Download Coping with Analysis in the Age of QE

Coping with Analysis in
the Age of QE
Michael Kahn, CMT
Michael Kahn Research LLC
November 2012
Save us Obi Ben Bernanke
Ben Lightyear.
QE to infinity and beyond!
Have another shot
of Bernanke juice.
Ben Bernanke as a child
Who am I?
Chartered Market Technician (CMT)

trained and certified in market analysis

late addition – not a numbers or systems guy
Columnist – Barron's Online
Newsletter Editor – Quick Takes Pro
Former charting software designer
Social Media Marketing wannabe
…and beaten up enough by the markets
What do I do for clients?
Help investors assess risk and reward.
no crystal ball
no tea leaves
no chicken entrails
What is Technical Analysis?
A method of evaluating securities by
analyzing statistics generated by market
activity.
-- from the Market Technicians Association website
What is Fundamental Analysis?
A method of evaluating a security that
entails attempting to measure its intrinsic
value by examining related economic,
financial and other qualitative and
quantitative factors.
-- from the CFA Institute website
(and Investopedia)
What do they have in common?
Neither one can handle conditions that
cause the market to be restricted,
manipulated and otherwise not free.
Cliché time
It is time to:
 Think outside the box
 Bend but do not break
 See the forest for the trees
 Go with the flow
-- Are you getting my drift?
Key Points

My bias – I use charts and believe the
market knows more than I do.

No matter what happens, people tend to
do similar things when faced with similar
situations.

This is not brain surgery
(with apologies to all the quants out there)
People

People’s behavior is the basis for chart
patterns.

Interpreting those patterns in 2007 was
different than it was in 1997.

Interpreting those patterns in 2012 is
different than it was in 2007
The Big Question
Does market analysis work anymore?
The Big Question
Does market analysis work anymore?
Yes! (mostly)
Adapt
An analogy:
 Walls still hold up a roof.
 Walls are now made of stone, not wood.
 Regular hammers and nails won’t work.
…….Try masonry nails. Maybe glue.
The concept is the same.
The implementation is different.
What is QE?
Quantitative easing (from Wikipedia)
An unconventional monetary policy used by
central banks to stimulate the national
economy…. A centrAl bAnk implements
quantitative easing by buying financial
assets from commercial banks and other
private institutions with newly created
money in order to inject… … … … … … …
… … … … … … … … ZZZZzzzzz……..
What is QE?

I don’t care
What is QE?

I don’t care for the dirty details and
logic behind it.

All I need to know is that it is a
mechanism to provide a ton of cash
into the market.
What is QE?

I don’t care for the dirty details and
logic behind it.

All I need to know is that it is a
mechanism to provide a ton of cash
into the market.

And where there is liquidity, there are
rising stock prices.
Proof
various shenanigans
and jawboning
ECB LTRO
announced
China stimulus too!
* Quantitative Easing * Long-Term Refinancing Operation
More recent proof
More recent proof
More recent proof
More recent proof
So, how do we cope?
A little more gut
Did not follow through
Sentiment
AAII survey 70% bears
Try a little more bottom up
Try a little more bottom up
Who was in crisis? Financials..
Now suddenly outperforming.
Ratios
Ratios
Ratios
Leadership
Stuff that doesn’t work
Stuff that doesn’t work
Moving average crossovers
Stuff that doesn’t work
Stuff that doesn’t work
Volume
Stuff that doesn’t work
Well, it works in some applications
Volume
Stuff that doesn’t work
Well, it works in some applications
Volume
Stuff that doesn’t work
Well, it works in some applications
Stuff that doesn’t work
Stuff that doesn’t work
Bonds
Stuff that doesn’t work
Bonds
VIX
Case Study
Case Study
Now you are messing with me!
Opportunities are not cut and dry
If you don’t see anything, it’s not there.
Keeping it useful

The focus is on action, not prediction.
I’d rather be right than President.
- Sen. Barry Goldwater
Summary

New normal (groan)

Sentiment plays a bigger role

Bernanke Put (trend is up)…
…or is it?
Summary

Diminishing returns from QE

We will emerge from this marketmeddling but with slightly different
tools of the trade.

Human behavior will not change
The real reason we do this:
To make the buy, sell or hold
decision.
Not to predict the future
Don’t - Analysis Paralysis (groan)
- Get hung up on precision
Do – K.I.S.S.
– Spirit of the analysis,
not the letter of the law
(sorry again, quants)
Technical analysis is a windsock,
not a crystal ball.
- Carl Swenlin
Quick Takes Pro
Getting Technical
Trading Strategies
www.QuickTakesPro.com
www.Barrons.com
www.MarketWatch.com
Books (www.QuickTakesPro.com/education.html)
Beginner’s Guide to Charting Financial Markets
Technical Analysis: Plain and Simple – 3nd edition
Real World Technical Analysis
…plus my favorites from other authors
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