Interview With Technician Mark Arbeter
Technician Mark Arbeter was interviewed in this month's issue of Technically Speaking. He's one of my favorite follows on Stocktwits @MarkArbeterSPCIQ and is currently the Chief Technical Strategist at S&P Cap IQ. Mark Arbeter, CMT earned his Chartered Market Technician Designation and joined Standard & Poor's in 1987. Mark forecasts the direction of the major stock market indices, stock sectors, commodities, the treasury market, and currencies using traditional chart pattern analysis, market internals, market sentiment, and intermarket analysis. I thought this was great. Enjoy!
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INTERVIEW WITH MARK ARBETER, CMT BY AMBER HESTLA-BARNHART
How would you describe your job and what led you to look at the particular markets you specialize in?
My investment career is probably different than most. I quit college after one week (engineering) and started working for a very successful manufacturing company that was listed on the AMEX. I saw how successful they were and how well they were run so I started buying their stock at the ripe old age of 19. I did very well and decided to start taking business classes at night. After five years of working and investing, I made enough money to go back to college full-time and pay for it myself. I finished undergrad and grad school in four years. It helped living at home. Along the way, a broker gave me a copy of S&P’s Trendline chart book and I guess the rest was history. Charts made sense in evaluating an investment, accounting and finance did not. I guess I’m a visual person. In fact, I wrote a paper in grad school for an accounting class and titled it “An Accountant’s Job is to Distort, Not Report.” I don’t think the professor was happy but I passed the course. Interestingly, this was back in 1982, well before the accounting scandals of the ‘90’s.
I started at Standard & Poor’s (now S&P Capital IQ) in August 1987, the week the market peaked. I also had just gotten married and was planning on buying a house later that year with the money I had invested in the market. I of course got slammed in the crash and buying a house and keeping my new wife didn’t seem like a high probability. Well, everything worked out, somehow.
While a newbie at S&P, a VP gave me a copy of William O’Neill’s book and to this day, I still think he has developed the magic formula for making big money in the market. The one key that stands out for me becoming a technician is that charts almost always lead the fundamentals. This can be seen at every major top and every major bottom. Also at intermediate-term tops and bottoms. One of my proudest moments came in the latter part of 2011 when it seemed the whole world was bearish and there were horrific headlines everywhere you looked. However, the charts, in my view, were turning very bullish and I started putting out targets well above most. Also, in 2012, I started talking about the potential that the secular bear was ending and that a new secular bull may be upon us. I was seeing major breakouts in many sectors as well as the major indices. In addition, there were a fair amount mega-caps that were breaking out of 10+ year bases to new all-time highs. I think over the past couple of years I finally was able to divorce myself from the headlines and trust the price action as well the many technical indicators I follow. Unfortunately, that learning process took way to long.
I have had a very unique job at S&P over the past ten to fifteen years. The Research Director at the time thought that my talents as a technician may help our fundamental analysts. I don’t think the combination of both disciplines was very popular when we started to embark on it, but it has worked out well. We have the STARS system at S&P, 1 being a strong sell and 5 being a strong buy. I have become both proactive and reactive with the fundamental analysts here. I probably help out the most when a stock is going against the fundamental analysts’ STAR ranking. I provide a different viewpoint that is totally objective. I know, we are all supposed to be objective, but that is almost impossible at all times.
I write a weekly technical comment that appears on MarketScope Advisor and do a short mid-week technical write up. I cover the S&P 500, of course, as well as many of the other major indices. I also write about the bond market, commodities, and currencies. I am a member of S&P’s Investment Policy Committee, chaired by Sam Stovall. We set 12-month targets for the S&P 500 as well as set asset allocation. I also am part of the sector team, devising which 10 S&P sectors to overweight and underweight.
Which technical indicators do you rely on and how do you combine them?
First and foremost, liquidity rules. I don’t think that’s technical, but never ignore what the Federal Reserve is doing. Besides basic chart reading, I use many technical indicators that measure momentum, market internals, and market sentiment. I also use a “little” Elliott Wave. I use nothing fancy and have no complicated models. I think there are too many indicators canned in charting packages and while they are fun to test, there is no simple answer to what we do or magic indicator. Usually when I start leaning on one indicator because it has had a hot streak, all of the sudden it stops working. Funny how that works. Well, that’s the market. When you think you got it beat and you let your ego and emotions get out of control, Mr. Market takes care of that and smacks you in the head. I have learned that when I get on a hot streak and I start feeling really good about my calls, almost always I get knocked down. You just have to keep fighting. Predicting the future is a tough almost brutal profession at times. When your right, and especially when you’re sitting on the opposite side of most, you feel like the “King of the Street.” When wrong, you feel like changing professions. It’s a very challenging lifestyle full of second guessing, whipsaws, people with short memories regarding their calls, etc. But, it’s the only world I know.
In general, there are a couple things I may do different than some technicians and many fundamental analysts. I try my hardest to be proactive in my market calls, not reactive. One note - I am not talking about individual stocks here. I also will stick my neck out at times. Of course my head gets chopped off at times, but so be it. There are too many stock market analysts that just play it to close to the vest. Why do we need them? Just put 60% in stocks and 40% in bonds and walk away.
When analyzing/forecasting the S&P 500 for instance, my job is to get my customers in the market for the meat of a bull market and out for the meat of the bear market. Taking that down a level, I attempt to capture the majority of intermediate-term rallies and miss the majority of intermediate-term pullbacks or corrections. Sounds simple, rarely is. When we get a confluence of technical warnings I wave the yellow flag and tell customers to reduce equity exposure. These warnings relate to price momentum divergences, market internal divergences, frothy sentiment readings, weakness in key sectors, weakness in leaders, or just a general weakness under the surface that many times is not showing up in the biggest indices. These warnings generally come before the peak in prices, and generally I am early at tops. I prefer to sell strength than to be panicked out by weakness. I don’t wait for this moving average or that moving average to get taken out. That means you’re selling weakness and we all know the market falls a lot faster than it rises. In addition, many of us our managing decent-sized 401K’s which don’t allow you to capture intraday prices. I find it a gross injustice to be reactionary in this business which so many are. When you are reactionary, you really aren’t predicting the future, just reacting to the present.
Why do you think sentiment indicators are important in current times? Which are the top Sentiment indicators that you use?
Sentiment is a big part of my overall analysis and I use it for all the markets I cover. I must first give kudos to the kings of market sentiment, Jason Goepfert, at www.sentimentrader.com as well as Bernie Schaeffer and his staff, at www.schaeffersresearch.com. If you want something related to sentiment, they have it. Their sites are also very educational, even for us so-called market veterans. I keep track and follow many sentiment indicators including put/call ratios (equity-only, OEX, Total CBOE, ISEE (call/put)), market sentiment polls (Investor’s Intelligence, AAII, Consensus, MarketVane, NAAIM), Commitment of Trader’s (COT) data and Rydex flows. So, obviously, there are a lot of inputs that go into analyzing sentiment of a particular market.
Sentiment is, has been, and will always be an important part of the investment process for the simple reason that individuals are driven by emotion. There are great charts that show the “cycle of market emotions,” running from depression to euphoria and back again. It was relevant 100 years ago and it's relevant today, no matter what market you are looking at. The great traders, investors, and money managers, whether fundamental or technical, all have conquered the emotions game with discipline. As Sir John Templeton wrote, "Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that "The time to buy is when there's blood in the streets." He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that's not the whole story. The original quote is believed to be "Buy when there's blood in the streets, even if the blood is your own."
The one tough thing about using sentiment and being a contrarian, which seems to suit my personality well for some reason, is that the majority can be right in their market calls for extended periods of time. This is where you have to decide what type of market you are in – secular bull or secular bear. During long-term bull markets, the range of sentiment observations will be much higher than it is during a long-term bear market. Of course, there are times when you don’t know what type of market you are in. But in general, we are trying to capture the majority of advancing moves during a long-term uptrend and would rather sit on the sidelines the rest of the time.
It’s truly amazing watching the swings in market sentiment. As we said, it seemed like the whole world was bearish in late-2011, with some sentiment indicators more fearful then they were at the bear market bottom in 2008 and 2009. This really caught our eye as sentiment generally flows with prices and the lows in 2011 were well above the lows in 2009. We think we are currently seeing the opposite right now, except for individual investors. Many so-called experts have turned bullish this year with the current mantra elicited by many being that as long as the FED is in the game, the market won’t even see a decent pullback. Well the FED has been in the game since 2008/2009 and they weren’t reciting this over the past couple of years. So we currently think there is a need to reset the bullish sentiment and shake up the late-comers and band wagon jumpers before the next leg of the bull market begins.
How do you use intermarket analysis in your work?
The concept of intermarket analysis was pioneered by John Murphy in 1991 with his book Intermarket Technical Analysis. We certainly watch the interactions between many markets, but believe the concept has almost become too popular. What we mean by this is that if market “A” moves higher with market “B” for more than a month or two, they must be correlated. I see way too many analysts talking about correlation that just makes no sense. The other issue with intermarket analysis is that at times, markets can move together for long periods of time, then move opposite for long periods of time. Then there’s the FED meddling in the bond market year after year, messing up the relationship between stocks and bonds. I rely on intermarket relationships when they make sense, and this sometimes has to do with fundamentals and the economy. Obviously, a great part of the commodities boom last decade correlated nicely with a declining U.S. Dollar Index. Commodities were also aided by booming emerging markets so the three were all tied at the hip. During this period, copper become known as Dr. Copper and did a great job of preceding moves in the U.S. stock markets. However, that connection has broken, at least for now. Copper peaked February 2011 and currently in a nasty bear market while US stock markets have moved to all-time highs. If you would have stayed with this one relationship as a key input to your analysis, you would have been bearish on US stocks and dead wrong. So, overall, these relationships work until they don’t work, and if you don’t realize when markets are disconnecting, it can really hurt your forecasting ability.
Do you look at any fundamental or economic inputs to develop your opinions?
I follow the Conference Board’s Consumer Confidence Index, which is just another piece of sentiment data related to the individual. Generally, bull markets peak when confidence is high to very high, and bear markets bottom when confidence is low or very low. This is what trips up many individual investors, economists, and fundamental strategists. What’s interesting about this index as well as other individual investor polls right now is that despite the bull market since 2009, confidence remains very fragile. One reason may be that confidence fell to its lowest level in many decades during the financial crises, so it has jumped from below 30% to a current reading of near 60%. However, we will note that the 2007 bull market peak coincided with a confidence level of about 110% while the 2000 bull market peak saw confidence soar to 145%. This combined with the very bearish AAII data could be very bullish for stocks over the next couple of years if individuals become more confident with both the economy and the stock market. In other words, there would seem to be a lot of additional fuel for stocks still sitting on the sidelines.
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Make sure you're following Mark Arbeter on Stocktwits @MarkArbeterSPCIQ
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