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Coping with Analysis in the Age of QE Michael Kahn, CMT Michael Kahn Research Coping with Analysis in the Age of QE Michael Kahn, CMT Michael Kahn Research LLC November 2012

Save us Obi Ben Bernanke Save us Obi Ben Bernanke

Ben Lightyear. QE to infinity and beyond! Ben Lightyear. QE to infinity and beyond!

Have another shot of Bernanke juice. Have another shot of Bernanke juice.

Ben Bernanke as a child Ben Bernanke as a child

Who am I? Chartered Market Technician (CMT) n trained and certified in market analysis Who am I? Chartered Market Technician (CMT) n trained and certified in market analysis n 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 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 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 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 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: n Think outside the box n Bend but Cliché time It is time to: n Think outside the box n Bend but do not break n See the forest for the trees n Go with the flow -- Are you getting my drift?

Key Points n My bias – I use charts and believe the market knows Key Points n My bias – I use charts and believe the market knows more than I do. n No matter what happens, people tend to do similar things when faced with similar situations. n This is not brain surgery (with apologies to all the quants out there)

People n People’s behavior is the basis for chart patterns. n Interpreting those patterns People n People’s behavior is the basis for chart patterns. n Interpreting those patterns in 2007 was different than it was in 1997. n 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?

The Big Question Does market analysis work anymore? Yes! (mostly) The Big Question Does market analysis work anymore? Yes! (mostly)

Adapt An analogy: n Walls still hold up a roof. n Walls are now Adapt An analogy: n Walls still hold up a roof. n Walls are now made of stone, not wood. n 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 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? n I don’t care What is QE? n I don’t care

What is QE? n I don’t care for the dirty details and logic behind What is QE? n I don’t care for the dirty details and logic behind it. n All I need to know is that it is a mechanism to provide a ton of cash into the market.

What is QE? n I don’t care for the dirty details and logic behind What is QE? n I don’t care for the dirty details and logic behind it. n All I need to know is that it is a mechanism to provide a ton of cash into the market. n And where there is liquidity, there are rising stock prices.

Proof various shenanigans and jawboning ECB LTRO announced China stimulus too! * Quantitative Easing 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

More recent proof More recent proof

More recent proof More recent proof

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

A little more gut Did not follow through A little more gut Did not follow through

Sentiment AAII survey 70% bears Sentiment AAII survey 70% bears

Try a little more bottom up Try a little more bottom up

Try a little more bottom up Who was in crisis? Financials. . Now suddenly Try a little more bottom up Who was in crisis? Financials. . Now suddenly outperforming.

Ratios Ratios

Ratios Ratios

Ratios Ratios

Leadership Leadership

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

Stuff that doesn’t work Moving average crossovers Stuff that doesn’t work Moving average crossovers

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

Stuff that doesn’t work Volume 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 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 Well, it works in some applications

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

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

Stuff that doesn’t work Bonds VIX Stuff that doesn’t work Bonds VIX

Case Study Case Study

Case Study Case Study

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

Opportunities are not cut and dry Opportunities 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 useful n The focus is on action, not prediction. I’d rather be Keeping it useful n The focus is on action, not prediction. I’d rather be right than President. - Sen. Barry Goldwater

Summary n New normal (groan) n Sentiment plays a bigger role n Bernanke Put Summary n New normal (groan) n Sentiment plays a bigger role n Bernanke Put (trend is up)… …or is it?

Summary n Diminishing returns from QE n We will emerge from this marketmeddling but Summary n Diminishing returns from QE n We will emerge from this marketmeddling but with slightly different tools of the trade. n Human behavior will not change

The real reason we do this: To make the buy, sell or hold decision. 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. 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 Technical analysis is a windsock, not a crystal ball. - Carl Swenlin

Quick Takes Pro Getting Technical Trading Strategies www. Quick. Takes. Pro. com www. Barrons. Quick Takes Pro Getting Technical Trading Strategies www. Quick. Takes. Pro. com www. Barrons. com www. Market. Watch. com Books (www. Quick. Takes. Pro. com/education. html) Beginner’s Guide to Charting Financial Markets Technical Analysis: Plain and Simple – 3 nd edition Real World Technical Analysis …plus my favorites from other authors

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