NOTES FROM TOP ANALYSTS, TRADERS, PORTFOLIO MANAGERS AND STRATEGISTS -- DEALING WITH OUR BIASES -- FORECASTING VERSUS REACTING -- PECKING ORDER FOR FIVE KEY ECONOMIC INDICATORS
MTA TIDBITS... Today's Market Message will provide tidbits from the Market Technicians Association's annual symposium, which was held in NYC on April 3rd and 4th. The Symposium focused on the fusion of technical analysis with fundamental valuation, behavioral finance, macroeconomics and quantitative methods. It was truly an outstanding event with over a dozen speakers.
Rather than directly quoting each speaker, I opted to paraphrase some of the more interesting insights. These insights come from top portfolio managers, technicians, strategists, wealth managers and quantitative analysts. Compliance issues bind some of the speakers so I am not attributing individual insights to a particular person. You can find a list of symposium speakers, bios and the agenda at the MTA website.
Notes from the 2014 MTA Symposium (Part 2 of 2). Part 1 appeared on Monday, April 7th.
USER MORE THAN JUST A HAMMER... If all you have is a hammer, then everything looks like a nail. Expand your toolbox so you have the right indicator for the right market situation.
Leave your biases at the door. Chartists with a bearish bias will tend to see bearish patterns, while chartists with a bullish bias will tend to see bullish patterns. Try to look at the chart in an objective manner and see what is actually there.
It is dangerous to be right! If we make a forecast and it is right, we then think we can forecast the future. Learn to live in the present. Today, the present, is a gift. Don't extrapolate what has yet to actually happen. The way to build a position is to act on what is happening right now on an incremental basis. Forget about what you "think" is going to happen. Act on what is actually happening and change when the evidence changes.
Stock market valuations are not yet at extremes. We are currently in a valuation expansion that has further room to run. Yes, there is an uptrend in valuation and this is bullish for stocks. This same speaker also suggested that the VIX is going to 10!
The spread between the 10-YR Treasury Yield ($TNX) and high-yield debt is quite narrow and this is positive for stocks. This spread will widen when the market senses problems in the debt market or the economy.
PECKING ORDER FOR FIVE KEY ECONOMIC INDICATORS... Here is how the five key economic factors work. Equity prices are highly correlated to earnings. Earnings are correlated to the economy. The economy is correlated to the yield curve. The steepness of the yield curve drives available credit. Fed policy is driven by core inflation (core PCE). Core PCE is positively correlated to unit labor cost and both are falling.
1967 was the peak birth year for the baby-boomers and the economy was strong when they were in their early 30s (1997-2000). The peak birth year for the echo-boomers was 1990. If the echo-boomers are confident and working, then they should provide the fuel for the economy and stock market in the next few years.
The big question right now is: will the economy achieve escape velocity when QE ends? Chartists should compare the rate-hike cycle that began in 1994 for clues on what might occur in the next 6 to 24 months.
If you build a system and test it as 100% invested, then you must try to trade that system as 100% invested. In other words, actual system performance will differ from backtest results if you are only 70% invested.
REACT TO THE MARKET. DON'T FORECAST!... The market does not go up because there are more buyers than sellers. Similarly, it does not go down when there are more sellers than buyers. Buying and selling are equal because every trade has a buyer and a seller. They agreed on a price and exchanged the same amount of shares.
It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. That is what gets you in trouble. This is a paraphrase from Mark Twain.
Define your minimum length of trend before starting your analysis Are you looking for a 1 week trend, a three month trend or a one year trend?
It is impossible to have a bullish reversal pattern in an uptrend or sideways market. A bullish reversal pattern requires an existing downtrend to reverse. Absent an existing downtrend, there is nothing to reverse. You cannot have a morning star pattern in an uptrend. Similarly, you cannot have an evening star pattern in a downtrend.
