Louise Yamada: Don’t “venture into the waters”

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While one support level after the other of the major US stock market indices is being breached, I have just come across a CNBC interview with top-ranked Louise Yamada of Technical Research Advisors. Louise’s track record is just too good to be ignored, especially when she mentions possible targets of 4,000 and 400 on the Dow Jones Industrial Average and the S&P 500 Index respectively. She concludes: “We would not venture into the waters … like trying to catch a falling sword”.

My belief is that if stocks are unsuccessful in rallying off the current massively oversold levels, any notion of the markets simply undercutting the previous lows before bottoming out is off the table and the outlook takes on a distinctly appaling color.

Please click on the image below to view the video clip.

Source: CNBC,  March 2, 2009 (hat tip: The Technical Take).

For those interested in what Louise said in July 2008, click here for a top-class interview with Kate Welling.

 

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8 comments to Louise Yamada: Don’t “venture into the waters”

  • Keith - Hermosa

    I cannot believe that anyone believes in this financial astrology. You don’t need to read the bumps on the skull when the mouth is talking. Look at the numbers, not the pretty shapes they create on a graph. Unbelievable.

  • Doug

    I assume by “financial astrology” Keith means technical analysis. As in cooking, there are all levels of skill; some folks burn beans, others create exquisite meals. There is no worse “financial astrology” than the mess that goes by the name “fundamental analysis.” Let’s see, what did p/e, peg and price to book value ratios tell us about the future of stocks in, say, 2007? Oil was overpriced at $40 in 2006, according to the fundies, but that didn’t stop it from going to $147, did it? What kind of analysis could have gotten you long oil at $40 and short oil at $135, at the right time? Certainly not FA. Even the great exemplar of FA, Warren Buffet, has see his flagship cut in half this year, and made some premature and boneheaded bottom calls. People who deride TA generally know almost nothing about it. FA is a form of “rational storytelling” which will succeed in rising markets (a rising tide lifts all boats) but lose money in static and falling markets. The simple idea that you can take already stale numbers (10Qs are the most recent, 10Ks are worse) and look at product lines, supply/demand predictions (talk about astrology!), management qualities and come to anything but a dice roll on the price of a stock or commodity 3 months into the future, now that is more than astrology, that’s just voodoo. Give me the charts, prices will either trend or revert to the mean, and TA has many tools that can help get an edge on those events. Money management completes the tool chest.

  • Let’s face it, if either TA or FA was 100% accurate, the alternative would no longer exist & we would all be rich.

    What seems reasonable to state at this point is that not all the cockroaches have been exposed & therefore there is still undefined risk in current (or any) prices. This is compounded by the uncertainty of which entities the feds may choose to bail & which they might let fail.

    Except hoping to catch a trend, who is betting the house, either way, in this market?

  • Doug

    First of all, something need not be 100% or even 50% accurate to be very profitable (assuming profitability is the goal and not “being right”). The problem with FA (assuming no money management, since money management is effectively TA and not FA) is that it posits a value for an instrument: X is a good price, 0.50 X is twice as good a price, etc. Two times X is too expensive and either must be sold or shorted. It asks the investor to average down when prices fall and to sell when prices rise. TA says FA value is nonsense, the only value that matters is market value. If you buy at X and sell at 3X you have done well. If you buy at X and sell at 0.80 X you have also done well. But if you buy at X and buy more at 0.50 X and double your position at 0.25 X (See Bear Stearns, Lehman, Citi, GE) then you have %$#$ed up big time.

    TA ignores pundits, news stories, rumors, suspicions, brothers-in-law and stale data, and resolves its issues on the only bases that matters: time, price, momentum, volume, money management. Great fortunes have been made and are being made using these tools, even at 40%, or 30% “accuracy”, whatever that means. But like any skill (see tennis, golf, computer coding), it requires the minimum 10,000 hours of directed practice (See Gladwell, Outliers) before even initial mastery is achieved. That’s 5 years of 40 hours a week, roughly. Let’s face it, 99% of people are fundamentally lazy (see Madoff’s investors). Most people want to look at it for 30 minutes, see that it doesn’t “work” (that is, they can’t do it), and broadcast their opinion to the world.

    People have asked me to show them how to trade and I say, sure. I give them a list of five books (~$250) to buy and read first, so they can have the minimum vocabulary, and then say I will show them everything I know. For free. Guess what? Nobody has ever even bought the books. Several have said, “no, I don’t want to learn all of that, some of those books are 400 pages long. I just want to learn a few winning setups, you know, the good stuff, and trade a few hours a week, just to get a little extra income.”

    Sure, why not. Why don’t you just learn a couple of great golf shots (30 degree wedge shots, how to fade a 5 iron) and enter a few pro tournaments a year, just to pick up 10 or 20 grand a year, off the pros? I’m sure Tiger and Phil would oblige.

  • Frank W

    The reason that fundamental analysis does not work very well is that the fundamentals change over time — sometimes from day to day. Recall the fundamentals for oil back in 2007 and compare them with those of today. Similarly, look at earnings projections for the S&P 500 over 2008. They drop like a brick, giving ever lower fair value estimates for the S&P 500. By the same token, technical analysis is not perfect either. All too often it is ambiguous. Then again, after a certain time passes, the market corners itself and has only one way to go. That’s when you know what to do, and there is enough time to do it. As for Yamada’s targets for the DJIA and S&P 500, I get basically the same numbers using a totally different system, namely Elliott Wave Theory, which is the most sophisticated method going and the hardest to apply. What is worrying is the projected yearly earnings to 2Q9. It is $14.36, giving a fair value estimate for the S&P 500 of 215. This is unnerving as it is so far out of line with technical analyses. I can’t ever remember when fundamental analysis ever provided a worse figure than technical analysis. The bottom line is that it is not a question of either fundamental analysis or technical analysis. It is both. Any knowledgeable technician will tell you that. He will advise you to look at your charts, then look at the fundamentals and then look back at your charts. The fundamentals can be helpful in sorting out which way the market is headed.

  • Doug

    Frank,

    The FA vs TA argument goes back decades, but I think TA has trumped FA completely. FA was practically useless in the late 1990s (quick, what was the value of AMZN, or YHOO, on fundies in 1997?) and even more useless in 2008 (recall Cramer’s several calls that Bear Stearns and Lehman were screaming buys at certain points). Pure TA would have its speculators not only out of long positions in those names, but actively short. Not only does FA information change rapidly, it starts out stale (reported numbers), and isoften massaged or fraudulent (see GE’s decades of smoothed earnings, see Enron’s bogus trading floors).

    More interesting is the TA vs TA argument. To wit, how one uses TA will determine whether it is a useful or useless (and harmful) set of tools. Put simply, if a TA tool (say, a pattern or an oscillator cross) is used predictively (if A happens then B must happen, load the boat), then pain and heartache will ensue. There is so much chaos (in the mathematical, Mandelbrotian sense) in the movements of the markets that predicting a move based on chaotic phenomena is like betting on which bird on a wire will fly away first, and how far.

    Most people who know little to nothing about TA go off on the idea that TA is about people looking for heads and shoulders, cups and handles, an abandoned baby pattern or a shooting star, and measuring the head to the scapula, doubling it and naming a top or bottom. Most Elliot Wavers fall into this trap, in my experience, although I think Elliot Wave / Chaos Theory is, in fact, correct. If you put 10 EW adherents in a room for 10 minutes with a chart you’ll get 10 different wave counts; leave them there for a half hour and the number will rise to 30. But it is clear to a purblind man that the market moves in waves and never in a straight line.

    However, if TA is used “reactively”, it’s very clear that the tools can be very effective. For example, if a certain set of conditions occur (a moving avg cross, an oscillator reading, along with certain levels of market vol), entry is long here (size dependent on prudent money mgt) with a hard stop loss here (now based on money mgt AND market volatility measurements) with targets placed here (again, based on market volatility measurements) with a time stop. One is simply reacting to market phenomena with a mechanical-style, edge-seeking system and utilizing proper risk controls. The systems used (channel breakouts, reversion to the mean) can be remarkably simple.

    I would disagree with the idea that any knowledgeable technician would have to check with any fundamentals. Some might. Many CTAs work mechanical and discretionary methods which provide for no fundamental input. In fact, many of the trend following systems follow large sets of instruments (up to 50 or 60), taking signals based on what I outlined with strict mathematical management rules. Not only do they not use any FA information, they could not use any FA information.

  • Frank W

    As I said, Elliott Wave Theory is difficult to apply. It is even more difficult to understand. But if you are going to study it, I advise you to read Frost and Prechter’s “The Elliott Wave Theory”. It is very short and not murky. You do not need to read hundreds of pages in dozens of books. In particular, do NOT read Elliott’s stuff. It is full of the astrology and mysticism that Keith abhors, including pictures of things like pyramids with the eye on top. Frost and Prechter took all that out. They turned this theory into a kind of science. As for putting a number of Elliott Wave Theorists into a room and letting them work for half and hour and noting that they get different results, it’s just like Doug said further above. A few people know what they are doing, while most people don’t. Take Prechter, for example. When he worked as an analyst in the back room of Merrill Lynch, he did brilliant work. He gained stature, so he went on his own. He entered the lecture circuit and started grandstanding. His work took second place. He took short cuts. Did eyeball analyses instead of counting the waves, which is designed to insure that the analysis is wrong. The last time I read anything by him was in the early eighties. By this time he had become a minor god and charged big bucks an hour to talk with you on the phone. And his work had become garbage. People who apply technical analysis to futures trading mostly don’t look at the fundamentals, but those who apply it to the stock market typically do. You don’t have to, but I do. I am not going to analyze with one hand tied behind my back.

  • re: Keith – Hermosa

    You could be a contrarian if you like..

    I keep a little profit last year as using TA.

    See who will last to the bank…..

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