundation in the productive economy.

I don't think, therefore, that technical analysis is 'predictive' but it does show the trends of sentiment, and the strength of 'supply and demand.'

It would be more effective to be doing technical analysis while looking at the playing hands of all the traders at the table, but only 'the broker-dealer-who-must-not-be-named' and their cronies are able to do that.

I am becoming increasingly disenchanted with the US markets because of the increasingly blatant price manipulation. Anyone who follows the futures markets closely over extended periods of time can see it.

This was an 'innovation' proposed by Bob Rubin in the 1990's. He said it was cheaper to avoid a mess by goosing the SP futures than it was to let the market fail and then clean it up afterwards.

And besides, those who know about the program and its details can all make fabulous fortunes in the process.

Obama's failure to reform is one of the great disappointments, and although there is still 'some' hope it is fading fast. America seems determined to do its deal with the devil, and nothing seems able to stop it.

Tom Chechatka says:

August 22, 2009 at 10:46 am

Yves, thanks for the kudos. I am flattered.

Squanto nailed it. My snark was only with regards to lengthy posts that defy blog "norms." I think it comes with the territory, though. With Finance/Investment-related analysis there are many angles to cover in order to get one's perspective across. Plus, we're dealing with a subject where there's more at stake than if we were writing about, say, bass fishing. However, I am working on keeping posts shorter.

Truth is current circumstance has reached a point where the bearish case made over the past several months awaits but a detonator — something whose impact proves, first, paralyzing, then, devastating. Lord knows there are so many vulnerabilities with capital higher up on the food chain than equity. And like last year, equity markets will be the place where capital is raised when a hole higher up in the capital chain is exposed. It's only a matter of time. The exposure could impact the U.S. Treasury (and won't THAT be devastating!).

So, to answer your question I remain bearishly positioned, having begun to do so early once again (just like Y2k).

Best wishes to all…

Eric L. Prentis says:

August 22, 2009 at 12:30 pm

A scientific form of technical analysis is used to beat the stock market by +146 percent at only 66 percent of the risk, from 1928-2008. Once the random white noise is taken out of the stock price data, autocorrelation is evident which does not support the Efficient Market Theory. Previous empirical tests of the data are extremely biased because they assume mutual fund portfolio managers should be able to beat the stock market when in fact it is very unlikely, given the restrictions that most mutual fund managers of specialized funds have to operate under, i.e., they cannot go short, cannot invest in bonds, have to be 95% invested in equities, have to sell their stock at a set low price, have to deal with withdrawals and inflows from the investing public at the worst possible times.

To learn what the leading financial economic journals don’t want you to know about the falsehood of the Efficient Market Theory, and consequently, why the 1990 and 1997 Nobel Prizes for Economics should be returned, please click on the following link:

http://www.theastuteinvestor.net/f/An_Empirical_Test_Eff_Mkt_PDF.pdf

I actually had one financial journal editor, who rejected my paper, say, “why are you giving this information away, instead, I would start a hedge fund and make millions.”

Anonymous says:

August 22, 2009 at 12:37 pm

Who cares?

What is matter is making money and the person being comfortable with his/her system.

Plain stupidity

Anonymous says:

August 22, 2009 at 12:40 pm

Amazing

And i see now why you are jealous of Zero Hedge. No substance.

What a waste of reading time

ripsnort says:

August 22, 2009 at 2:14 pm

1:40, that comment says everything about ZH, attacks that are uninformed and wrong enough to discredit the source.

Anonymous says:

August 22, 2009 at 7:18 pm

3:14

Thats your point of view, not mine.

Case closed

Anonymous says:

August 22, 2009 at 8:25 pm

Yves has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior experience includes Goldman Sachs (in corporate finance)…

No wonder why you attacked ZH…

Freddy Krueger says:

August 22, 2009 at 8:29 pm

9:25

What an irony

reprobate says:

August 22, 2009 at 9:12 pm

Yves has never disguised her past, unlike one of your many Tyler Durdens. And she has bashed Goldman, I recall on AG and NY Fed and other instances.

This is really school yard age stuff, which seems to be what ZH likes to cultivate. Get them to turn of fthe brains and just whip 'em up.

Dave Raithel says:

August 23, 2009 at 12:24 am

Read through the comments, took a look at Mr. Prentis' paper. Reminded me of the latest two Dilbert strips (and that movie, Pi, but I digress):

http://www.dilbert.com/2009-08-21/

http://www.dilbert.com/2009-08-22/

There was a link – to Kedrowsky's Infections Greed? – last week making the same point as the second strip – well, sort of the same point. Mostly.

Captain Teeb says:

August 23, 2009 at 5:55 am

So Yves,

So what do you think is the link between technical (chartist) forecasting and economics. A chart may cover a day or century; the former is likely noise, but surely the latter falls within the realm of economic study.

Also, in an era where successful investors are celebrities, whether long-termers (Buffet) or short-termers (Soros, Paulson), what do such investors have to contribute in their public remarks on economics?

With notable exceptions (Keynes, Ricardo) economists are generally not mega-successful investors. Should we expect them to be? In other words, does a great track record mean that you're on to something fundamental or, conversely, does a lousy or non-existent record mean you have no credibility?

Finally, what is the goal of economics? (It bills itself as a science, but what other science is unable to provide better-than-coin-toss predictions?) Is it to predict? To rationalize? To invent a plausible story consistent with the interests of the economist's patron?

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