Modern Investment Thinking: Blinded By The Math

Technical Analysis --- Great Expectations, Minimal Results

Without too much of a stretch, it could be documented that the Investment Grade Value Stock (not just "value stocks") bubble of 1987 was caused by investor focus on company fundamentals. It would be a piece-of-cake to prove beyond any doubt at all that blind faith in technical analysis created the dot-com bubble at the turn of the 21st century.

More recently, blame for the late 2007 through early 2009 "financial crisis" could easily be nestled down at the feet of big government, misguided regulators, and maniacally creative Modern Portfolio Theory (MPT) practitioners, not to mention their ROTF-LOL institutional mentors. What's next?

Pick a day, any day, where the DJIA is up or down by more than 100 points. Take a look at the "most advanced" or "most declined' listings and note the shortage of plain vanilla common stocks. What you see is a pari-mutuel spreadsheet listing of the most popular derivative betting mechanisms, adjusted day-to-day, depending on the direction of their wagers.

With index ETFs significantly outnumbering the companies whose prices they are attempting to keep track of, isn't it even less likely than in the past that technical analytics can be useful? Aren't these numbers simply the result of demand for casino-esque sector funds and their seemingly limitless varietals? Where do you think the SEC's thumb is?

So as you sit at your desktop, studying the charted presentations of your favorite technical indicator software, keep in mind how the "fundamental quality" of the numbers they report upon has changed. How much of the volume is the second or third level derivative result of derivative trading by speculators who couldn't care less about which candlesticks are on top of whose heads and shoulders.

Should an up-tick in a "triple-short-the-S & P 500" index be considered a positive or a negative? Can NYSE new high and new low numbers be trusted? How much of the daily volume is the backing and filling within indexed portfolios? Are support levels reality or fiction anymore, either on an overall market or an individual stock basis?

Yet, the problems that I have with technical analysis have nothing to do with the numbers themselves, most of which are fascinating and useful in lessening the need for head scratching about the past. It's the "quid pro quo" projection into the future that I think is total foolishness.

The technical analysis employed in the Market Cycle Investment Management (MCIM) methodology is essential in determining where we are within the various cycles, right now. However, absolutely nothing (either technical or fundamental), can tell us what may or may not happen in either the immediate or more distant future.

Modern Portfolio Theory would have us believe that the future is, indeed, predictable within a reasonable degree of error. Theorists, research economists, other academics, and Wall Street marketing departments have always gone there --- and they've always been wrong.

Any claim to precision; any attempt to time the market; any hope of being at the right place at the right time, most of the time, is just not a reality of investing. And there's the rub for both forms of analysis, and for "the emperor's new clothes" risk assessment techniques and "active asset allocation" processes so popular in MPT.

So long as we live in a world where there are tsunamis and Madoffs; politicians and terrorists; big corporate egos and far more dangerous big government; and imperfect intelligence (both human and artificial) --- there will be no hope of certainty. Get over it, reality is pretty cool anyway once you've accepted it.

The future is uncertain, for certain. No numbers of any variety, in any combination or with any correlation or probability, will ever achieve the alchemy needed to reliably, even consistently, change leaden reality into golden certainty.

The only certainties you really need to know about concerning financial instruments and financial markets are that their long-term cyclical price movements (and short-term volatility) are neither certain nor predictable. The trick is to plan better for the upcoming gyration with a clear and consistent set of decision-making disciplines that make sense in either direction.

But, at the same time, technical trends, levels, totals, averages, etc., can give you significant expectation creation nourishment. For my purposes, IGVSI (Investment Grade Value Stock Index)Issue Breadth numbers, a Bargain Stock Monitor, and New 52-Week Highs vs. Lows relationships provide enough information to chart the current cyclical location pretty accurately.

But these numbers are unique in one very important element --- they have already been screened for fundamental quality.