Squiggly Lines

Last evening an associate copied me on an research item authored by David Pescod of Canaccord Wealth Management. Mr. Pescod was curious as to why two technical analysts (myself and Larry Berman) could have “almost opposite views” on the outlook for the equity markets when “they both look at the same squiggly lines”. The item can be downloaded from gettingtechnical.com/analyis/filters – or follow this link: http://www.gettingtechnical.com/04_analysis/pdf_files/cfilter.pdf

The item is actually dealing with two issues – Larry and seem I disagree and that we both look at the same squiggly lines

I have not spoken to Larry on this but as far as I am concerned it is the disagreement among investors, portfolio managers and analysts that allow the markets to operate. If we all agreed on a securities value – all securities would be perfectly priced – we would all be right – a perfect investing world. Sadly it is the squiggly line movement that is hurting the our profession. Today anyone can be a technician – all you have to do is to log onto one of the hundreds of free charting web sites and presto – you have a nice squiggly line chart and suddenly you’re an expert. Oh! by the way – don’t forget there are millions of investors looking at the same squiggly lines and are they all right?

The Problem With Portfolio Managers (2)

As I have said before – for the most part, portfolio managers are all the same as they all fear something. They fear the markets are about to collapse and yet they fear not to be invested. That is because they fear the markets may advance without them on board. In order to defend against a falling market they all own some gold and they all over-diversify. I recall Warren Buffett saying that "Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing."

So here we are, into a rally following a nasty correction and the question is do we move on to new highs or do we bail because the worst is yet to come. We all know what the portfolio managers are doing. They all own some bonds, some gold and perhaps an inverse product. Their objective is to have equity exposure - but not too much, and so if the market declines they won’t decline as much. The inverse is also true, if the market advances they won’t advance as much.

Which way do you think the equity markets are heading? Our chart is the weekly bars of the Phix SOX Semiconductor Index plotted above the S&P500. The studies are the 40-week MA, the Coppock Curve and the lower study of relative analysis MA. So what do you think about the outlook for the equity markets - and why?

The Problem With Portfolio Managers

I have over the years worked with many portfolio managers and I have attended the investment committees of several money management firms – IC/PM for short. Guess what I have learned from them? Nothing. Yes, that is because they are all the same – they all fear something. They fear the markets are about to collapse and yet they fear not to be invested. That is because they fear the markets may advance without them on board. In order to defend against a falling market they all own some gold and they all over-diversify. I recall Warren Buffett saying that "Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing."

Now there are three ways to protect against a falling market – you can reduce and go to cash, You can remain long and place an inverse (or short) ETF into the portfolio – or you can seek out long position that will rise against a falling market AND also rise should the markets also advance.

I think the better option is to seek out a asset that will advance without regard to the current market conditions. This special asset will soften a corrective period and because you are for the most part long – should the markets advance – your in the game

Our chart is displaying a long position of the Natural Gas ETF (HNU) plotted above the short inverse S&P/TSX60 bear ETF (HXD). Note the high price correlation – both are displaying recent price advances – but if the broader stock indices should recover we will lose on the HXD and what is more probable – still enjoy an advance in the HNU