Monday, February 27, 2012

Deemer, Deemer on Technical Analysis

Don’t tune out. This is not yet another technical analysis primer. Walter Deemer, who logged almost half a century as a technical analyst, has joined forces with Susan Cragin, who knows how to put words and sentences together. The result, Deemer on Technical Analysis: Expert Insights on Timing the Market and Profiting in the Long Run (McGraw-Hill, 2012), is a thoughtful overview of some concepts that inform technical analysis and that the longer-term investor can employ advantageously.

The book includes only a handful of charts, even though Deemer was once described as a person “who regards his charts the way an expert horticulturist might regard a bed of prize geraniums.” (p. 280) His basic stock chart displays price, a 50-day EMA, and in a separate panel “the all-important relative-strength line—which is simply the stock price divided by a broad market index such as the Standard & Poor’s 500 Index.” (p. 84) Deemer also presents charts that look at markets more obliquely. For instance, the ratio of median single-family home prices to the price of gold (1963-2011).

Although this book is part memoir, taking the reader back to the time that “state-of-the-art technology” was 3’ x 3’ loose-leaf binders designed to display four charts (a one-point point-and-figure chart, a long-term point-and-figure chart, a daily chart, and a weekly chart) on facing pages, the bulk of the book is devoted to explaining how to read the tea leaves.

The savvy technical investor, Deemer writes, “always has certain broad indicators in his back pocket, ready to review at a moment’s notice. He knows where the market is within the Kondratieff and four-year cycles. He knows where in the interest-rate and dividend-yield cycles he is. He knows where the last major bottoms and tops are. He knows whether current market sentiment is extremely optimistic or pessimistic. He knows what the current chart pattern looks like. And that’s what he starts with.” (p. 158)

What else can the technical investor call upon to improve his market timing skills? Deemer describes indicators that worked well over time—until they didn’t. A case in point was the ratio of the amount of money in Fidelity’s select money-market fund compared with the amount of money in its sector funds as a whole. (For those who weren’t trading in the 1980s, Fidelity’s sector funds were designed for active traders and were priced every hour.) It was a contrary indicator, with cash very low at market highs and very high at market lows.

He also introduces a promising new indicator based on the ISEE index, a call-put ratio that measures only “opening buy” transactions by the public.

In addition to learning how an experienced technical analyst thinks about investing, the reader can profit from Deemer’s words of wisdom, which he calls “advice for the perplexed” and “rules to live by.” A single example: “Document each buy or sell decision that you make. … Once every six months, prepare a summary report and explain your investment decisions to another human being. (Not your dog—another human being.) Just knowing that you will have to do this will make a big difference in how you operate.” (p. 258)

A footnote: In his brief bibliography Deemer recommends The Intelligent Chartist by John W. Schulz (1962), calling it “the most intellectual discussion of and reasoning behind technical analysis ever written.” (p. 299) I have already filled out an inter-library loan request. If successful (there seems to be only one copy in all of the Connecticut libraries that are willing to lend), I’ll share my thoughts on it in a future post.

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