MTA Symposium 2014

This week was the annual Market Technicians Association Symposium. I continue to say it: this is my favorite investing conference of the year, every year. Bill Kelleher did an awesome job as well as the rest of the MTA staff, including guys like Tyler Wood and Tim Licitra, who really put together an awesome event. And for that we are all thankful.

It's impossible for me to share everything I learned throughout the Symposium, but I'll try my best to put together a few of the things that stood out most to me. Hopefully this will give you guys a better idea as to how great the event is and drive you to attend next year.

Early Thursday morning we kicked off with a panel discussion led by Frank Teixeira, CMT, CFA - the Chief Technical Analyst at Wellington Management. Frank is always one of my favorite presenters - he's funny, smart and passionate - never disappoints. This year in particular he really got me pumped up as he was taking on the interest rate bulls. He was adamant about paying attention to what is happening NOW. There are people out there acting on the premise of a higher rate environment and making portfolio decision based on this concept. But we're not in a rising rate environment, this is still a downtrend. He asked everyone to raise their hand if they would have asked you 10 years ago where Japanese Interest rates were going, if you would have said higher? Everyone would have, himself (and myself) included. But they're not. The lesson is to wait for the turn. There is no need to anticipate and make decisions based on something that hasn't happened yet. I've been making a similar point for 6 months, so I knew right off the bat that this was going to be a killer event.

Another interesting point that Frank was making was being aware of what you think you know. In other words, "It's not what you know. It's what you think you know that ain't so". That sort of mentality really makes a lot of sense to me as I am someone who is constantly questioning the "common sense consensus" (i.e. U.S. Rates have to rise). Some other tidbits from that panel discussion came from Charles Trafton, CMT. His simple yet priceless point was to, "Manage Your Risk and Control your losses". This is something so easily forgotten by so many market participants that it cannot be restated enough times. My friend Brian Lund commented on Twitter joking that he hoped nobody paid to hear that. But truthfully, I think people should actually pay to be reminded of that everyday.

Correlations were also something that Trafton mentioned. You often find the financial media trying to invent correlations that aren't actually there. Jeff DeGraaf touched on this topic as well later that day. Just because something is moving more than usual while there is a specific news event that day or week doesn't mean that one has anything to do with the other. Trafton showed a chart of the quality of Rock Music over several decades compared to US Oil Production. It really is amazing how closely these two move together. Trafton says, "Beware of correlations without causation". This is a clever example that should really hit home to any journalists and financial media reporters reading through this summary.

Mike Murphy, also from Wellington, continued the panel discussion talking about how, "there is no single right way to make money in the market, there are many ways". In addition, "Successful investing is not just about capturing the upside, but about protecting yourself from the downside". Truer words have never been spoken. The fourth panelist Duke Jones, CMT of Merrill Lynch was hilarious. He told the story of back in the day when he was first studying for his Chartered Market Technician designation. His boss' boss approached him and said, "If you ever bring up a Head & Shoulders pattern, you're fired". So his note to self was the following:

• 1) Do not ever bring up a head and shoulders pattern

• 2) What is a head and shoulders pattern?

A few more points that Jones made was to keep an open mind in terms of your tools and analysis. His example was simply, "If all you have is a hammer, everything looks like a nail". He continued, "The best part about Technical analysis is that we've never had to restate a chart". Price is the only truth that is not an estimate and will never be revised. And these prices trend. It's much easier to be a part of the primary trend. He joked, "Never confuse genius with a bull market". Teixeira also touched on this telling the audience that he can't name a single great Japanese investor. Why? They've had the wind at their face for decades.

For the rest of Thursday morning and through lunch time we had a few breakout interactive sessions that included Dr. Ben Hunt on Information theory and Perry Kaufman who puts a nice quantitative spin on Market timing.

Perry Kaufman really was a rocket scientist... Learning a lot about pairs trading @MarketTechAssoc #MTA2014 learn more about markets @HVST
— Jeff Dorman (@jdorman81) April 3, 2014

  Some of the stuff Dr. Ben Hunt was talking about really got you thinking. There are what he calls "Known Knowns", which are things that we know that we know. We also know there are "Known Unknowns". That is to say, we know there are some things that we simply don't know. But there are also the "Unknown Unknowns", the ones that we don't know we don't know. This philosophical dilemma that we are constantly battling with as market participants is something that really made a lot of sense to me. He also discussed something that my good friend Josh Brown talks about a lot: the notion of not judging the contest, but rather judging the judges of the contest. Dr. Hunt put up an example of a Newspaper Beauty Contest where 10-15 women's faces were published and readers had to vote. Hunt called this the social media of its day. Readers had to vote, not on who was the prettiest, but who you thought everyone else thought was the prettiest. The results were driven by the crowd looking at the crowd. Great stuff to think about.   After lunch of Thursday, MTA President David Keller led a panel discussion on the 25th anniversary of the CMT designation. Included in the panel were Barry Sine, CMT, CFA, David Krell, CMT, and Ralph Acampora, CMT. A few interesting notes were the fact that 40% of MTA members today reside outside of the United States. This is becoming more and more of a global organization every day. A huge area of growth in new CMTs is coming from current CFA Charter holders who are realizing more and more that studying stocks and the market is a necessary compliment to their analysis of companies. In fact, Barry Sine was the one who the CFA institute asked to write the 75 pages of technical analysis that is currently in the CFA exam preparation material. With the wider acceptance of technical analysis, it should be no surprise that we are also seeing a similar shift in academia, where we are at a new all-time high in Technical Analysis courses, specifically at the MBA level.   Ralph Acampora, as usual, did not disappoint. He told all of his old stories that we've all heard a million times and continue to want to hear it, because they're that awesome. I've never met someone so proud of this organization and how far we have come as a technical analysis community. In 1933, the SEC came out detailing that stock analysis had to be based on sound fundamental principles. The next year Ben Graham and David Dodd of Columbia Business school authored "Security Analysis", the bible of fundamental analysis. In 1948, John Magee and Robert Edwards co-authored the Bible of Technical Analysis, "Technical Analysis of Stock Trends" . But the following year, in 1949, the SEC brought up John Magee on fraud charges for using chart to recommend stocks. This is a true story.  

"Magee did not have an MTA to back him up." - @Ralph_Acampora #mta2014 — Phil Pearlman (@ppearlman) April 3, 2014

  Fast forward to 1977 and John Magee received the MTA's annual award recognizing his contributions to technical analysis. Fast forward to December 2004 when Ralph Acampora, Barry Sine, a few other technicians and a room full of SEC and NYSE lawyers met at the New York Stock Exchange. At the time there was only one type of analyst. After that meeting, the SEC officially recognized that there were now two types of analysts: One is a Fundamental Analyst, who has a CFA and follows companies. The other is a Technical Analyst, who has a CMT, and follows stocks. This according to Ralph, is the most important date in modern technical analysis - December 17, 2004.   The panel discussion went on with these guys telling the story of that day. Towards the end of that meeting, one of the layers for the NYSE put a chart in Ralph's face and asked, "What is fact?". Ralph turns to him and responds, "Price is fact. Earnings are estimates and earnings get restated. You never restate a chart". The attorney said it's the best answer he'd ever heard. Barry Sine, who holds both the CFA and CMT designation is a practicing fundamental analyst. But he says that the there are some huge differences between the two organizations. Sine says that he doesn't see the huge amount of young people he sees at technician events at any of the CFA events. He also doesn't see the amount of enthusiasm that he sees from MTA events. In terms of innovation, Sine says there isn't any progress being made in fundamental analysis. In technical analysis, he sees tremendous innovation taking place every day, especially with new technology. Sine thinks that the CFA charter is becoming overly saturating. For example, there are currently 25,000 people sitting for the CFA exam in Singapore, but only 8000 jobs available in that market. The best quote:  

"If you want a job get your CFA. If you want to keep your job get your CMT"

  This was one of my favorite panel discussions. The focus of this year's symposium was Fusion Analysis, and incorporating both disciplines into your work. Throughout the entire event, I noticed a lot of presenters giving fundamental analysis a lot of credit. Although the occasional joke was made, all of the speakers were extremely respectful of both disciplines. When referring to technical analysis, Barry Sine said that, "sure it works in practice, but will never work in theory". David Krell said the most important thing you can do as a young market participant is to get your feet wet. Just buy 100 shares, "You will learn more from that one trade than anything else you can ever do". When David Keller was asked what he would tell young aspiring technicians is to, "Always be a student of the market", and I couldn't agree more.   The keynote presentation Thursday came from Ned Davis and Jeff DeGraaf. This is one of the ones I was looking forward to most as these are two of my favorite analysts that I have followed closely throughout my career. My friend Barry Ritholtz interviewed Ned Davis last year and I strongly suggest you listen go listen to it (see here). Davis started with the simple notion that, "Price is the equilibrium point between supply and demand". He then went on to call famous fundamentally-based market participant Warren Buffett, "A Sentiment Technician". Buffett's popular saying, "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”, is by definition a premise based on market sentiment, not at all fundamentals. Buffett says, "It's not that I like pessimism, it's that I like the value that pessimism produces". I thought this was a great concept that is important for all of us to recognize. Davis went on preaching a weight-of-the-evidence approach, as opposed to cherry picking to prove your point and view of the market. He says, "the great importance of technical analysis is the stop loss. That's the whole point of Technical Analysis - is having a stop loss"  

"We're in the business of making mistakes. Winners make small mistakes, losers make big mistakes" - Ned Davis #mta2014 @MarketTechAssoc — J.C. Parets (@allstarcharts) April 3, 2014

Jeff DeGraaf talked a lot about the process. He has a real problem with dual scaling something to prove your point. He says the financial media does this all the time. I couldn't agree more. A recent example of this that I saw was when the media was justifying the Palladium Breakout with the turmoil in Ukraine. I mean, really? Anyway, DeGraaf's example was his "money" indicator for Morgan Stanley Stock. Here is the chart he provided showing his indicator compared to $MS -

His point was that you can fit many indicators on a dual scale format to back up your thesis. Correlation analysis should be tested with a scatter plot and R squared analysis. Pictures like the one above can be deceiving. Here is what the "money" indicator actually is - Corn Futures. There obviously isn't any causation for a correlation between the two, yet the chart above might suggest otherwise. Here is the actual chart:

When talking about the difference between trend following and mean reverters, DeGraaf says that trend following works. Mean reversion is extremely difficult for career longevity. With respect to indicators, you can't look at the whole picture as one environment. Because it's not one environment, you have uptrends and downtrends, bull markets and bear markets. So DeGraaf uses a quantitative model to define which "regime" the market is in within a trend - bull or bear trend. Then based on which regime we're in, he adjusts how he uses certain indicators. He says that making these adjustments depending on uptrend and downtrends improves results. Ned Davis likes to use the relative strength in Financials as an indicator for the US Stock Market. DeGraaf actually said that he feels the relative strength in the Industrial sector is even more important than the Financials relative strength. I thought that was interesting. DeGraaf also talked about how not every indicator needs to give buy and sell signals. A lot of the indicators we look at can simply help to add and remove conviction which helps with position sizing and hedging strategies. That was an awesome point that I rarely hear mentioned. A good indicator he likes is the IPO Index vs the S&P500 to get a food feel fro the underlying credit environment. Larry McDonald on Friday touched on this with respect to the types of structure in new bond issues.

[caption id="attachment_17807" align="aligncenter" width="602"] Jonathan Krinsky, JC O'Hara, Dan Russo, Ari Wald[/caption]

A few more interesting thoughts that I took from the keynote presentation: DeGraaf back-tested breakouts in stocks with and without volume. And as it turns out, the breakouts without volume actually had better returns than those that were accompanied with volume. Regarding sentiment, DeGraaf sees a lot of noise in most of these sentiment polls. The reason is that the data is usually somewhere in the middle. For example a move from 40% bulls to 50% has zero statistical value. Regression analysis with all the data from the middle has a very low R squared value. But if you take out the middle a just rely on the outliers, you start to get a skew. I thought that was interesting. With respect to earnings estimates, DeGraaf was very adamant about how much energy is wasted on trying to be right on earnings. He says you shouldn't care about whether earnings are $1.10 or $1.20, it makes no difference. It's the multiple that you need to get right.

Ned Davis mentioned that mid-term elections year historically don't give the best returns. In fact, the average decline into mid-term year lows is a 21% decline. But the average gain 2 years later is 60% from that mid-term low. He says a correction here in the stock market would be a great buying opportunity. So he is looking for signals to call that correction but not seeing it yet. DeGraaf is also looking for a correction, but he is more in the consolidation camp that would come with a 3-5% decline. This would just be a pause within bullish conditions. The trend is good, credit stuff is good, but this consolation should frustrate people for 3 months and then head higher. With respect to the bond market, DeGraaf likes to focus on 2yr yields. He says that if 2yr yields cannot continue to ascend here, yields are going to be in trouble. Since the focus of this year's symposium is Fusion Analysis, here were some tips from the panel:

• You have a responsibility to report more than opinion - Don't make the data fit your conclusion
• Do rigorous and proper quantitative and statistical work - But be creative in your thinking
• Regime Analysis can differentiate and turn mediocrity into gems
• Outliers are often the source of the best information - But think same sizes
• Don't rely on visual interpretation for a systems profitability - Test, Test, Test
• Behavioral biases exist in fundamentals - exploit it
• Don't be afraid to use technical tools with data other than price
• Be disciplined

Thursday Night was the Gala and Awards dinner. Congratulations to my friends Charlie Bilello and Michael Gayed for winning the 2014 Charles Dow Award. You can find their white paper here titled, "An Intermarket Approach to Beta Rotation." Bob Pisani's speech was killer. He was very passionate about what we do as technicians and I was very impressed with his enthusiasm.

Bob Pisani has a career ahead of him as an after-dinner speaker, seriously killing it at #MTA2014 — Jon Boorman, CMT (@JBoorman) April 4, 2014

It was overall a great night. I really had a blast. Here are some of the pictures from the aerialist dancers who performed for us throughout the evening:

***

Friday morning was my panel discussion with Ralph Acampora, Charlie Bilello, Greg Harmon and Phil Pearlman Moderating. The panel was titled, "A Visual Toolkit for Investing: The Rise of Charting in Social Media". I will make sure to publish the video once it's out. But in the meantime, please feel free to watch the panel discussion from this year's New York Trader's Expo where we were part of a similar discussion (See Here). Here were some of the comments from Friday morning:

@ppearlman bringing the enthusiasm this morning at #MTA2014 mediating a panel with @allstarcharts @Ralph_Acampora @harmongreg @MktOutperform

— Antonella Carbonaro (@AC_antonella) April 4, 2014

@MktOutperform says if u put urself out there on $twtr gonna get neg feedback but have 2 be able 2 ignore the noise just like mrkt #MTA2014 — Karl Snyder, CMT (@snyder_karl) April 4, 2014

If posting on social media your getting lots of neg feedback ur probably on 2 something per @allstarcharts & @ppearlman Agree #MTA2014 — Karl Snyder, CMT (@snyder_karl) April 4, 2014

@allstarcharts schooling Louise Yamada and Gail Dudack on Twitter at #MTA2014 - awesome! http://t.co/HScR1op5K8 — Greg Harmon, CMT (@harmongreg) April 4, 2014

  Later on that morning Tony Dwyer and Jurrien Trimmer, CMT led the Strategist panel. Dwyer got going by discussing the fact that an inverted yield curve has led every single recession in the United States. So based on his math, we are 4.5 years at a minimum from the next recession. Trimmer, from Fidelity, really stressed the high yield index vs the S&P500 and the very high correlation between the two. John Murphy later on that day mentioned something similar, except by using a ratio between Treasury bonds and High Yields Bonds for a better correlation with the S&P500. He really appreciates that charts simply display information in graphical form. You can relate it to whatever language a person is speaking.   I was really looking forward to my pal Larry McDonald's presentation. I first read his book back in 2009 - A Colossal Failure of Common Sense, which gives an inside look at the fall of Lehman Brothers. I really enjoyed that book when I first read it, so it's nice to now know Larry personally and also get to listen to him present in front of a room full of technicians. He sees there is a big differences in the size of markets since 2007. But the difference comes in the debt market, which is up to $162 Trillion from just $123 Trillion, while equities are around $65-66 Trillion today from $64 Trillion in 2007. With regards to volatility, he says that the $VIX has spent more days above 30 over the last 5 years than it did in the previous 17 years combined. One of indicators that Larry shared with the audience was the Emerging Markets sell signal. When $JPM 5-yr CDS crosses above HSBC CDS, sell Emerging Markets. Same thing when Morgan Stanley 5-yr CDS crosses above Standard Charter CDS = sell EM. This worked well in May of 2013 and most recently in January 16, 2014 (just before $EEM lost 12% very quickly). Something he mentioned to me at the Gala Thursday night was looking at the percent of wall street analysts with a specific outlook. It usually pays to take the other side of that. Coming into 2014, the outlook for Yields was up towards 3.6% on the 10yr and they were all bearish Gold. Well the fact that Bonds and Gold did so well in the first quarter should be no surprise as the consensus sell side got it wrong again. When I asked him to talk about bonds and where he thinks they are going, he said 2.8% on the 10yr is a big level. If that gets broken to the upside we should see 3% very quickly. If we break 3% it will be a big event for the bond market. Until then, yields still in a downtrend.

“Nothing in this world can so violently distort a man’s judgment than the sight of his neighbor getting rich.” -- J.P. Morgan, 1907

Finally John Murphy came on to the stage to finish up this year's symposium. This is the Father of Intermarket analysis and the author of some of my favorite books, so this truly was a treat for me. He joked (but was serious) that when he originally brought interemarket analysis to the attention of the MTA, they rejected his paper. Fast forward to last week and Murphy was receiving the MTA's lifetime achievement award. Murphy says that intermarket analysis combines all global markets into a unified and coherent whole. Intermarket analysis bridges the gap between fundamental, economic and technical analysis. And finally, intermarket adds a new dimension to traditional technical analysis.

Charts never lie... RT @allstarcharts "Charts are a leading indicator of fundamental analysis" - John Murphy #MTA2014 @MarketTechAssoc — Abigail Doolittle (@TheChartress) April 4, 2014

I've always noticed that John Murphy and I view markets in a very similar way. But after this presentation is when I truly realized what a Murphy Disciple I really am. We might not always agree when it comes to our conclusions, but the way we look at things is very similar, scary almost. He started out the presentation by calling the Secular Bull market in Gold over. He points to the negative correlation between gold and stocks over the past 35 years. When gold peaked in 1980 and started its 20-year decline, Stocks were just beginning their epic secular bull market. Once that peaked and stocks entered into a secular bear market in 2000, Gold was just reversing higher rallying from the $200's to up above $1900/oz. The recent breakout in the S&P500 above the 2000 and 2007 peaks is what leads him to believe that the secular bear market in stocks is over and secular bull market in gold is also over.

The rising dollar is generally not good for Gold. Murphy thinks that if the US Dollar rallies from here, it should mark the end of this short-term gold rally:

Something interesting that Murphy mentioned was the fact that agricultural markets tend to lead a commodities rally. This isn't something that I had ever run the numbers on. But think about it, as great as commodities have done this year (on an equal-weighted index), the most strength has come from Coffee, Corn, Cocoa, Wheat, etc. So I thought this was a fascinating concept that I will definitely look into in my work going forward. Here is the chart of Agricultural commodities diverging from the base Metals to start the year:

He says that China is the biggest importer of commodities and therefore China is the reason that commodities have been so weak over the past few years. More specifically China imports 40% of Copper in the world. So these two markets have been very closely tied together. Murphy suggests that since the Yuan depegged from the US Dollar in 2005, the Chinese currency has gone straight up. But in the first quarter the Yuan is down big time as Copper prices also fell, "They plunged together".

The next part of John Muphy's presentation focused on what he refers to as, "Global Linkages":

1) Euro direction influences stock performance

2) Merging Market Assets are Bouncing Off Chart Support

3) Weak Yen Boosts Japanese Stocks in Battle With Deflation

Here is the Euro testing a Major Trendline from the top in 2008 (which we have looked at here before):

He specifically points to the trend in the Euro impacting Eurozone stock performance. If you look at a chart of $EZU/$SPX which is European stocks vs US Stocks and lay it over a chart of the Euro and you get basically the same chart. But when it comes to Japan, we see something much different. The strength in the Nikkei is tied with weakness in the Japanese Yen. Here is his chart showing that inverse correlation since the Yen started to fall hard at the end of 2012. He emphasized how in order to take advantage of the rise in Japanese Stocks, you must hedge against the currency using an ETF like $DXJ which does it for you. This gives you a much better returns that $EWJ which is unhedged.

The final part of Murphy's presentation focused on the relationship between US Stocks and Bonds. He says this relationship currently favors stocks as the Stock/Bond ratio has now broken a 13-year resistance line.

Stocks and Bonds are one of the trickiest relationships to study because it changes. Stocks and bonds moving in opposite directions is deflationary behavior. Last time we saw this was in the 1930s. Here is a chart showing how previous peaks in bond prices have been good for stocks:

I thought Murphy gave an excellent intermarket focused presentation. He is a big fan of ETFs as they have revolutionized the intermarket field. Prior to ETFs, you could only take advantage of most of this analysis through the futures market. Some of his current thoughts are why the economic community ignores yield curve inversion even through it consistently predicts recessions. Also, we are currently no where near and inverted yield curve (to Tony Dwyer's earlier point), so there is no impending threat of a recession. He suggests watching the Cyclicals vs Staples ratio as there is a positive correlation there with the US Stock Market. He believes we are due for a market correction here as utilities and energy are leading and he is noticing money moving towards staples. They are currency talking about doing QE out in Europe, which would be bearish for their currency. This would be bullish for the US Dollar (as Euro = 57% of US Dollar Index) and would therefore be bearish for European stocks.

I could have definitely gone for another day of charts at the symposium #MTA2014 great event as always. Well done @MarketTechAssoc

— J.C. Parets (@allstarcharts) April 5, 2014

Every year I say the same thing, how are they possibly going to make next year's symposium even better. And every year the MTA is able to pull it off. I learn so much from this event every time I've gone, but as always the best part of the entire symposium experience has to be the people. I've made such great friends with people all over the world through events like this. As our global markets become more and more interrelated and the distribution and consumption of information continues to speed up, your location becomes less important. I think events like this remind us of this evolution in our society, and it is something we shouldn't ignore. I met guys for the first time this week that I've been communicating with for years. Arthur Hill of Stockcharts.com for example, is someone whose work I've been reading for close to 10 years. I never once met him, but after lunch one day this week, it was like we had known each other forever. I now have a friend in Belgium! It's things like this that make it all worth it.

I hope this summary helps to shed some light on our event and pushes you towards coming next year. If you have any questions on last week or on any upcoming events, please feel free to contact me at info@eaglebaycapital.com and you can also follow me on Stocktwits and Twitter @allstarcharts