Technical Analysis and the Data

I know that I have been hitting your email in box harder than usual so far in 2022. I have often told folks that in this business there are truly only a few months a year where the workload is extremely high, and these times are almost always during times of uncertainty and market volatility. I think that it is quite evident that we are in these times now hence another email.

The majority of my work and discussions focusses on the fundamentals of research. By fundamentals I am referring to looking at a stock’s price to determine whether it is trading higher or lower than its present value. We look at the overall economy and the strength of the industry that the company lies. Finally, you boil this down to the company's revenues, profit margins, earnings, and future growth to determine a price target and fair value. The other method I use is referred to as technical analysis. Technical analysis is the art and science of forecasting the direction of prices through an analysis of historical market data.

That is what I am writing about today.

Way back in 1995 I got to travel to New York and meet Louise Yamada. Louise was the Managing Director and Head of Technical Research for 25 years at the firm where I was employed, and she became quite famous for her many predictions on the market earning her the well-deserved moniker of legend. We did not have the computer or printer technology that we do today and as a result much of technical analysis was done on paper with colored pens and highlighters to mark specific points in history that could be used to guess the direction of the markets in the near future. As a result, Louise’s entire office will wall to wall charts taped and stapled to all four walls. I was in Technical Analysis Mecca.

Since then, the growth in technical analysis tools has grown at a rate that is beyond data. Nearly every firm in the world has a technical analyst or team in their employ. Here at Redfish, I use the firm fsInsight which is a FundStrat company. The head of technical analysis there is Brian Rauscher, CFA (Chartered Financial Analysis). It is the work of Brian that you often hear me quoting when we have discussions about the market. I wanted to give you a few bullet points from his latest research that hit my inbox last night.

I have related Brian’s opinion that the markets will be extremely choppy in the first half of the year several times. We are certainly seeing that! In addition to the Covid related numbers that have fueled the majority of the market moves we are now adding in elevated inflation readings, rising interest rates, and constant Federal Reserve Board ruminations. This is certainly a recipe for volatility. Brian reminds us in his letter that his goal is to rely on objective tools and diminish the level of emotional decision making which often leads to poor decision making. It is during these times of market stress that we need to focus more than ever on the data and not our feelings when we look at the markets or our statements.

The number of folks who are feeling as if we are headed for disaster is nearing ten-year highs as I shared with you in a letter not too long ago. This has driven the bears into a state of euphoria as they can finally say “I told you so!”. According to Brian, the bears are claiming that the current rate of inflation is going to be structural and long lasting and not transitory, as the labor market is tight, the Fed is behind the curve, rates will surge upward, valuation multiples will need to compress, and the current profitable cycle that businesses are in will come to an end.

But what do Brian's charts tell us? It paints quite a different picture.

Brian’s data driven analysis is showing a flip to bullishness and that a trading bottom occurred on January 24th. He does admit that we will see continued high levels of volatility, which is a scary time for investors...but don’t let your emotions rule the decision-making part of your brain. Brian is advising us all to remain patient in this choppiness. The entire first half of the year will be challenging. He also still feels strongly that the second half of the year will see the stock market rally around 22%. Use the choppiness to your advantage.