Steckler's Star Studded Stock Picks

[Tatnic]

Just guessing here ... was it Eggleston Flats?

Whitethorn was the name I was trying to rememeber. So Rob, where in God's country are you? My wife and I were remembering a trip to Devon and how beautiful it was with all the sheep pastures stretching way up into the wooded hills. I told her that the one area in the US that reminds me of Devon is Virginia and how it can just leave you speechless. I don't miss the hot summers and high humidity but I do miss the mountains and valleys.

[Rob]

Roanoke was known as "Big Lick".... Hey Rob.... In Bedford County there's an area called "Body Camp".... Do you know about that?

Caustic Soda, yeah the name "Big Lick" came from a huge salt lick that used to draw all the wildlife to the area before civilization moved in. I've read that the lick was about where the downtown section of Campbell Ave. is. I've never heard of Body Camp. Sounds like a nudist colony.

So Rob, where in God's country are you?

I've lived in Roanoke since 1991, would have been born here if my dad's job didn't move him out in the early 50s. I've got very deep family roots in Virginia. I love it here.

[peanuts]

Dave,

I'm sure that you already know about this one: FTK dude

I thought it would be a good oil service stock for you. I saw the chart and said to myself, "I bet Dave is on this already"

Well, are ya?

I also noticed that your PCCC is acting nicely!

[DSteckler]

Neat O&G web site

http://www.rigzone.com/

[mrmarket]

Steckler is Baaaack! Good to see you davey.

[DSteckler]

Technical Research Recovers

Two people quoted in this article, Dick Arms and Louise Yamada, are members of AAPTA (American Association of Profesisonal Technical Analysts).

Technical Research Recovers
George B. Moriarty
December 4, 2006

In 2005, Citigroup and Prudential, two homes of robust technical analysis businesses, shuttered their TA departments. While the decision went largely unnoticed by the mainstream media, it was big news in the technician world because the two firms hadn't just closed businesses, they had excised two of the legends of TA - Louise Yamada and Ralph Acampora.

Long a stepchild in the analysis process, TA found itself on the outs at these two firms due, sources say, in equal part to cost concerns and revenue, as the banks couldn't determine how to get paid for the technicians' services.

The trouble in grasping the value of technical research came from the fact that, as opposed to the perceived inherent value in fundamental analysis, technical (or market) analysis doesn't provide an edge to the clients. Hence TA, among the Wall Street firms, began its death march.

However, a funny thing happened on the way to the funeral. TA has found its niche, and has begun a comeback that adherents argue proves the value of the skill even as its critics continue to doubt the value technical analysis delivers. And ultimately, an overview of the history of TA on the Street shows that what has happened is not so much a rebirth as a return to what gave the skill its start and now gives it new strength.

Commodity or Necessity?
The crux of the debate about the value of technical analysis begins at the core of the discipline. Merrill Lynch analyst Mary Ann Bartels points out that Charles Dow was among the first technical analysts, even though he probably didn't know what he was creating back in the late 1800s.

"In those days, there was no fundamental data available to investors," Bartels says. "So he started watching market behavior and developed his economic theory. The information that can be drawn from the ticker tape is amazing."

And that is the center of the debate. The tape presents the supply and demand picture, and some say that deciphering this depiction of supply and demand has become a commodity skill, and there's no need to pay Wall Street research prices for it. Be it the Dow Jones Industrial Average, General Electric or Baidu.com, the chart that appears with each stock quote you pull up presents a line representing the balance between buyers and sellers.

The doubters see the science of TA as having become a commodity that provides users with no edge, but adherents preach the value lying behind the daily chart that comes with every stock quote on Yahoo! Finance and that is waiting to impart a longer-term view of the market.

Louise Yamada, who now runs her own firm, says the basic concepts behind TA are a tool in the investment process, but that tool is not the complete process.

"It studies supply and demand. That's all it does," Yamada says. "The study is tracking what other people are doing with their money. It helps because when a chart moves out of a neutral trend, that means there is aggressive demand."

Indeed, Yamada takes that supply and demand to the extreme long term. She notes that Alan Shaw, who hired her to replace Ralph Acampora, identified in 1981 a break in a trend of interest rates that extended back to 1946, and that she thinks the current rate environment may just now be breaking that trend anew.

And it is that long-term view that TA practitioners argue separates the trained technician (yes, there are training courses and certifications), who can take that supply and demand representation and layer onto it a valuable perspective, from the lay users who cannot grasp the intricacies of the charts. For instance, Helene Meisler, an independent analyst who writes a trading newsletter for TheStreet.com, says the key is looking at the historic pattern of a chart, and she shares how her analysis of the chart of General Motors helped her land a job at Goldman Sachs' trading desk in the late 1980s. She received a call from the head of administration in sales and trading who asked her to look at General Motors and "do whatever it is you do" and they'd send a runner over to get it. In looking at the chart, she saw a pattern that indicated the stock could make a sharp move higher.

"I said if GM broke through $43.50 it was going to go to around $46 or $47," Meisler says. "I walked into the interview and the first person I met with was Bob Mnuchin, the partner in charge of trading at the time, who said, We're long 100,000 shares of Motors in here. At Goldman, you have to put your money where your mouth is.'"

The stock went up two and a half points that day, and Meisler landed a job as a technical analyst on the trading desk. (Meisler left the firm in 1992, and Goldman does not currently employ any technical analysts in its research department.)

Buyside Doesn't Buy
Meisler's story makes for compelling cocktail party talk, but it fails to appease the doubters, and buyside investors have some real issues with TA. One broker who focuses exclusively on hedge funds says there's absolutely no secret sauce to TA and that everyone sees the same thing, so he asks, "What's the value of using sellside technical analysis?"

Then, speaking to the mindset of the biggest of fishes, a fund-of-hedge-funds manager says that in a conversation with SAC Capital's Steve Cohen, he learned that the firm began as a largely technical trading house but had transformed itself into a fundamentals-oriented entity over time. SAC on any given day, some estimates say, can account for as much as 3% of daily volume on the NYSE and 1% of daily volume on Nasdaq.

And it's not just nonbelievers who question the value of institutional TA for the buyside. Charles Norton, principal at GNI Capital, says his firm combines the two disciplines and requires any investment employee to have read famed investor William O'Neil's book before they start. "We use the fundamentals to determine what to do, and the technicals to determine when to do it," he says. "You can have the greatest fundamental idea, but without the right timing, it means little."

That belief in the value of TA does not keep him from questioning the utility of Wall Street technical research for the buyside. Norton says technically focused hedge funds will generally have their own services in-house and might use outside services for an alternate viewpoint, but technical analysis from the sellside won't be as valuable.

"A fundamental analyst might offer the buyside something of value, be it access or something else," he says. "I don't think TA from an outside vendor, be it broker or otherwise, provides as much value, because buyside technicians tend to have their own recipe."

Practicing technicians though believe that the commoditized aspects of TA represent noise around the larger stories of the charts. Many people can spot a chart that is "breaking out" and moving averages and Bollinger Bands can be found on most quote engines. The harder part of technical research, they argue is in identifying what the intermarket relationships, first put into book form by John Murphy, are telling investors. For instance, one technician says a look at the equity, fixed income and commodity markets shows there is currently a much tighter noose around trends and that is leading to greater cyclicality. The increased cyclicality stems from the impact of hedge funds on the market, who are crowding into similar trades.

So perhaps it is no surprise that Wall Street firms have shied away from technical research, as it does seem to have a finite audience. Indeed, some firms have never employed full-time technicians in their research department. But it does bear noting that many firms have technicians employed in their proprietary trading areas and on trading floors in general (for example Morgan Stanley's Rick Bensignor reportedly moved to prop trading in 2005). Several sources said they knew of firms expanding their technical presence on trading floors and that one large bank was adding a technician to each trading group. Interestingly, none of the people would go on the record discussing the trading strategy.

But the legacy of technicians who made their mark on the research landscape is long and storied. When Yamada and Acampora broke into the business, the leaders were Smith Barney's Alan Shaw and Merrill Lynch's Bob Farrell. But emphasizing how close-knit the community was then, and remains today, is that Acampora and Yamada, who it should be noted remain among the top analysts today according to Institutional Investor's annual rankings, both came through the Shaw pipeline.

The Winds of Change
Yamada says that when Smith Barney was independent, the technical analysis was an integral part of the research process. The goal then was to help institutions limit risk and identify reward. But on reflection, she says that as the firm grew, technical research may not have been perceived as such an integral part of the research presentation.

"My hunch is that they felt as they were cutting budgets...[that TA was] an area that could be cut," Yamada says.
For his part, Acampora attributes Prudential's decision to cut the group loose in October 2005 to a business decision.
"The industry's changing. Prudential didn't let us go because of quality or because the clients didn't want us," Acampora says. "They let us go because they couldn't figure out how they get paid."

TA Today
And that brings us to today. With the firings of Yamada and Acampora a year behind us, where is TA's value? And if established shops like Citigroup and Prudential Equity aren't able to find value or get compensated for technical analysis, is there any demand?

The evidence, across all types of traders, is that demand is there and the money being paid for it is meaningful.
Ciitigroup's Smith Barney dissolved its US technical analysis practice on Yamada's departure and has not resuscitated it within the research group. However, the firm does maintain a TA group outside the US, and the bank's private client division has retained an outside provider to meet clients' demands. Prudential has not replaced its analysts.

Louise Yamada was lured back to the business by pension fund and institutional clients that clamored for her long-term views, which cater to their objectives. Indeed, she points out that she does more long-term analysis than most technicians, having begun making a long-term case for gold in 2000 and for oil in 2003.

As for Ralph Acampora, he landed at Knight, where CEO Thomas Joyce said he didn't want fundamental analysis, he wanted technical analysis because Knight is in the business of capturing orders. "He told me, We trade everything, and you track everything. Technical makes sense for me and my clients,'" says Acampora.

Since starting at Knight in 2005, Acampora has launched three products: an intraday service to capture momentum; a daily letter that provides ideas that can last a few months; and a weekly letter, which he authors, that provides ideas with a shelf life of 12 to 18 months. And the firm keeps bolting new products, such as foreign exchange, on to the research effort.

It's not just the new kids on the block expanding, either. Dick Arms, who created the Arms Index, or TRIN, in 1967, has recently launched new TRINs in Europe and in Australia. (The TRIN is a volume-based indicator of market breadth.)

"I went to the IFTA meeting and gave a speech introducing the European TRIN," Arms says. "There's a good deal more international interest, which started with a cocktail conversation that got me started in Australia."

Merrill Lynch's Bartels says she would argue there's been an increase in demand for what her shop calls "market analysis" over the past couple years. Merrill Lynch remains committed to this effort, and its team consists of six people and is an integral part of the research function. Bartels says that some of the increasing demand for her team's services might stem from the volatility created by hedge funds.

"It's not about looking at individual charts. It's looking at the market dynamics and what's happening in the whole market and not one individual pattern," she says. "Our value- added is being able to be anticipatory as to where the major moves are about to occur."

Ultimately the debate on technical analysis always comes back to the value it adds to the research effort, and Acampora's reply to a skeptical SEC attorney in December 2004 cuts to the heart of that value proposition.

"He asked me, What is a fact on that chart?'" Acampora says. "I said price is a fact. You restate earnings, but you never restate that chart."

(c) 2006 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.

[ParkTwain]

Carl Swenlin's current take (decisionpoint.com)

Good morning Dave,

Just wondering whether you are on board (in agreement) with Carl Swenlin's interpretation of these large-scale technical indicators. I find them to be very interesting in providing context for our day-to-day market battles and in explaining how the market got from July to October this year. His discussion is pretty persuasive to me.

"SENTIMENT NOT BULLISH ENOUGH FOR TOP"

http://www.decisionpoint.com/ChartSpotliteFiles/061201_rr.html

"CRASH TALK IS PREMATURE"

http://www.decisionpoint.com/ChartSpotliteFiles/061208_crash.html

[DSteckler]

Good morning Dave,

Just wondering whether you are on board (in agreement) with Carl Swenlin's interpretation of these large-scale technical indicators. I find them to be very interesting in providing context for our day-to-day market battles and in explaining how the market got from July to October this year. His discussion is pretty persuasive to me.

"SENTIMENT NOT BULLISH ENOUGH FOR TOP"
http://www.decisionpoint.com/ChartSp...061201_rr.html

The Rydex Cash Flow Ratio is a derivitive of the Nova/Ursa Ratio, which is what was formally used to measure sentiment. The problem with the CFR is that Rydex has added so many funds in the last 12 - 18 months that you shouldn't compare readings from 2004 with 2005, or 2005 with 2006, like Swenlin does.

"CRASH TALK IS PREMATURE"
http://www.decisionpoint.com/ChartSp...208_crash.html

Seasonal bias is to the upside from now through the end of the year.

[mystiky]

IIG - comment?

Hi Steckler,

Miss seeing you more often here...

If you have a minute, what are your thoughts on IIG ?

Looks like the 10.2 float with 5.5 mil short shares is causing some headaches for the shorts.

[DSteckler]

Chart looks nice, Mystiky. Definitely accumulation under way.

[Runner]

Dave, I was looking at WHQ and was wondering what your thoughts are on the huge volume spikes that I noticed on the chart? You know I don't look at volume much but I did turn volume bars on trying to make sense of it.

[DSteckler]

Appears to be distribution, Runner.

[Runner]

Appears to be distribution, Runner.

Thanx Dave!

[DSteckler]

Well, so much for distribution! I really meant to say accumulation....<vbg>

[Runner]

I notice a little pop. It was on my list but I just got home and missed it!!
I'm getting interested in Medical related groups at this time... What are ya watching Dave?