Coping with Coping with Analysis in the Age Analysis in the Age

of QEof QE

Michael Kahn, CMTMichael Kahn, CMTMichael Kahn Research LLC Michael Kahn Research LLC

November 2012November 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?Who am I?

Chartered Market Technician (CMT)Chartered Market Technician (CMT) trained and certified in market trained and certified in market

analysisanalysis late addition – not a numbers or late addition – not a numbers or

systems guysystems guy

Columnist – Barron's OnlineColumnist – Barron's OnlineNewsletter Editor – Quick Takes ProNewsletter Editor – Quick Takes ProFormer charting software designerFormer charting software designerSocial Media Marketing wannabeSocial Media Marketing wannabe

……and beaten up enough by the marketsand beaten up enough by the markets

What do I do for clients?What do I do for clients?

Help investors assess risk and Help investors assess risk and reward.reward.

no crystal ballno crystal ball

no tea leavesno tea leaves

no chicken entrailsno chicken entrails

What is Technical Analysis?What is Technical Analysis?

A method of evaluating securities A method of evaluating securities by analyzing statistics generated by by analyzing statistics generated by market activity. market activity.

-- from the Market Technicians Association -- from the Market Technicians Association websitewebsite

What is Fundamental Analysis?What is Fundamental Analysis?

A method of evaluating a security A method of evaluating a security that entails attempting to that entails attempting to measure its intrinsic value by measure its intrinsic value by examining related economic, examining related economic, financial and other qualitative and financial and other qualitative and quantitative factors.quantitative factors.

-- from the CFA Institute website-- from the CFA Institute website

(and Investopedia)(and Investopedia)

What do they have in common?What do they have in common?

Neither one can handle Neither one can handle conditions that cause the conditions that cause the market to be restricted, market to be restricted, manipulated and otherwise not manipulated and otherwise not free.free.

Cliché timeCliché time

It is time to:It is time to: Think outside the boxThink outside the box Bend but do not breakBend but do not break See the forest for the treesSee the forest for the trees Go with the flowGo with the flow

-- Are you getting my drift?-- Are you getting my drift?

Key PointsKey Points

My bias – I use charts and believe My bias – I use charts and believe the market knows more than I the market knows more than I do.do.

No matter what happens, people No matter what happens, people tend to do similar things when tend to do similar things when faced with similar situations. faced with similar situations.

This is not brain surgery This is not brain surgery (with apologies to all the quants out there)(with apologies to all the quants out there)

PeoplePeople

People’s behavior is the basis for People’s behavior is the basis for chart patterns. chart patterns.

Interpreting those patterns in Interpreting those patterns in 2007 was different than it was in 2007 was different than it was in 1997.1997.

Interpreting those patterns in Interpreting those patterns in 2012 is different than it was in 2012 is different than it was in 20072007

The Big QuestionThe Big Question

Does market analysis work Does market analysis work anymore? anymore?

The Big QuestionThe Big Question

Does market analysis work Does market analysis work anymore?anymore?

Yes! (mostly) Yes! (mostly)

AdaptAdapt

An analogy:An analogy:Walls still hold up a roof.Walls still hold up a roof.Walls are now made of stone, not Walls are now made of stone, not wood.wood.Regular hammers and nails won’t Regular hammers and nails won’t work.work.

…… …….Try masonry nails. Maybe glue..Try masonry nails. Maybe glue.

The concept is the same. The concept is the same.

The implementation is different.The implementation is different.

What is QE?What is QE?

Quantitative easing Quantitative easing (from Wikipedia)(from Wikipedia)

An unconventional monetary policy used by An unconventional monetary policy used by central banks to stimulate the national central banks to stimulate the national economy…. A central bank implements economy…. A central bank implements quantitative easing by buying financial assets quantitative easing by buying financial assets from commercial banks and other private from commercial banks and other private institutions with newly created money in order institutions with newly created money in order

to injectto inject… … … … … … … … … … … … … … … … … … … … … … … … … … ZZZZzzzzz……..… … … … ZZZZzzzzz……..

What is QE?What is QE?

I don’t careI don’t care

What is QE?What is QE?

I don’t care for the dirty I don’t care for the dirty details and logic behind it.details and logic behind it.

All I need to know is that it is All I need to know is that it is a mechanism to provide a ton a mechanism to provide a ton of cash into the market.of cash into the market.

What is QE?What is QE?

I don’t care for the dirty I don’t care for the dirty details and logic behind it.details and logic behind it.

All I need to know is that it is All I need to know is that it is a mechanism to provide a ton a mechanism to provide a ton of cash into the market.of cash into the market.

And where there is liquidity, And where there is liquidity, there are rising stock prices.there are rising stock prices.

ProofProof

* Quantitative Easing * Long-Term Refinancing Operation

China stimulus too!

various shenanigans

and jawboning

ECB LTRO announced

More recent proofMore recent proof

More recent proofMore recent proof

More recent proofMore recent proof

More recent proofMore recent proof

So, how do we cope?So, how do we cope?

A little more gutA little more gut

Did not follow through

AAII survey 70% bears

SentimentSentiment

Try a little more bottom upTry a little more bottom up

Try a little more bottom upTry a little more bottom up

Who was in crisis? Financials..

Now suddenly outperforming.

RatiosRatios

RatiosRatios

RatiosRatios

LeadershipLeadership

Stuff that doesn’t workStuff that doesn’t work

Stuff that doesn’t workStuff that doesn’t work

Moving average crossovers

Stuff that doesn’t workStuff that doesn’t work

Stuff that doesn’t work Stuff that doesn’t work

Volume

Stuff that doesn’t work Stuff that doesn’t work

Volume

Well, it works in some applications

Stuff that doesn’t work Stuff that doesn’t work

Volume

Well, it works in some applications

Stuff that doesn’t work Stuff that doesn’t work

Well, it works in some applications

Stuff that doesn’t work Stuff that doesn’t work

Stuff that doesn’t work Stuff that doesn’t work

Bonds

Stuff that doesn’t work Stuff that doesn’t work

Bonds VIX

Case StudyCase Study

Case StudyCase Study

Now you are messing with me! Now you are messing with me!

Opportunities are not cut and dryOpportunities are not cut and dry

If you don’t see anything, it’s not there.If you don’t see anything, it’s not there.

Keeping it usefulKeeping it useful

The focus is on action, not The focus is on action, not prediction.prediction.

I’d rather be right than President.I’d rather be right than President.

- Sen. Barry Goldwater- Sen. Barry Goldwater

SummarySummary

New normal New normal (groan)(groan)

Sentiment plays a bigger Sentiment plays a bigger rolerole

Bernanke Put (trend is Bernanke Put (trend is up)…up)…

……or is it?or is it?

SummarySummary

Diminishing returns from QEDiminishing returns from QE

We will emerge from this We will emerge from this market-meddling but with market-meddling but with slightly different tools of the slightly different tools of the trade.trade.

Human behavior will not Human behavior will not changechange

The real reason we do The real reason we do this:this:

To make the buy, sell To make the buy, sell or hold decision.or hold decision.

Not to predict the futureNot to predict the future

Don’t - Analysis Paralysis Don’t - Analysis Paralysis (groan)(groan)

- Get hung up on - Get hung up on precisionprecision

Do – K.I.S.S.Do – K.I.S.S. – Spirit of the analysis, – Spirit of the analysis, not the letter of the not the letter of the lawlaw (sorry again, quants)(sorry again, quants)

Technical analysis is a Technical analysis is a windsock, not a crystal windsock, not a crystal ball.ball. - Carl Swenlin - Carl Swenlin

Quick Takes ProQuick Takes Prowww.QuickTakesPro.com

Getting TechnicalGetting Technical www.Barrons.com

Trading StrategiesTrading Strategies www.MarketWatch.com

Books (Books (www.QuickTakesPro.com/education.html/education.html))Beginner’s Guide to Charting Financial MarketsBeginner’s Guide to Charting Financial Markets

Technical Analysis: Plain and Simple – 3Technical Analysis: Plain and Simple – 3ndnd edition edition

Real World Technical AnalysisReal World Technical Analysis

……plus my favorites from other authorsplus my favorites from other authors

Quick Takes ProQuick Takes ProFree Chart of the DayFree Chart of the Day

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You can also dive right into a free trial of the You can also dive right into a free trial of the daily Quick Takes Pro newsletter. Sign up at daily Quick Takes Pro newsletter. Sign up at the website.the website.