Interview with Ike Iossif
by Mark Haines
February 24/05
M.H. Hi Ike, how are you doing?
I.I. I am doing well, thank you.
M.H. Over the past couple of years there have been several instances that traditional technical tools appeared to have lost their "touch." You have just concluded a multi-month research project into the matter, and I would like you to elaborate on some of your findings.
I.I. Nothing is 100% accurate. Fortunately in this business you only need to be correct 60%-70% of the time in order to be successful. Over the years, people who practiced technical analysis had tried to identify -within their sub-field of T.A.- those patterns/readings etc., which 60%-70% resulted in a particular outcome. However, over the past few years, there have been several instances that the expected outcome has taken place less than 60%-70% of the time, and it has happened with different indicators, across almost every sub-field of technical analysis. We did an exhaustive research examining many indicators/systems/methodologies trying to find a common denominator. We found several, but there are five that seem to have had the biggest impact.
M.H. What are they?
I.I. Technology, demographics, changes in the internals of the markets, the proliferation of hedge funds, and ETFs.
Technology and the internet have altered forever the way individuals interact with the market. Ten years ago, if one heard an expert recommending XYZ stock that sounded promising, then the next step was to call his/her broker -usually a few days later- and ask the broker if he knew anything about it. In most cases the broker didn't but promised to look into it, and in the mean time he sent via regular mail, any information that was available, which meant a couple of charts, and "fundamental research" by whoever was covering that particular company. When the information arrived, usually didn't get read until the weekend. Monday is usually a busy day in everybody's business, so, it wasn't until Tuesday, or, Wednesday until a call was made to the broker for final consultation, and placement of the order. On average it took 10-15 days, from the moment an individual came across information about a stock, before he/she acted upon it.
However, over the past few years the process that once took 10-15 days, got condensed to 60-90 minutes. Today, if one hears something that sounds promising, he/she can look up more technical and fundamental information about the stock that they can even comprehend via their online broker, or, via e-signal, trade-station etc., and make a decision. However, when the decision making process by millions of people is shortened from 10-15 days, to 60-90 minutes, the impact on the market place is huge, and it can't be captured, or, measured by tools designed to work for an environment of much slower pace. In addition, the internet has made available to the average person many technical indicators that once were used by few. Joe Granville used to say that "what everyone knows, is not worth knowing!"
Demographics have also changed the market place. Never before we had so many "investors" in their 20s, and 30s. Ten years go the average age of an investor was between 40-50. I do not mean to offend anyone, but the truth of the matter is this; we have an entire generation of investors used to seek instant gratification in every aspect of their lives, and they carry the same attitude when it comes to investing. In the past five years I have not come across one person between the age of 25 and 35 who has asked me what in my opinion is going to be a good investment over the next five years, they simply want to know what is going to double over the next 3-4 weeks!
M.H. You mentioned the change in the internals, do you mean decimalization?
I.I. That's a part of
it, but there is another one even bigger. Take a look at the a/d line,
and at the cumulative volume for NASDAQ. It appears that there is a "negative
divergence" between price and the a/d line, and a "positive divergence"
between price and cumulative volume. A technician looking at this chart
trying to draw a conclusion, can easily be mislead.
Chart courtesy of Carl Swenlin and www.decisionpoint.com
M.H. Why?
I.I. Because at the
beginning of 2002 there were 25% more listed issues than they are now.
Of course the a/d line will lag, giving the appearance of a "negative
divergence." Is it for real? No, it is not, unless we make an adjustment
on a percentage basis, and then we compare the results. Which brings us
to the next subject, the impact of hedge funds.
The top line represents the average daily number of traded issues, the
line on the bottom represents the average daily up volume per traded issue.
Notice that not only it hasn't decreased, but actually it has increased!
Take a look at the next chart which shows the up volume per advancing
issue over the same period.
Notice that although NASDAQ is at the same level it was in January of
2002, the number of up shares per advancing issue has doubled, when you
adjust for the 25% decrease in listed issues we still get a 50% increase
in the number of up shares per advancing issue.
M.H. What does that mean?
I.I. It means that price momentum is the dominant methodology in the market. Never before we had just one trading methodology crowding out every other methodology known to investing/trading men and women. If you have just one methodology dominating the market, mainly those technical indicators that are designed for this methodology will work on a consistent basis, which explains why several non-momentum measuring indicators -such as sentiment- have failed to perform as they used to.
Ten years ago, the number of hedge funds operating in the U.S. was approximately 1/10 of what it is now. Moreover, in most cases there was a direct contact between the operator, and the investor, and the lock-up period was normally one year. Now, we have 10 times more funds operating, and the usual lock-up period is just 90 days. If you have just 90 days to outperform the market, otherwise the consultant who has invested in your fund on behalf of the client, will pull the funds out, then you really don't have much choice; you go after price.
I am not going to get into the impact of ETFs, my good friend Alan Newman (http://www.cross-currents.com/) has researched the subject in great detail.
The bottom line is this; as long as the above conditions continue to exist, investors need to scrutinize the technical tools they use, make the necessary adjustments to reflect the quantitative changes that have taken place over the past few years, and overweight momentum related indicators in their arsenal of technical tools.
M.H. I would like to change the subject and discuss your interpretation of the charts.
I.I. Ok, We'll
take a look at the charts.
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