Wednesday, January 11, 2012

Musings on Market Analysis

Technical analysts have been fighting the ignorami and kool aid drinkers who profess that there is no value in looking in the past to try to predict the future. Tell that to the patrons of your local OTB as they pour over racing forms to check their mudders. Or your favorite Wall Street analyst as she talks about the trend in earnings (uh, trend - that a technical analysis term).

But lately, since 2008, I have to admit there is something to the argument that charting is less worthy than asking a company how they are doing and publishing a buy rating. We're doing great! Buy our stock!!

Mouth breathers.

But again, there is something to the argument that you cannot use charts to predict the future. No, I have not jumped ship. But think about how charts work.  They let us know what investors did in the past and then tell us if we have similar conditions in place.  Let me reiterate - Investors tend to do similar things when faced with similar situations.

Note I did not use the word "same."  You know, that whole "history rhyming" thing. Nothing repeats exactly but human nature is a constant and that is what charts help us exploit.

Charts measure the mind of the market and that means the collective thoughts of the masses. A free, liquid market is critical and right now with the small investor gone and the gubmint meddling in ways that have never been seen before there are no masses to analyze. There is nobody waiting in the wings for a chart to break out. More likely, there is a scalper looking to get out at the higher price and that is not how it is supposed to work.

Sure, I still use charts and there is still a good deal of value. Let's just say that a large box of salt grains is always at my side.

I had a little conversation with Alan Newman, proprietor of the unique CrossCurrents newsletter.  He wrote in his latest missive:
The financial markets have metamorphosed into the wildest of beasts, untamable monsters that would not resolve in traditional bull markets as commonly expected.
I said that I have suspected for a while (since 2008) that all of our analyses do not work as expected any more and will only get worse. He answered:
Obviously, I'm very worried about the capital formation system (at least it used to be). And you have pinned another important factor. TA can't possibly work as well as it used to because TA in its essence, is a distillation of sentiment (which affords us the right perspectives). With the public gone, sentiment ain't what it used to be. But it does work.
Two different paths to the same view.

The point of today's ramblings is that the pros are just as frustrated as everyone else. We need the government to step aside and let the market purge itself of all the garbage that has built up in the name of saving it. When true market forces come back into power, so, too, will the public.

As Colin Quin would say, "that's my story and I'm sticking to it."

1 comment:

bmbull said...

Excellent. Very well said Michael.