The full title of this book is Deemer on Technical Analysis: Expert Insights on Timing the Market and Profiting in the Long Run by Walter Deemer and Susan Cragin (2012).
Deemer had an entire career in Technical Analysis and worked with the who’s who of the industry. He started work at Merrill Lynch and worked under Bob Farrell (Chief Market Analyst), then he moved to Gerry Tsai’s Manhattan Fund when the Manhattan Fund first got started, followed by heading the Technical Department at Putnam. He then set up his own firm Deemer Technical Research, and was hired by the Putnam fund managers. He was also a past President of the Market Technicians Association (MTA).
The best takeaway I had from the book is the importance of avoiding the drawdowns, even at the expense of missing the good times. Deemer quoted a study by Gary Fritz which showed that if you avoided both the 20 worst and best weeks, you would still beat the market, and if you avoided the 20 worst weeks, you would make a ton of money. The key to successful trading is to avoid mistakes (in not following your trading plan), because mistakes lead to losses. Avoiding losses is the key. However many times, you might think that you want to take a risky trade (or one that your trading plan disallows) because you fear you would miss out on potential gains. Gary Fritz’s conclusion meant that the possibility of missing a good trade is not a good reason for taking a risky trade or for not following your trading plan. This helps me to better follow my trading plan and be more aggressive in avoiding higher risk setups.
The book is good from a breadth perspective. It touches on a whole slew of different charts and indicators that a technical analyst looks at, but it doesn’t go in-depth. A number of the indicators shared were indicators that Deemer had used previously but are no longer working. He also shares indicators that he is interested in but has not figured out how to put to use.
I would love for the book to have some case studies on his market calls. Deemer highlighted that he made some good calls at Putnam almost right at the turning points. While the story is impressive, I would much prefer to learn how he did it, what he looked at etc. to learn how to apply in the current context.
Time the Market to Avoid the Bad Times, Even at the Expense of Missing the Good Times
- From January 1, 1990 to May 20, 2011, S&P 500 gained 278%.
- If you miss the 20 best weeks, you would make -1.3%.
- If you avoided the 20 worst weeks, you would make 1,737%
- If you avoided the 20 worst weeks AND you miss the 20 best weeks, you would make 380%.
- Kondratieff Wave
- Long-term cycle of boom and bust lasting ~54 years (trough to trough)
- We are now heading into a Kondratieff winter, where the world is going from a period of exuberance, to a period of pessimism.
- Four-year (Kitchin) Cycle
- Market lows occur every ~4 years. Market peaks are not regular.
- In all the 3 instances where the four-year-cycle low occurred more than four years after the prior low, all ended very badly (May 1962, October 1987, March 2009)
- Presidential Cycle / Sell in May / Elliott Waves
- Not reliable.
Look Out for Breakaway Momentum at the Start of a New Bull Market
- Really strong momentum is found only at the beginning of a really strong move — a new bull market or a new intermediate up-leg within a bull market.
- Breakaway momentum occurs when 10-day total advances on the NYSE are greater than 1.97 times 10-day total NYSE declines.
- It is a relatively uncommon phenomenon, occurring ~20 times since World War II. The most recent times this was detected was in March, July, and September 2009.
The Stock Market Leads the Economy
- The stock market very often generates breakaway momentum three months before the end of a recession (as later determined by NBER).
Use All-Time Highs / Relative Strength to Find the New Market Leaders In a New Bull Market
- The leadership in a new bull market telegraphs its intentions by generating relative strength toward the end of the prior bear market.
- Buy stocks that make new all-time highs the quickest. Such stocks have (1) resisted the decline because it has to be close enough to its old all-time high to make a new one, and (2) it then had enough strength to get over the old high.
- This means that it was showing relative strength both over the preceding bear market and at the beginning of the new bull market. Any stock that makes a new all-time high at the beginning of a bull market is therefore displaying well-above-average long-term relative strength — and any stock that generates well-above-average long-term relative strength at teh beginning of a bull market is very likely to lead the entire bull market.
- This works pretty well at the beginning of an intermediate rally too.
How to Spot When a Fad Group Has Run Its Course
- When an IPO in a fad group trades below its offering price (not opening price) on settlement day, the fad has run its course.
- The logic here is that when settlement day comes (currently, is in 3 days), the free ride for people who got in on the IPO is over — and if people taking advantage of the free ride aren’t making money at that time, it’s a clear indication that the game in that particular fad group is over.
Margin Debt Indicators Don’t Work Anymore
- There are now so many other ways to leverage positions (futures, options, leveraged ETFs, etc.) that margin debt has fallen by the wayside as a measurement (of excessive speculative activity).
Pay Attention When Indicators Exceed Normal Bounds
- Exception analysis is the idea of following many indicators, which most market analysts do. When the indicators are within normal bounds, ignore them. But when the indicators exceed normal bounds in one direction or the other, pay attention.
- Some indicators send messages only every couple of years, but when they send a message, it can be an extremely important one.
- Financial: First to move, leading sector
- Materials: Own if economy is going boom. Avoid if economy is going to tank.
- Industrials: Own if economy is going to boom. Avoid if economy is going to tank.
- Consumer discretionary: Less volatile
- Consumer staples: Defensive.
- Energy: Last to move, lagging sector.
How Best To Deal With Shake-Outs
- Part of the problem with bottoms is that, yes, they always come back, but sometimes they go down further before they come back. And what if you have no powder to burn, that is, no uncommitted assets to invest, before the next run-up?
- Even very sophisticated institutional investors have a rough time with this. It’s just the nature of the beast.
- The best way to deal with the shakeout is to have dealt effectively with the preceding top, leaving some dry powder for the next. Barring that, investors can only attempt to remain emotionally detached during the gut-wrenching shake-outs at the bottoms.
Gold is a Bet on Currency Devaluation
- When you buy gold, you are anticipating a currency devaluation, and you are also anticipating that gold will continue to be perceived as the best alternative to paper currency.
- The question to ask is not how high is gold going to go; the question to ask is how low is the dollar going to go.
- Gold usually spends a short time at the top, but takes a long, long time to develop the bottom.
- Mining stocks usually lead the underlying commodity.
- Stocks at all-time highs: http://www2.barchart.com/stocks/athigh.php
- Charts: http://www.decisionpoint.com
- Charts: http://www.tc2000.com/
- Charts: http://www.thechartstore.com/
- Sentiment: http://www.sentimentrader.com/