Saturday, November 8, 2014

The 2014 Mike Epstein Award

Mike Epstein Award 2014
Market Technicians Association Educational Foundation
Prof. Blake LeBaron: Abram L. and Thelma Sachar Professor of International Economics at Brandeis University

In 2009, the MTA Educational Foundation established an annual award in memory of our late colleague, Mike Epstein.  Each year, the award is presented to the person who best exemplifies Mike’s goals for long-term sponsorship of technical analysis in academia and in practice.

The original mission of the MTA Educational Foundation was to create and fund educational programs in the field of technical analysis. Throughout the years, this mission has expanded to include the creation and support of a complete Technical Analysis curriculum that is now being taught in colleges and universities for college credit. (source:

Fulfilling these goals would not be possible without dedicated partners from academia. Advocates on the university side are critical for not only teaching what we already know about technical analysis but forging new ground in the field that we can pass on to the next generation to put into practice.

The MTA Educational Foundation is honored that Professor Blake LeBaron of Brandeis University will accept the 2014 Mike Epstein award. His work goes beyond the indicators that most of us use to the core of how markets operate and how strategies for dealing with them evolve over time.

For most of us, the world of non-linear analysis and simulated markets is beyond our day to day activities of trying to make money for ourselves or for our clients. Indeed, most of the time "regular" analysis does quite nicely. It is the outliers, the unusual and the black swans, that have the potential to drastically change our results and Prof. LeBaron's work seeks to understand them.

For those people who have only heard of technical analysis, it is a somewhat mysterious endeavor. After all, forecasts are made without considering how a company's business is doing or how international trade is flowing. What they don’t realize is that the sum wisdom of the crowd - that thing we call the market - is indeed considering those factors and just about everything else professionals and amateurs worldwide track.  But instead of making rational guesses directly from the data about what might happen to future stock, bond and other prices they take the indirect route of measuring what everyone has done and is doing about it right now.

In other words, it tracks where people are putting their money rather than their talk. I'll spare you the colloquialisms about what talks and what walks.

Technical analysis is a pure play on market forecasting and money management. Its input - price - is what actually happened and it is never revised later as a government report usually is. And it is objective. Price is what it is. It is not subject to individual interpretation.

Of course, this is the simplest way to look at it. There are many derivatives of price, such as momentum indicators, commonly in use today. Other market generated data such as volume and sentiment indicators round out the second level of analytical inputs.

The next level is where Professor LeBaron and his colleagues do their work. His research has concentrated on the issue of nonlinear behavior of financial and other macroeconomic data but he is also interested in understanding some of the observed behavioral characteristics of traders. This includes strategies such as technical analysis and portfolio optimization.

It sounds like an earful for most of us, especially considering his many publications with titles such as "Heterogeneous Gain Learning and Long Swings in Asset Prices" and "Chaos and Nonlinear Forecastability in Economics and Finance."

We've heard the phrase "publish or perish" in the university world and with tongue planted firmly in cheek these impressive titles are well above my pay grade. But then consider a few of LeBaron's other publications: "Wealth Dynamics and a Bias Toward Momentum Trading" and "Foreign Exchange Market Trading Volume and Federal Reserve Intervention." Those are of direct interest to most of us.

For the less informed, this writer included, the jargon masks the value in the research.

Blake LeBaron was born in Boston so Brandeis is a coming home of sorts for him. But before that, he was a computer science and engineering major at Rensselaer Polytechnic Institute. He developed his interest in economics there and given his chosen fields of study he knew it was going to be from a data driven, computational approach.

His graduate work at the University of Chicago, where he earned his PhD, was focused on non-linear aspects of finance and his thesis was on nonlinear dynamic chaos, tested on stock returns. What was most interesting to him was finding the deeper meaning in the many the wiggles we see every day in the stock market. What he found was that they are not really as random as they seem. And chaos is not just the absence of identifiable trends but something that hides that meaning.

This led to direct testing of technical analysis in the 1990s.

Today, he is juggling several investigations. One is on minimum variance portfolios and how they are related to trend following. Another compares and contrasts the carry trade with trend following in the foreign exchange markets. And a third is trying to understand how trend following strategies come together to become correlated, and therefore a common factor.  Quoting, "This is the 'when alpha becomes beta' dynamic that many people talk about."

I'll give you a moment to let all that sink in.

LeBaron sees changes in the investment world, especially since the financial crisis of 2008. Persistently low interest rates, high frequency trading and exchange-traded funds are making their mark. More significantly, they have changed the overall body of market data over time. That is important to note when attempting to explain market movements because the data a decade ago was simpler and trader intentions were more easily determined. Today, one can express a bullish or bearish opinion with complex strategies including multiple instruments.

He also suspects that investors and traders themselves are changing. Whether it is the rise of passive or semi-passive investing through ETFs or lingering shock over two bear markets in just a few years, something is different. But as all of us in the technical analysis world believe, so, too, does LeBaron believe that that technical analysis can still smoke out market changes early.

He says that students at Brandeis have a great interest in the field. While he is not teaching a direct technical analysis course this semester, he reports that there are enthusiastic students with dual interest in behavioral finance. The students have even formed the Brandeis Technical Trader’s Society to educate members on the subject and on related topics.

From his office located in the middle of the woods off to the side of the Brandeis campus, Blake LeBaron is indeed fostering interest by students in technical analysis. He is also proving that technical analysis is a viable strategy for not only understanding how markets evolve but in putting strategies to work in the real world today.