9 SAMT Journal Autumn-Winter 2017 PDF

THE SWISS
TECHNICAL
A N A LY S I S
JOURNAL
AU T U M N -
WINTER 2017
Volume Five
Issue 2
2017
The Swiss Association of Market Technicians
ZÜRICH • GENEVA • LUGANO • CHUR

2 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal
l Zurich
Willkom men Chur

Benvenuto
l
Bienvenue
Welcome l
Geneva
l Lugano
From the President’s Desk Dear SAMT Members & Industry Colleagues,
It was a shock for the industry to hear the sad news, that a veteran of technical
analysis has passed away. With Hank Pruden, we lost a friend and a wise
technician at the same time. We have a tribute to SAMT Honorary Member
Hank Pruden on page 6.
This news overshadowed the annual IFTA conference in Milano, Italy which
took place in late October. Read about this great industry conference on page 9.
At the same time, I would like to remind you, if you missed this chance
and would like to participate in the next conference, I am happy to share
the news that the 2018 conference will take place in Kuala Lumpur,
Malaysia!
Great analysts who were speakers at the IFTA conference in Milano
appear in this edition: Perry Kaufman (page 12), Robert Prechter (page
19) and Alberto Vivanti (page 27).
On page 30, SAMT’s Vice President Mario Guffanti reviews the Annual
Lantern Fund Forum in Lugano. Bitcoin and cryptocurrencies were one
hot topic there. Make sure you don’t miss this great review!
SAMT Vice President, Ron William, interviewed Dr. Van Tharp at the
VTI workshop in London in October on page 35.
Finally, Phil Roth contributed a great piece of work about Investors vs. Traders
showing how the attitudes and activities of stock market participants aid
forecasting, see page 41.
If you would like to participate in local Swiss events, get to know great
speakers, exchange information and tactics with colleagues from the industry,
check out the information on our dedicated webpage section.
Our best wishes for the holiday season and the new year.
Sincerely Yours,
Patrick
Patrick Pfister, CFTe
President of the Swiss Association of Market Technicians (SAMT)
The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 3

THE SWISS
WHAT’S INSIDE
TECHNICAL
ANALYSIS A TRIBUTE TO SAMT HONORARY MEMBER
Hank Pruden, PhD
JOURNAL Barbara Gomperts 6
Volume Five • Issue 2

AUTUMN- WINTER 2017
THE IFTA 30TH ANNUAL CONFERENCE
IN MILAN: Sailing to the Future
Mario V. Guffanti 9
Journal Committee
Mario V. Guffanti, CFTe
Managing Editor
+39-333-1420142
PORTFOLIO RISK IN UNCERTAIN TIMES
mario.guffanti@samt-org.ch Defense Stocks Required
Perry Kaufman 12
Ron William, CMT, MSTA
+44 7857 245 424
ron.william@samt-org.ch
A Baker’s-Dozen Questions on Socionomics
Design & Production
for Robert Prechter
Barbara Gomperts
+1 978 745 5944 (USA) Ron William 19
barbara.gomperts@samt-org.ch
A KEY THEME AT THE 30TH IFTA

CONFERENCE
Trend Following in Portfolio Management
Alberto Vivanti 27
REVIEW: THE 7TH ANNUAL LANTERN

Follow SAMT on FUND FORUM, LUGANO
Mario Valentino Guffanti, CFTe 30

AN INTERVIEW WITH DR. VAN THARP,
Founder of the Van Tharp Institute
Ron William, CMT, MSTA 35
INVESTORS MAKE BOTTOMS; TRADERS

MAKE TOPS: An Analysis of Technical Indicators
that Show How the Attitudes and Activities of
Stock Market Participants Aid Forecasting
Philip J. Roth, CMT 41 To read articles on issuu.com
from the past five years of
The Swiss Journal of Technical
THE SWISS ASSOCIATION OF MARKET TECHNICIANS Analysis, click here.
SAMT Speaker Series Q3 2017 61
Board of Directors 62
Swiss Journal of Technical Analysis 63
Membership 64
IFTA’s CFTe Certification Program 65 The Swiss Association of Market Technicians (SAMT) is a
not-for-profit organization that does not hold a Swiss Financial
Services License. It is the aim of the SAMT to promote the
Partner Societies 66 theory and practice of technical analysis, and to assist
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A Tribute to SAMT
Honorary Member,
Hank Pruden, PhD
Barbara Gomperts
On August 26, the world lost Hank I can still recall first meeting Hank I had the honor and the pleasure to
Pruden. He was a shining light in Pruden. In all the years I knew him, meet Hank Pruden in 2006 when I
the field of technical analysis, to his his enthusiasm was infectious, his chaired the 19th IFTA Conference
students at Golden Gate University generosity full and his support in Lugano. Hank was among the
and to his many colleagues through- unwavering. Hank was equally speakers, his presentation was
out the world – and, he was my dear committed to the Technical Securities intriguing, but what impressed me
friend. Analysts Association of San Francisco, most was his vivacity as a moderator
the MTA and IFTA. Personally at the roundtable with a group of well
I can’t remember when I met Hank.
gratifying was Hank’s steadfast know analysts discussing the markets
We really got to know each other
inclusion of pattern analysis under perspectives. He was an anchorman!
when we worked on 11 issues of the
the TA banner. We had planned to A great analyst and teacher, a friend.
MTA Journal — he as editor and me as
get together with our wives in Milan We are missing him.
the ‘production department.’ In the
at the IFTA conference this year, but
spring of 2013, I asked if he would – Alberto Vivanti, SAMT Board
alas it is not to be. — Robert Prechter,
like to contribute an article to this
Elliott Wave International, USA gh
new publication, The Swiss Technical
Analysis Journal. He did and continued gh Hank Pruden will be dearly missed,
to contribute an article to every issue both as a true champion of our
Each year as the annual IFTA
through Spring 2017. industry and a heart-felt friend.
conference approached I would look
Thank you Hank for being such an
Our shared passion was not technical forward to having dinner with Hank
inspiration to so many people around
analysis, journals or Wyckoff, but Pruden and, if we were lucky, with
the world. May future generations
France and all things French. Our his lovely wife Sarah. This year there
honour this great heritage that you
last conversation was about whether was no dinner; Hank had moved
have contributed so much to, and
he and Sarah should have lunch or on to the great charting room in the
may we all shine a light so bright for
dinner at Le Jules Verne in the Eiffel sky. Hank pioneered the teaching of
you to smile back on. I will always be
Tower — he was planning their visit technical analysis at the university
grateful for your passion and support.
to Paris after the IFTA conference. level and was the expert on the work
Hank was a ‘foodie’. Planning the of Richard D. Wyckoff, but most of — Ron William, SAMT & IFTA Boards
restaurants was more important than all Hank was simply a good human
gh
booking the flight. being and a good friend and I will
miss him dearly. — John Bollinger, Hank was one of the most delightful
When I had the idea to do a tribute
Bollinger Bands, USA people that I have encountered
in this Journal, I was amazed to see
both within the realm of Technical
how many lives Hank had touched all
Analysis and outside it. At IFTA
over the world. Even the November
conferences he always greeted me so
issue of TA of Stocks & Commodities
warmly and I remember at a dinner
magazine printed a tribute to Hank
one year he observed that I was by
and reprinted one of his articles. As
myself so he invited me to join his
I collected these tributes, I cried and
table and enveloped in his warmth
laughed as I read them. That smile
and generosity. In my role as IFTA
and laugh of his was infectious and
journal editor I published several of
drew everyone in.
his Wyckoff articles and it was always
At the end of this article there are a pleasure to work with him. I will
print and video interviews with surely miss his smiling face.
Hank – listen if you can – as they will
— Regina Meani, Australian
remind you just how terrific he was. March 2015. Sarah and Hank at the Umbria
restaurant near Golden Gate University Professional Technical Analysts,
— Barbara Gomperts, SAMT Social in San Francisco. It was a favorite spot of Sydney
Media Manager Hank’s. The owner called him Il Professore.

I first met Hank at a cocktail party after a BCA Research Once you met Prof. Henry Pruden, you would first remember
conference in May of 1975 and took an instant delight his great laugh radiating throughout the room. Prof. Pruden
to this incredibly clever and kindly man. To say that was among the first TA teaching professor and I remember the
Hank had an important influence on my life is to IFTA conference in San Francisco in 1995, when we started to
understate it. He was later to invite me to speak at get to know him better. Thereafter, we met regularly each year
a TSAASF meeting, where I met future partner Joe at the IFTA conferences for the next 15 years and at several
Turner. Later, we formed Pring Turner Capital with MTA conferences, like the MIT conference organized by Prof.
Bruce Fraser. Andy Lo in 2005 in Boston.
There are many branches in technical analysis, and Besides teaching in San Francisco, Hank was also a great
Hank was the “go to” or expert on the Wyckoff Method. traveler, visiting many capitals in Europe, and even spent a
There are many ways to contribute to our craft. Hank’s sabbatical year teaching in Paris and the south of France. In
path was through teaching at Golden Gate University 2003, he and Martin Pring enthusiastically supported my idea
and speaking at conferences. He also worked invisibly to organize a conference in Sao Paulo to initiate a new Brazil
and tirelessly on many IFTA committees in various technical analysis society. Testimony is in this wonderful photo
positions. He was always deeply involved with the of the three of us seated for lunch at the Bovespa after our
TSAA-SF throughout the many decades I knew him. speeches, and I can still hear him laughing in the photo. Later
he visited Switzerland several times, and was always ready to
Hank was also the “go to” person at those after hours
speak to our Swiss TA association. In 2014 I had the privilege
get togethers, where his insightful analysis never
to hand him an honorary membership to SAMT. Prof. Henry
failed to stimulate. Above all, I remember him for his
Pruden was not only a fine technical analyst veteran, ready
human characteristics, tremendous personal support
to share his knowledge with fellow analysts, he was a great
and incredible humor. To say that Hank will be sorely
gentleman and a great companion to have around the bar!
missed is to misspeak, he already is. God Bless you,
Hank. — Martin Pring, mpring.com, USA (above left) — Bruno Estier, Bruno Estier Strategic Technicals, Geneva
(above right)
gh
Hank Pruden, who I called “Henry” much to his annoyance, was a good friend over the many years I knew him. I’ve
known him for so long I can’t remember when we first met. He had published some interesting work on Wyckoff and
was an ardent promotor, advocate and fan of Wyckoff’s methods. What I liked about him was that he avoided the
pomposity of the academic world, had a great sense of humor, and was just plain nice. My last memory of him was a
lecture he gave at an MTA Symposium in New York. While we had conversed often in his capacity as a leader of the
technical world, I had never heard him speak except to get rewards, honors, and prizes, but this instance was a work
of art. His presentation was clever, light but serious, and almost an Oscar worthy performance that played with the
audience and I hope taught them something about technical analysis. I shall miss him greatly.
— Charles Kirkpatrick, Kirkpatrick and Company, USA
gh
Hank was a unique personality. He inspired us in 2006 to set up a course in Technical Analysis and Algorithmic Trading
at Uppsala University in Sweden. Hank’s joy of life, brilliance in technical analysis and investor behavior – and his love
for his family and friends are things that I will always remember.
— Max von Liechtenstein, Former Chairman of STAF, Sweden

This content was originally published on StockCharts.com and is reprinted with their permission.
Bruce Fraser has also given his permission to reprint this tribute to his dear friend, Hank Pruden.
Wyckoff Power Charting
Dr. Henry O. (Hank) Pruden 1936-2017

Bruce Fraser | September 12, 2017 at 06:40 PM
Technical analysis education suffered Dr. Pruden was a prolific writer were serving others by following
a great loss with the recent passing publishing many papers on technical our passions and doing our very
of Dr. Henry O. (Hank) Pruden. A analysis and peak performance in best work. Hank showed us how to
consummate educator, in 1976, Hank trading. We have linked to a number touch the lives of others through the
combined his incredible capacity for of his articles here and hope to make metaphor of trading mastery.
inspiring students with his personal more of them available in the future.
passion for Technical Market Analysis. Celebrate Hank’s life by viewing these
In 2007, he published his seminal work
The result was the very two videos:
“The Three Skills of Top
first graduate course, at an Trading” (Wiley). In it we View a brief bio of Dr. Pruden’s life
accredited university, in discover Dr. Pruden’s view here. This video was shown at the
the study of markets using of the essential qualities of 2013 International Federation of
chart analysis. Dr. Zahn, the consistently successful Technical Analysts (IFTA) Annual
Dean of the Business School trader. Dr. Pruden designed Conference in San Francisco when
at Golden Gate University the curriculum of the Dr. Pruden received the IFTA Lifetime
in San Francisco, said courses at GGU to reflect Achievement Award. (click link)
‘Let the Market Decide’ this world view. In his
when Hank proposed this Dr. Pruden’s last appearance was
personal development as
innovative new graduate a video presentation at the Best of
a complete trader he came
course. Hank’s electric Wyckoff 2017 conference in August.
to understand that trading
teaching style and unique The title of the talk is: Using P&F
success depends on being
curriculum made this class Charts to Find the Present Position &
competent in these three
an instant hit. The classroom would Forecast the Probable Future Trend of
skills of top trading. His goal was to
fill up every semester and students U.S. Equity Prices: Applications of the
have every GGU graduate be capable
would take the class again and again. “Wyckoff Law of Cause and Effect”.
in these important skills. And to have
Thank you to Roman Bogomazov at
In 1987 Hank took a sabbatical, every reader of his book be on the
wyckoffanalytics.com for generously
recharged his batteries, and came path to trading mastery. His mission
making this video available for all to
back stronger than ever. Hank and I was to have every student become the
see. (click link).
collaborated on the creation of a new complete trader.
class based on the Wyckoff Method An accomplished “Wyckoffian”, Bruce
Dr. Pruden is one of those rare people
(which we team taught). Hank then Fraser has been teaching graduate level
who touched the lives of many in
developed an entire Technical Analysis courses on Technical Analysis at Golden
a most personal and positive way.
Certification Program. Students could Gate University since the early 1990s,
To honor his life and commitment
earn a certificate in Technical Market where he has been instrumental in
to others, let’s step forward and
Analysis or take these courses in crafting the curriculum. At Golden Gate
strive to be the very best complete
conjunction with their M.S. degree. University, Bruce’s teaching has focused
trader possible. Hank believed we
largely on Wyckoff Analysis
SAMT and Swiss TV Interviews
SAMT interviews Hank Dukascopy TV interview Interview with Ron William on

November 2013 17 June 2014 Dukascopy TV, 25 June 2014

The IFTA 30th Annual Conference
in Milan: Sailing to the Future
Mario V. Guffanti
The 30th annual IFTA conference, held this past October, returned
to Italy after nine years. While in 1998 the conference was held
in Rome, this year the venue was the Excelsior Hotel Gallia in
Milan, with a first day kick off in the Milan Stock Exchange
building. In our Spring issue we interviewed Francesco Caruso,
SIAT Vice President and organizer, who together with the SIAT
President Davide Bulgarelli and a good number of SIAT members
contributed to the complex organization of this annual event.
In our interview Francesco said that the title of the conference,
“Sailing to the Future”, allowed them to go beyond the usual
themes of Technical Analysis, exploring a sea of opportunities
originated by a totally new “quant” generation of technology,
Francesco Caruso and Davide Bulgarelli
markets and instruments. One of the goals was to try to go inside
the vast theme of the collaboration between Technical Analysis
and other fields of economics (i.e. Behavioural Finance, AI, Big
Data, Cryptocurrencies), with top institutional and academic
contributions.
I attended the conference and I can certainly say that the objectives
were achieved.
For three days, 41 speeches were presented in the conference
room of the Hotel Gallia. The forty second speaker, Hank Pruden,
was remembered by Davide Bulgarelli during the event.
I certainly cannot detail all the interesting speeches that took
place, but a brief talk about the main topics with some speakers
can be done. About half of the speakers were Italian, and the
speeches presented were on well diversified and original topics.
Several speakers - L-R: Mohamed Ashraf, Maurizio Among the big American names were John Bollinger, who
Mazziero, IFTA President, Mohamed El Saiid, John presented a personal history of technical analysis focusing
Bollinger, Gregor Bauer, Francesco Caruso, Luca Giusti, on the contributions of the individuals that he found most
Gideon Lapian (Chair AATI); kneeling: Eugenio Sartorelli useful in his investment process; Perry Kaufman, showed an
and Giovanni Trombetta)
interesting method that trades selected Dow components, being
more profitable than any of the broad indices, and a short-term
market approach applied to the future markets; Robert Prechter,
examined people’s natural tendency to extrapolate social trends
linearly and showed an alternative fractal model.
On the Quant side we had Kathryn Kaminsky, who spoke about
the convergence of Technical Analysis and Quantitative methods,
and Prof. Spyros Skouras, who discussed the distinction between
technical analysis and quant trading, and the key insights that
the first discipline brought to quant community.
One theme I have frequently heard was that of trend following
techniques: our SAMT Vice President, Alberto Vivanti, and others
have spoken on this subject.
Also a highly topical issue, the crypto-currencies, was dealt
both with individual speeches, such as that of Prof. Ametrano of
L-R: Dan Valcu, Spyros Skouras and Perry Kaufman

Politecnico di Milano, and with a round table discussion,
with Davide Bulgarelli, Davide Capoti and Matteo
Maggioni.
Other subjects were about new indicators (Francesco
Caruso presented a new technical indicator, the Composite
Momentum, subject of his article in our Spring Journal),
Algos, Neural Networks, Artificial Intelligence, Statistical
Indicators, Fractal Dynamics, Bifurcation Theory, Market
Psychology, Commodity Models, Options, Technical
Analysis and macroeconomic trends and new charting
techniques.
In a room contiguous to that of the conference, two
university professors, Eric Guerci and Nobuyuki Hanaki
(Université Côte d’Azur, France), conducted a collection
of data through two tests that the conference participants
could do on computers. It was a work on Experimental
finance, an emerging field of academic research that L-R: Alberto Vivanti, Robert Prechter, Mario V. Guffanti and
Ron William)
analyse data collected under a controlled experimental
setting and try to provide new quantitative insights to
questions related to the field of finance.
The conference was closed by the speech of Nazri Khan
Adam Khan, about the latest megatrend in trading world.
Dr. Nazri Khan is the chairman of the next IFTA conference
that will be held next year in Kuala Lumpur.
At the Italian conference he was accompanied by a large
delegation of 25 of his fellow countrymen who began to
introduce us to their fascinating country where the next
conference will be held.
While waiting to fly to Malaysia for the next IFTA
conference, I propose you read articles by three of the
speakers from the Milanese conference. Perry Kaufman
shows us a new model built around defence securities,
SAMT members: Samir Jalaleddine and Nico Büchel
which allows us to have better control of portfolio risk.
Robert Prechter, is interviewed by our Ron William on
his Socionomics work. Alberto Vivanti tells us about the
following trend techniques in portfolio management.
John Bollinger and Kathryn Kaminski Alberto Vivanti
Click to watch a memorable video that recaps the Milan Conference.

SAMT & SIAT members (L-R): Salvatore De Michele, Mario V.
Dr. Nazri Khan, speaker and Chairman of the next IFTA Guffanti, Riccardo Ronco, Alberto Vivanti, Andrea Unger and
Kuala Lumpur conference Ron William
Malaysia delegation

Portfolio Risk in
Uncertain Times
Defense Stocks Required
Perry Kaufman
We all know that putting uncorrelated stocks, or uncorrelated assets into

a client’s portfolio will reduce risk and limit drawdowns. But what does
“uncorrelated” really mean, and how much does it help? Better to know now
than be surprised in the future.
Think about two men, or women, each flipping a coin. The results are certainly
uncorrelated. Statistics show that there is a 25% chance one will show heads
and the other tails, and another 25% that the opposite person will show tails
and heads. That leaves 25% when both show heads and 25% when both show
tails. If we think about it in terms of stock prices, prices will move the same
direction 50% of the time, even if those stocks have nothing whatsoever in
common.
But of course, they do have something in common – they are driven by the
economic health of the country. At a minimum, we
should expect any two stocks, picked arbitrarily,
to move in the same direction more than 50%.
Let’s look at some examples.
When we construct a stock portfolio, it is
traditional that we look for those companies that
offer diversification, that is, stocks that don’t
move the same way at the same time. We typically
measure that using correlations.
Business as Usual
We’ll start by assuming that more diversification is better, and that the simplest
way to find the relationship between any two stocks, or a stock and the broad
index, is to find their correlation. This is a simple in Excel, but remember that
correlations use the daily returns, not the prices.
The correlation, which ranges from +1 to -1, tells us how similar the movement
of one stock is to another. A value of +1 means it’s identical, -1 that it’s exactly
the reverse. Those cases don’t happen. The value 0 says that there is no
relationship between the price movement. My own assessment is
+0.50 to +1.00 Very strong correlation

+0.20 to +0.50 Positive correlation
-0.20 to +0.20 No relationship
-0.20 to -0.50 Clear inverse relationship
-0.50 to -1.00 Unlikely to happen
We see strong positive correlations between interest rate vehicles, such as

a 2-year and 5-year Treasury note. We also see it when there is a crisis, and
investors all redeem their funds at the same time. It’s the money that moves
the market.
As an example, let’s look at four different stocks, General Electric (GE), Bank
of America (BAC), Merck (MRK), and Amazon (AMZN), each quite different.
Table 1 shows the correlations against each other and against SPY (the SPDR

Table 1. Correlations from 1998.
ETF) for the 20 years beginning 1998.

The averages on the right show that the strongest correlation is against SPY,
and less when one stock is compared with another. We should expect that
because the SPY is an average and picks up the general direction of the market.
These four stocks are included in that average.
We don’t usually think of price moves in terms of correlation, instead we think
about whether stocks move up and down together. If we just look at the days
stocks moved the same way, we get a much higher relationship. In Table 2, we
see how stocks moved compared to GE. I think it better represents the way we
think about stock movement.
Table 2. Rolling correlations,

against SPY, during three
representative periods.
Rolling Correlations
Looking at the average correlation over a long period hides a lot of information. Chart 1. SPY price (top) and the
How much did the correlation change during that time? How did it react correlations of the four stocks
during a crisis, such as we saw in 2008? Can we pick stocks to diversify a against the SPY (bottom) during
portfolio from the long-term correlations? July and August 2017.
During July and August 2017, the market moved slowly

higher. We can call it business as usual. The dominant
news was increasing tensions between the U.S. and
North Korea, and Amazon buying Whole Foods and
then lowering prices. SPY prices are shown at the top
of Chart 1 and the rolling 20-day correlations are in the
bottom panel. The rolling correlations give us a much
better understanding of how price patterns change.
When the SPY rises, we see the correlations increasing.
This happened at the beginning of July and the end of
August. During the sideways periods, the correlations
move towards zero. Each stock moves according to its
own fundamentals. These periods alternate, giving us
the sense that we have good diversification.
Correlations During a Crisis

It’s not the ordinary market that is the problem, but the
extremes. If we’re good at diversifying a portfolio, we
would have been protected during the financial crisis
of 2008. But we weren’t. Chart 2 shows the rolling 20-
day correlations of the four stocks against SPY for 2008.
Notice that Merck and Amazon both had periods of
low correlation, but the overwhelming picture is that
correlations hovered around 0.80, showing extremely
high similar movement.

Chart 2. Correlations during
the 2008 financial crisis.
Price Movement in a Crisis

It may be easier to see if these occasional, low correlations meant that a stock
was rallying while others were declining. In Chart 3 we can see the prices of
the four stocks and SPY. Despite the drop in the correlations of Merck, the price
chart shows that it declined more than the other stocks during 2008, and all
four stocks decline more than the index, SPY. Then choosing stocks based on
either long-term or short-term correlations did not prove to be helpful during
a crisis. Table 2 shows how the average correlations varied during the three
periods we’ve looked at.
Chart 3. Prices of the four

stocks and SPY, adjusted to
100 on January 1, 2008.
Table 2. Rolling correlations,

against SPY, during three
representative periods.

How Do You Select Stocks to Protect Risk?
We’ll be forced to use common sense to create a portfolio that protects an equity
investment during a crisis. But first we need to be specific about the crisis, and
that is a problem. We know that the attack of 9/11 could have been protected
by defense stocks and bonds (the flight to quality). The recent North Korean
risk also calls for defense stocks. Then there was the financial crisis of 2008.
Again, risk-free bonds would have helped.
Do we need to consider anything else? An attack on our power grid? An energy
shortage? An assassination? It’s going to be necessary to decide which events
would cause a large move in the stock market, what stocks or other assets
would protect us, and what portion of the portfolio should they represent.
The 1987 Stock Market Crash Chart 4 (Left), Bonds rally while
While not the same as 1929, the stock market crash in October 1987 was the stocks fall.
largest since the Great Depression. The Dow dropped 27.2% on the Monday Chart 5 (right), Gold reacts as
and Tuesday of October 18th and 19th. At the same time, bond futures rallied an immediate hedge, but then
(Chart 4) and gold flopped around (Chart 5). collapses.
It’s clear that the flight to quality means government interest rates, but gold
failed after years of being touted as an important hedge.
The Internet Bubble
The next event was the internet bubble, which saw the stock market go into
a 3-year decline after an incredible rally in Nasdaq stocks in the later 1990s.
Chart 6 shows the S&P futures with bond futures, although the S&P did not
receive the brunt of the losses. Again, we see bonds as a good hedge.
Chart 6. The Internet

bubble bursts. Investors
run to bonds.

9/11
Then there was 9/11. We were all there, one way or another. Stocks plunged,
bonds soared. Only the defense stocks, Lockheed-Martin (LMT), Raytheon
(RTN), and Northrop-Grumman (NOC), rallied. In Chart 4, we’ve added
Boeing (BA) to show that aerospace is not the same as defense. At the same
time, Chart 8 shows that bonds did not offset the equity losses. The initial
reaction was that yields rose, then ended the year higher (futures lower).
Chart 7. Defense stocks rally during the

9/11 terrorist attacks. The 2008 Financial Crisis
Chart 8. US bonds did not provide a Although a bit late and a bit sloppy, bond futures finally rallied in response to
hedge during the 9/11 period. the severe sell-off in late 2008. Before that, it provided a reasonable hedge as
the S&P steadily declined (see Chart 9).
Chart 9. Bond futures provided a
reasonable hedge during the financial
crisis of 2008, although its reaction at
the worse time was sloppy.
North Korea
Although we’ve seen more conflicts during the past two decades, Iraq and
Afghanistan seem less important in light of the tension and escalation of
rhetoric between the U.S. and North Korea. The defense stocks seemed to have
anticipated the crisis well before it became news. Chart 10 shows the movement
of the three defense stocks and Chart 11 shows how bonds reacted.
Times Change
The combination of the S&P and bonds has served well as a conservative
portfolio for years. During a financial crisis or swings in the U.S. dollar, bonds
have been the safe haven. During periods of strong economic activity, stocks
give the best returns. During a crisis, stocks drop and bonds rise, just as we
like.

But times have changed. Terrorism and geopolitical threats have become too Chart 10. The defense stocks react to
common. Neither bonds or gold show any consistency in protecting portfolio N Korean tensions.
Chart 11. Bonds mostly track the S&P
risk. However, defense stocks have filled that gap. during N Korean missile tests.
To show that defense stocks are not just a stop-gap, Chart 12 shows the history
of those stocks, along with SPY, adjusted to zero at the beginning of the chart.
It’s clear that defense stocks are just as likely to perform well, even while
having their unique hedging quality.
Chart 12. History of defense stocks
from 1998, compared to SPY.
Then, a combination of a broad market index, or diversified individual

stocks, bond futures, and defense stocks will be the better choice. But in what
proportion?
By the Numbers
Again, we’ll start by looking at a few cases. When the stock exchange reopened
on 9/17/2001, the SPY closed down 4.21 points, while LMT, RTN, and NOC
closed up and average of 6.03 points. We can’t do this in percent because prices
of those stocks have been adjusted for splits. Based on the price moves, a
portfolio of 58% SPY and 42% defense would fully hedge the crisis.
For the 2008 financial crisis we need to look at futures. Again, back-adjusting
makes it impossible to use percentage returns. From July 2007 through
December 2008, the S&P dropped from about 1400 to under 600, 800 points,
although we know it was equivalent to about 50%. One contract at $50 per
point, give a total loss of $40,000 per contract. Yoiks! At the same time, bonds
rallied (more or less) from 55 to 85, settling at 77, up 22 points, equivalent to a
gain of $22,000. Then a portfolio that had two contracts of bonds for each one
of the S&P would have been fully hedged.
If we put together the S&P, bonds, and defense stocks, we get:
27% S&P futures + 54% bond futures + 19% defense stocks = 100% investment
where the S&P and bonds are futures. Bonds can vary based on maturity and

whether they are cash, futures,
or ETFs. Using only S&P and
bond futures, from 1987, in the
proportion 27-54, we get the
results in Chart 13. Note that
there are no declines in 1987,
and after the internet bubble.
There is no decline for 9/11 and
a sideways period that ends in
2003. There is volatility in 2008
but no significant drawdown.
Net gains are 25% better than a
portfolio of 60% stocks and 40%
bonds, but more important, the
risk is far lower.
Intellectual Challenge
Adding 19% defense stocks
to the portfolio of stocks and
bonds presents an intellectual
Chart 13. Comparing a portfolio of 33% dilemma (see Chart 14). Performance is not as good as the portfolio without
stocks and 66% bonds with the traditional the defense stocks. The returns are slightly lower and the risk is slightly higher.
60% stocks and 40% bonds. The question becomes “Do I believe that defense stocks with be important in
the future?” My vote is “yes.” If you don’t like 19%, then any added allocation
to defense stocks will reduce
exposure to some future price
shocks. Good management is
about anticipation.
The other challenge is to reverse
the weighting of the industry’s
60% stocks and 40% bonds to a
more conservative 33% stocks
and 66% bonds. While we tend
to stay with the traditional
recommendations until it’s too
late, reducing leverage will
capture more of the gains from
the bull market of the past six
years. Isn’t it time to change the
paradigm?
Chart 14. Portfolio of 27% stocks, 54% bonds, and 19% defense stocks.
Perry Kaufman began his career as a “rocket scientist,” first working on the Orbiting Astronomical Observatory
(OAO-1), the predecessor of the Hubble Observatory, and then on the navigation for Gemini, later used for
Apollo missions, and subsequently in military reconnaissance. He then transferred the techniques developed in
Aerospace for estimating the path of a missile to his systematic programs for trading in markets. His programs
serve institutional clients in the financial, forex, energy, and agricultural markets.
Perry Kaufman is the author of “Trading Systems And Methods” and “Alpha Trading.” He has been the managing
director and general partner of investment funds and the chief architect of their strategies. He is president
of KaufmanSignals.com, a website that offers subscriptions to trading strategies and portfolios. He can be
contacted via his website, www.KaufmanSignals.com, or by email at perry@kaufmansignals.com.

A Baker’s-Dozen Questions on
Socionomics for Robert Prechter,
President of Elliott Wave International & the Socionomics Institute
Ron William, IFTA Educational Committee
Robert R. Prechter is known for developing a

theory of social causality called socionomics and
for his career applying and enhancing the Wave
Principle, R.N. Elliott’s hierarchical-fractal model
of financial pricing. Prechter has authored/edited
18 books on socionomics and finance, including
a New York Times best seller. His 2016 book,
The Socionomic Theory of Finance, aims to replace
conventional financial and macroeconomic theory
with a new paradigm based on socionomics.
Prechter has presented socionomic theory to
academic conferences and universities including
the London School of Economics, the University
of Oxford, the University of Cambridge, Georgia
Tech and MIT. Prechter and colleagues’ paper,
“Social Mood, Stock Market Performance and U.S.
Presidential Elections” (2012), was the third most
downloaded paper on the Social Science Research
Network that year. Prechter graduated from Yale
University in 1971, joined the Market Analysis Department of Merrill Lynch
in New York in 1975 and founded Elliott Wave International in 1979, where he
has published monthly market analysis in The Elliott Wave Theorist. Prechter
served for nine years on the board of the Market Technicians Association and
served as its president in the 1990-91 year. He is a member of the Triple Nine
Society and the Shakespeare Oxford Society.
Ron William (RW): What inspired your discovery of socionomic theory?
Robert Prechter (RP): I was drifting toward socionomic thinking when I was
19 years old. In early 1969, I wrote a college paper assessing a brief history
of popular song lyrics for expressions of attitudes towards achievement and
suggested that they portended economic changes. The idea that the stock market
and popular culture were linked crystallized in my mind in late 1975, shortly
after joining the Market Analysis Department at Merrill Lynch in New York. I
was musing about tonal changes in Beatles records that occurred in 1965-1966
while perusing a wall chart of the stock market. I suddenly realized that the
tone of popular music overall ebbed and flowed with the stock market. That’s
when I first sensed that I had recognized something new.
The more I watched the stock market, the more it became obvious to me that
news does not lead stock prices, nor is it unrelated. News lags stock prices.
Economists claim the reason for this relationship is that investors anticipate the
future. I have never met these clairvoyant investors. I concluded that something
immediately causal to stock market movement must be producing compatible
yet slightly delayed results in economic, cultural and political changes. Knowing
something about Elliott waves led me to an answer: waves of social mood.
During 1976-1978, I became completely committed to socionomic causality.
I have a letter I sent to my dad in February 1979, where I wrote, “The state
of business is a consequence of the changes in mood.” I underlined the word
consequence and used the term mood. To get a feel for what adopting this

causality means, you can read the
contrasting statements in Table 1.
In April 1979, I went independent and
started a financial publishing company.
In August of that year, I issued my first
declaration of socionomic causality.
Although the bulk of my time was
dedicated to business, in 1985 I
managed to publish a long report
titled “Popular Culture and the Stock
Market,” which was boiled down
for a Barron’s article. [These items
are reprinted in Pioneering Studies in
Socionomics.—Ed.] That sort of kicked
things off.
By the late 1990s, I had become a
purist. I was able to show that every
exogenous-cause argument was
wrong and that socionomic causality
successfully explains the same data. I
gathered all my ideas on the subject
and came out with The Wave Principle
of Human Social Behavior and the New
Science of Socionomics in 1999.
RW: If social mood governs social
actions, including stock-market pricing,
what governs social mood and why?
RP: Nothing external governs social
mood. Social mood is an unconsciously
Table 1 shared mental disposition that arises in humans when they interact socially. It
does not spread by contagion, it is not imparted by leaders, and it is not imposed
by authorities. It arises holistically from mutual interaction, the way an economic
marketplace does. Social mood predisposes members of society toward feeling
and expressing through action certain characteristic sets of emotions. Humans’
impulses to herd in contexts of uncertainty allow social mood free rein to
prompt social actions. Fluctuations in social mood regulate shifts in overall
optimism and pessimism, which are recorded in stock averages. They adhere to
a fractal structure, which is common to living forms. R.N. Elliott recognized this
fact empirically, and Benoit Mandelbrot confirmed it mathematically. The Elliott
wave model describes that structure.
RW: How does the Socionomic Theory of Finance (STF) provide a basis for
technical analysis?
RP: Technicians, along with Graham-and-Dodd value analysts, have long
operated under the belief that fully rational pricing and random walk are
wrong and that the stock market provides buying and selling opportunities.
They could not always convincingly explain, however, why markets provide
such opportunities. STF offers a coherent depiction of financial market causality
that justifies technicians’ pursuits.
Neoclassical economists and Efficient Market Hypothesis (EMH) theorists
believe that economic and financial causality are fundamentally the same, so
they have long judged technicians to be delusional. If economic theory pertained
to finance, they would be right. Think of it this way: Wouldn’t it be crazy to
study the past behavior of shoe prices as if they meant anything about future
shoe prices? That’s how conventional economists view technical analysis. Their
view follows logically from the premise that the causes of stock pricing and
shoe pricing are the same.
To eliminate this error, STF delineates a financial/economic dichotomy,

which distinguishes between the
field of (micro)economics, where the
law of supply and demand applies
within a paradigm of rational utility
maximization and external causality,
and the field of finance, where the law
of patterned herding applies within a
paradigm of pre-rational herding and
internal causality. Participants in an
economic marketplace can consciously
maximize the utility of their money
because they are relatively certain about
how they currently value things such as
food, tools and vacations; participants in
a financial marketplace unconsciously
default to herding, because they are
perennially uncertain about how other
people will later value things such as
stock certificates, debt instruments and
cryptocurrencies. Unconscious processes
aren’t random but proceed according
to mental defaults. For these reasons,
financial markets display no evidence
of equilibrium or mean reversion but
rather produce dynamic patterns such
as trends, bubbles, crashes, head-and-
shoulders formations and Elliott waves.
Neoclassical economics and EMH use Table 2
microeconomic causality for their financial model; STF proposes socionomic
causality. Table 2 lists key differences between the two proposals.
RW: The age-old debate about financial market theory continues, led by an
affiliation with old-Newtonian based models. To what extent has there been
a shift within the industry’s mindset about exogenous-cause, rational-reaction
theory, and how much support is your latest book receiving from academia,
thus far?
RP: There has been little fundamental shift in theoretical orientation to date.
What I see is an age-old oscillation. Behavioral finance was all the rage in the
first decade of the 2000s but is less so now. Psychological hypotheses about
markets were likewise prominent in the 1930s and 1940s but not so much in the
1950s and 1960s. Why is that? I think the trend of social mood determines which
view is dominant. As social mood becomes more positive, the stock market rises,
the economy grows, and observers increasingly embrace theories of exogenous
cause and rational reaction. As social mood becomes more negative, the stock
market falls, the economy contracts, and observers increasingly warm to
theories of endogenous cause and non-rational action. When mood is positive,
the world makes mechanical sense to people; when it’s negative, they become
confused and seek out alternative models.
This dynamic has played out clearly over the past two decades. In 1999,
economists were among the most respected people on the planet. Time magazine
put three of them on its cover. The profession was optimistic about the economic
future, embraced the idea of rational financial pricing and asserted that central
bankers know how to control the economy, which is a staple of the exogenous-
cause paradigm. That year, I was completing The Wave Principle of Human Social
Behavior, which commented, “The extremity of today’s bemusement toward the
outmoded idea of social cycles is yet another signal of an approaching major
social mood reversal and the beginning of a trend back toward a general interest
in patterns of social behavior.” Over the ensuing decade, social mood turned
negative, so the stock market declined twice, the economy had two recessions,
and behavioral finance became de rigueur, prompting a flood of new books

What a difference a about non-rational financial behavior. In 2002, behavioral finance pioneers
decade makes Vernon Smith and Daniel Kahneman won the Nobel Prize in economics. By
the end of the period, opinion about conventional economists had shifted
180 degrees. In April 2009, Business Week ran a cover asking, “What good are
1999 economists anyway?” and in July 2009, The Economist ran a cover showing that
modern economic theory had suffered a meltdown. Many people thought the
withdrawal of respect accorded economists at that time would be permanent.
Since then, however, social mood has trended positively, so stocks have risen, the
economy has expanded, and economists and their rational-market, exogenous-
cause paradigm have regained their halos. It seems unlikely that this oscillation
will ever cease. In each era, it seems hard to imagine that people could possibly
return to the ideas then considered outmoded, but they always have.
Still, good ideas eventually make headway. I feel deeply honored that some
brave leading lights in the areas of econophysics, behavioral finance, psychology
and applied mathematics have offered kind words about my book. Several
professors have incorporated socionomics into their curricula. These things
make me feel there’s hope.
RW: Professor Andrew Lo, of MIT University, has been a strong advocate of
alternative financial market theories, and in his latest book “Adaptive Markets”,
proposes a new model based on evolution. What synergies exist between the
Adaptive Market Hypothesis (AMH) and STF, and in which fundamental way do
they differ?
RP: I like theoreticians who think outside the box! On the other hand, adopting
2009 a model that works in another field can be problematic. Let’s just look at some
of the key differences between STF and evolutionary models so you can make
up your own mind.
In 1950, Armen Alchian proposed that an economy’s players succeed through
evolutionary adaptation. In the realm of financial markets, George Soros (The
Alchemy of Finance, 1987) proposed what he called “the principle of reflexivity,”
under which “investors[’] belief[s] will change the way they invest, and that
in turn will change the nature of the markets they are observing.” He posited
multiple feedback loops among investors’ fallible logic, market action and
external conditions. He said those interactions cause markets to evolve, often
in unpredictable ways.
The Adaptive Markets Hypothesis (AMH) comes to a similar conclusion
through a more rigorous route. If I may summarize the introductory paper
(Lo, 2004), AMH argues for the existence of distinct groups of market
participants—including retail investors, market makers, hedge fund managers
and pension fund managers—who compete for scarce profit opportunities in
the manner of different species competing for scarce resources such as food
and water in a setting of economic motivation. It proposes that these groups’
investing strategies evolve through learning by way of positive and negative
reinforcement, with the goal of achieving financial survival in an environment
that constantly changes due to participating agents’ own actions, which feed
back into the system as new environmental causes, leading to evolutionary
changes in markets, just as reflexivity theory has it.
STF agrees with Soros and Lo that financial pricing is subjective, that non-
rational beliefs and habits are involved in the financial pricing process, and
that humans’ attitudes change economic and social conditions. Yet it does not
embrace economic motivation, heterogeneous agency, reflexivity, adaptivity,
profit-making knowledge evolution among speculators or any version of self-
referential feedback mechanics.
Bear with me a moment, as this is a complex subject.
n Under STF, trading decisions made with reference to exogenous data do
not fundamentally determine market behavior; rather, the market’s mood
determines people’s interpretation of exogenous data as part of the process
of rationalizing optimism or pessimism. As an example: A recent statistic

showed that the economy grew at a 3% rate. Investors in an optimistic mood
would declare it a strong quarter compared to a recent weak quarter, whereas
investors in a pessimistic mood would say it is weak relative to past stronger
quarters. You can see this effect among economists going back decades. I give
an amusing example involving the trade deficit in The Socionomic Theory of
Finance.
n STF recognizes no heterogeneous groups to which one can attach a multiple-
species metaphor. It views speculators as members of a homogeneous group,
whose aggregate behavior is motivated by its members’ pre-rational herding
impulses. Speculators’ various market-related behaviors do not fit into
distinct categories but fall along continua. There is a full range with respect
to time horizons, degrees of experience, joining trends vs. looking for value,
the application of fundamental vs. technical analysis, etc. This is true not only
among all speculators but also with respect to each individual speculator at Investors in an
different times.
n Under STF, economic and financial markets are fundamentally different and
optimistic mood would
cannot be equated. Producers and consumers in economic markets on one
hand and speculators in financial markets on the other perform two distinctly
declare it a strong
different roles. Competing for resources does help people thrive in economic
markets, but the best way for most people to thrive when it comes to financial
quarter compared to a
markets is to avoid them. Furthermore, financial profit opportunities are not
scarce resources to be fought over, because no one uses them up; they are
recent weak quarter,
perpetually available to anyone, every minute of every day. whereas investors in
n Nature produces many successful species, but as far as I can tell, no class of
speculator achieves long-run financial success, so there must be little in the a pessimistic mood
way of adaptation, natural selection or evolution going on within or among
such groups. Consider that novices, large speculators and even professional would say it is weak
fund managers are all consistently wrong at market turns. As groups, they
never learn. In 2008, even the captains of America’s top investment banks, relative to past
which had been in business for a hundred years, proved they had learned little
about capturing profit opportunities when their firms faced bankruptcy. One stronger quarters.
such investment bank, which comprises some of the savviest financiers on the
planet, wouldn’t exist today had the government and the Fed not amended
the rules so they could bail it out. The firm’s lucrative ties to government are a
successful adaptation, but that is an economic advantage provided by access
to a rare resource; it has nothing to do with acquired wisdom about financial
markets’ profit opportunities.
n Under STF, the reason financial markets cannot evolve is that no group of
speculators can entirely escape the primitive dynamic of pre-rational herding.
So-called “Commercials,” the only consistent winners in financial markets,
are successful precisely because they are not speculating; I talk about that in
Chapter 17.
n Under STF, there are no feedback loops between market actions and
speculators’ beliefs or between market actions and social conditions. The cause
is unidirectional, from mood to beliefs to actions, which create conditions.
n Theories involving reflexivity, feedback, adaptation and evolution view
financial markets as qualitatively mutable. STF proposes that markets are
qualitatively immutable and only quantitatively variable. Changes in markets
that may seem like evolution—such as shifts in the degree of attention paid to
various stock sectors or in the relative popularity of value investing vs. trend
following—result from momentary changes of focus within the herd. Such
shifts are not a matter of what but of how much.
Economists, physicists, biologists, psychoanalysts, game theorists and
complexity theorists have all applied their models to finance. These models
serve their original purposes well but in my view are not fully transferable to
financial markets. So, I think that evolution is evolution and finance is finance.
One system does not successfully model the other. STF offers a theory of finance
that is not based on some other field’s model.

RW: Can technicians somehow apply aspects of STF and AMH together?
RP: I think the difference between them is too deep for that. As my colleague
Wayne Parker used to say, “Eclecticism is dangerous.” You can’t mix
incommensurate hypotheses; you have to choose one or the other. For example,
Lo, Mamaysky and Wang (2000) conducted a wonderful, seminal study
statistically validating the famous head and shoulders pattern (H&S) in financial
markets. But think about it: If markets did evolve away from recognizable profit
opportunities, then H&S, which signals a profit opportunity, could not be a
consistent phenomenon. The pattern’s efficacy—if not the pattern itself—would
be repeatedly, if not permanently, obliterated by adaptation and evolution. In
other words, it seems to me that to remain metatheoretically consistent, one can
subscribe to either H&S or AMH, but not both.
RW: Mainstream macroeconomic and financial theories rely upon exogenous
cause and rational reaction. So-called triggers for action include “information
flow,” “fundamentals” and various “catalysts”, which can translate into high-
impact events such as central bank policy, economic releases, or market shocks.
How can the application of social mood concepts deal with these influences
and help improve our analysis of the financial market?
RP: These concepts are borrowed from physics and chemistry and do not
pertain to finance. Chapter 1 of The Socionomic Theory of Finance, titled “The
Myth of Shocks,” offers some convincing anecdotal evidence that backs up
three exhaustive studies by other researchers demonstrating that even the
most dramatic natural and social events do not serve as triggers or catalysts for
moves in stock averages. Chapter 2 challenges thirteen widely accepted claims
of stock-market causality—involving interest rates, oil prices, central-bank
activity, economic data, and so on—deriving from the exogenous-cause model.
The evidence there surprises many people.
Chapter 23 on bubble theories specifically addresses the ideas of tipping
Figure A points. In physics, tipping points imply hidden forces building to produce a
singular event, typically a shift from one state of equilibrium to another. To
begin with, financial markets have
no such states of equilibrium. Their
prices fluctuate up and down in a
condition of perpetual dynamism, at
all scales of observation. One would
have to postulate an infinite number
of tipping points, a formulation that
would be devoid of explanatory or
analytical value.
To analyze financial markets, you have
to start with a model that recognizes
the market’s independence from
exogenous causes. I think the proper
model is waves of unconscious social
mood that adhere to a hierarchical
fractal, specifically the Elliott wave
model.
RW: What do your key indicators
signal about financial markets now,
and how will conditions likely change
from what we have experienced in
this cycle?
RP: Optimistic market opinions, deep
commitment to the stock market and its
derivatives, extreme linear projections
for higher prices, all-time-high levels
of debt and a persistent decline in debt

quality all indicate that social mood today [submitted November 8, 2017—Ed.]
is exceptionally positive. I recently displayed 40 sentiment indicators that are
at or near all-time extremes. That fact does not tell you for certain where the
stock market is going, however, because mood can get even more positive, a
development I have observed numerous times. But it does suggest a condition
of historically high risk in owning stocks and debt.
RW: Can we derive any socionomic conclusions about the social, political and
geopolitical landscape?
RP: Trends toward positive social mood lead to rising stock prices, economic
expansion, relatively peaceful times and affirmative cultural expressions.
Trends toward negative social mood lead to falling stock prices, economic
contraction, social and political conflict and contrary cultural expressions. With
that knowledge base, you can get a handle on the mood behind any social
environment.
RW: Who should incorporate socionomic analysis?
RP: Socionomics is for people who want to understand the world around them.
Our studies link social mood to some fifty human activities, including stock
market trends, employment trends, election outcomes, wars, scandals, drug
prohibition, epidemic disease, baby names, hemline heights [see Figure A],
skyscraper construction, roller-coaster construction, nuclear weapons testing,
procreation rates, automobile styling, automobile horsepower [see Figure B],
the quality and popularity of movie genres, the activity of serial killers and the
fortunes of pop stars. If those things interest you, then read our two latest books,
Socionomic Studies of Society and Culture—How Social Mood Shapes Trends from
Film to Fashion and Socionomic Causality in Politics—How Social Mood Influences
Everything from Elections to Geopolitics. These books are a lot of fun, and I think
they could change the way you view the world.
RW: What would you recommend specifically for technicians and speculators
to learn?
RP: Above all, they need to understand STF so they can avoid spending time
and energy on peripheral matters that have little or no analytical value. This is
not as simple as it sounds. It took me quite a few years to jettison all exogenous-
cause assumptions, because doing so is deeply counterintuitive. If you read just Figure B
the first two chapters of
The Socionomic Theory of
Finance, you should be
primed to go.
My next suggestion is
to learn the Elliott wave
model. It takes some
practice, but it’s worth
it when the waves are
clear. For an example
of application in real
time, read Chapter
22 of The Socionomic
Theory of Finance,
which contrasts twenty
years of analysis
in the oil market
by five successive
practitioners to supply-
and-demand analysis
from economists.
Measures of breadth
are helpful, since

specific wave labels imply certain breadths of participation among individual
stocks, stock sectors, stock indexes and—at the highest degrees—allied markets
globally, and the two datasets should be compatible. I also recommend
maintaining as many sentiment indicators as you can.
It is important to realize, though, that technical indicators cannot do the job
alone, because wave degrees determine how extreme those indicators will get.
I had to learn that the hard way, too.
RW: I have seen some practitioners ignore the rules and guidelines of wave
construction, and their posted work is a concern because it implies that the
Elliott wave model is subjective. Is there a way to fix that problem?
RP: Yes, we have a solution. A team at Elliott Wave International spent several
years developing an objective, hands-on test of wave-identification skills. It is
entirely computer-administered and graded. It is a tough test, not easy to pass.
At the last IFTA meeting, I met one person who had become a Certified Elliott
Wave Analyst (CEWA) and another whose colleague did so. If you pass that
test, you have proved to prospective clients or employers that you know the
subject.
RW: What vision do you hold for the future of socionomic study and the
resources for its development?
RP: Well, I have spent about 20 years writing books and papers, making
speeches and videos, hosting socionomics conferences and launching a monthly
publication called The Socionomist. My last two books completed a five-book set
on socionomics.
One of my goals has been to write three papers that would show the way for
further research. The first one would present the socionomic theory of finance,
the next would contrast socionomic causality to standard causality statistically to
provide a template for future research, and the third would be a comprehensive
study validating the Elliott wave model. The first two are done and have been
published in peer-reviewed journals. [They are: “The Financial/Economic
Dichotomy in Social Behavioral Dynamics: The Socionomic Perspective” (2007;
Journal of Behavioral Finance) and “Social Mood, Stock Market Performance and
U.S. Presidential Re-Elections: A Socionomic Perspective on Voting Results”
(2012; SAGE Open); reprinted in The Socionomic Theory of Finance and Socionomic
Causality in Politics, respectively, and available online on the Social Science
Research Network (SSRN). —Ed.] I’ll be working with my son Elliott on the
third paper, which is in the planning stage.
The Socionomics Institute is set to carry on without me, and it’s doing great.
Lampert, Hayden and Hall’s “Behavioral Finance Beyond the Markets: A Real-
Time Case Study of Russia’s Military Resurgence” was published in 2016 in
the Journal of Behavioral Finance & Economics, and half a dozen other papers have
been published or are in the works. But SI comprises only a handful of people,
and there is a lot of work to do. The Socionomics Foundation offers grants to
interested academics and welcomes anyone to help further the cause. Validation
takes time, but we’re making it happen.
For more about Socionomics, visit www.socionomics.net.

Related sites: www.robertprechter.com; www.elliottwave.com
We invite you to read the Review of Robert Pechter’s book,

The Socionomic Theory of Finance by the late Hank Pruden,
Ph.D., which appeared in the Spring 2017 edition of The Swiss
Technical Analysis Journal.

A Key Theme at the
30th IFTA Conference in Milano:
Trend Following in Portfolio Management
Alberto Vivanti
I enjoyed the 30th annual IFTA conference in Milan hosted by the Italian Society
of Technical Analysis (SIAT). It was a beautiful experience, both as a speaker
and attendee; I met many colleagues and friends, some I hadn’t seen for many
years, it was exciting to share our findings in technical research.
I discovered that the number of technicians that employ a trend following
methodology for portfolio construction is constantly increasing and that the
quantitative aspect of technical analysis is more and more important in asset
allocation.
The algorithmic analysis is giving an amazing contribution to the portfolio
construction, especially when the size of the exposure in the asset classes
becomes a key issue for controlling risk and optimizing the reward/risk
parameters of the portfolio returns. More and more investment fund managers
are concerned about a trend that, deep down, is the basic concept of technical
analysis. Momentum-based techniques are becoming an important component
of quantitative allocation models: the risk optimization factors in portfolio
construction can be improved through trend-based variable exposure.
In many presentations, given by valuable, experienced speakers and fund
managers at the IFTA conference, there has emerged that trend following
techniques, as a filter for protecting portfolios against an adverse environment,
reveal to be far more effective than many commonly used methods based on
volatility filtering.
One case example: consider the sector indexes that compose the European
market, the well-known Stoxx600 series. In figure 1, I have simulated three
equity curves: one, composed by a constantly rebalanced equal weighting of
18 sectors. I have not used the Stoxx600 Index because its weighting imbalance
among sectors caused by the sharp difference in market capitalization of the
index components.
The others are two simulated portfolios made of nine sectors each. One is a
monthly rebalance of the nine less volatile sectors, showing the lowest values
in standard deviation at the end of each month. It is calculated on a six-month
window of weekly data. The other is also a monthly rebalance of nine sectors
but with the opposite characteristics, the most volatile.

Table 1 - Equal Sectors Distribution with Volatility Filters

2000-2017 (September) CYROR Annualized Volatility Maximum Drawdown
Equal Weighting 18 sectors 4.8% 19% 56%
9 Low volatility sectors EW 5.7% 16% 47%
9 High volatility sectors EW 3.6% 23% 64%
Table 1 – Simulated returns of equal weighting of 18 Stoxx sectors, constantly rebalanced,

compared with two simulated portfolios: 9 low volatility and 9 high volatility sectors indexes
(standard deviation at 6 months, monthly rebalanced). The low volatility selection provides better
results, yet the maximum drawdown is still very high.
The less volatile portfolio was expected to be better and so it is. Return is
higher, volatility is lower. Nevertheless, even if better, the volatility figures and
the size of drawdowns are still very high, the return provided, even if higher,
still does not justify such amount of risk that is not far from that of a buy-and-
hold strategy.
Figure 1 – The simulated equity curves of €100 invested in 2000 in the three combinations
described in Table 1. The curve in the middle is the equal weighting of all the 18 sectors, the
blue line is the portfolio composed of the 9 less volatile sectors.
Table 2 - Equal Sectors Distribution with Volatility and Trend Filters

2000-2017 (September) CYROR Annualized Volatility Maximum Drawdown
Equal Weighting 18 sectors 9.4% 11% 13%
9 Low volatility sectors EW 9.7% 10% 13%
9 High volatility sectors EW 9.0% 13% 18%
Table 2 – Simulated returns of the three strategies described in Table 1 after the addition of
a filter, based on a six months momentum calculated on the equal-weighted index. When
negative, all the strategies stay out of the market and the exposure is taken to zero.

Things change by applying a trend filter to the same strategies, such as a six-
month momentum, calculated on the equally-weighted combination of the 18
sectors. If at the end of the month, this long-term indicator is negative, then
the whole investment is liquidated into cash. The simulated results are shown
in Table 2, the equity curves in Figure 2. Things change by applying a trend
filter to the same strategies, such as a six months momentum, calculated on the
equally weighted combination of the 18 sectors. If, at the end of the month, this
long-term indicator is negative, then the whole investment is liquidated into
cash. The simulated results are shown in Table 2, the equity curves in Figure 2.
Figure 2 – The simulated equity curves of €100 invested in 2000 in the

three combinations described in Table 2 with the addition of a long-
term trend filter on the whole investment.
Conclusion
It does not matter how complex and smart a trend-following strategy is.
The method described here is very simple and more complex momentum
strategies can be employed. The basic assumption does not change: a trend-
filtered strategy is much more effective than many traditional methods that are
employed in the funds industry to reduce volatility. There is a big diffusion of
funds and ETFs aimed to provide less volatile returns. It is true that a standard-
deviation filter can improve the quality of returns, but a dynamic allocation
exposure obtainable by a trend following strategy can do much better. This is
the path that more and more quantitative asset managers are now following.
Alberto Vivanti, Independent analyst, founder of Vivanti Analysis in 2003. Alberto is a technical and quantitative
analyst since the early 1980s, with a sound experience as an asset manager with Swiss Institutions. Author of a
technical newsletter, lecturer for institutions and instructor in Technical Analysis courses in Switzerland for the
IFTA Certification, author of articles and books, he has been co-author of a book with Perry Kaufman. Alberto
chaired the IFTA conference held in Lugano in 2006. He has been a speaker at the IFTA Conferences - 1998 in
Rome and 2006 in Lugano. Alberto is Vice President of the Swiss Association of Market Technicians, representing
the Chur and Liechtenstein Chapters.

Review: 7th Annual Lantern Fund
Forum, Lugano
Mario Valentino Guffanti, CFTe
The 7th Annual Lantern Fund Forum (LFF) in Lugano, was exclusively for the institutional public. For the past three
held on 20-21 November. This most important event in years we have been making a further selection within
Switzerland which is reserved for financial professionals the institutional public sector segment, distinguishing
and focuses on asset management, investment tools and between those who are buy-side, i. e., those who are
fundamental analysis. potential buyers or investors of third-party funds and who
have liquidity to manage and invest, and all the
others. We want to focus on the high-end segment
which we invited to the Forum for free.
In addition, there have been some phenomena that
continue to grow year after year, bringing more
and more organizational problems. I am referring
to people who register and then, without notice, do
not show up to the event, or people who, despite
having three months to register, only show up at
the start of the event. This causes serious problems
for the event organizers (the size of the rooms, the
numbers for catering, the number of badges and
brochures, the amount of material that sponsors
must bring, etc.).
MVG: What have you achieved from this Fund
Forum?
A new format RE: From the point of view of numbers I am satisfied.
This year the format was slightly different, in the sense Despite the introduction of the entrance fee, we had 1,200
that access to previous Fund Forums have always been attendees, about 200 delegates less than last year. But if we
free-of-charge, and subject to online registration or on analyze this drop in attendance, those who were buy-side
site. This year, however, only the delegates who belonged increased, while the cut took place in the sell-side: we had
to the buy-side, i.e., those who are potential buyers or 60+% buy-side and about 40% sell-side. We hope that this
investors of third party funds and who have liquidity to qualitative improvement was noticed by our sponsors, but
manage and invest had free admission, while the other we have to wait to evaluate the results of follow-ups in the
participants had to pay an entry fee. coming weeks to understand their level of satisfaction.
Another innovation was introduced where we could find Regarding the introduction of topics focused on
an important special session focused on the hottest topics Fintech, blockchain and cryptocurrencies, I am more
of the moment, not strictly linked to asset management: than satisfied. Our classical
Fintech, cryptocurrencies and blockchain. I interviewed audience followed these
Riccardo Esposito, CEO of Lantern Fund Forum, to better topics with great interest. The
understand the new format. introduction of new topics to
our classic program, enables
MVG: Good morning Riccardo, can you tell our readers us to attract a new audience
why you decided to change from a free to a paid event? to LFF.
RE: For several reasons. First, to make you perceive the
event was quality: To pay is the litmus test of quality, of SAMT & IG Bank
how much you believe in your products and services. My This year, SAMT partnered
goal is not to make money, but non-payment equals little with IG Bank and I conducted
or no value. a workshop with Andreas
The Fund Forum should be synonymous with quality and Ruhlmann, Premium Client
prestige, and in this perspective our organization decided Manager and Market Analyst,
from the beginning to eliminate the retail sector and aim at IG Bank. The content was

about the rules that every trader should know. We spoke it is buying ETFs, not only in Japan, but also in Europe and
about the academic studies that dealt with the importance the United States. The final consideration is how customer
of technical analysis, how to develop an exit strategy, stop- money can be handled in a world where central banks and
loss versus buy & hold, the best time to take profits or cut governments buy assets. They buy without making any
losses, how to optimally choose the size of a position and assessment of the quality of what they are buying.
trading psychology. A part of the seminar was dedicated to
Another question was about the survival of the European
the operation of the rules described, using the IG platform.
Union over the next five years, which saw the audience
The Forum focused on five topics: Fintech, independent agree for its continuation.
financial advisory, alternative investments, social
Mr. Mauldin talked on technology and how it will lead to
responsibility, and women & finance.
a better world. The themes were the new technologies that
will allow the world to be fully connected with innovative
Wi-Fi networks, such as the Goggle balloons with a Wi-
Fi receiver that could cover the whole world with their
new technology, or the solar drones of Facebook. This
could lead to free Wi-Fi connections on iPhones and other
mobile phones.
Mobile phones will be a thousand times more powerful
than today, we will probably wear them and in 20 years
they will be connected to our brain. It may seem crazy
now, maybe not us, but our children will be able to take
advantage of this technology and ask questions that
hundreds of expert systems with artificial intelligence
can answer and explain how to solve problems using the
available resources.
The keynote speaker was John Mauldin, visionary Three billion new people will enter the global system.
thinker, noted financial expert, New York Times best-selling There will be self-driving cars. The world will be very safe
author, pioneering online commentator and publisher of in self-driving cars. With self-driving cars, all the old jobs
“Thoughts from the Frontline”. like taxi or truck drivers will disappear. And with self-
driving cars no human error will cause car accidents, so
John Mauldin: A journey into the future in the next 20 years
there will be no need for auto mechanics as there won’t
will be a world of abundance, but with a very bumpy road.
be accidents; no need for insurance or agents, and so on.
Mr. Mauldin spoke about what the world will look like
It seems beautiful, but there are 10 million jobs in the US
over the next 20 years, not just technologically, but from
alone which will be affected. And where will these people
the aspect of how society will change and how economies
work? A truck driver is not ready to do a tech job. Artificial
will evolve. The result was a vision of a happy ending in
intelligence will take one job after another, and half of the
a new world of abundance, but with a very bumpy road
people in financial services will no longer have the job
to get there.
they have today, because in the next 10-15 years their work
Mr. Mauldin began by talking about his new book in will be done by a computer.
which he tells how he believes the world will be over the
There are credible people who have estimated that 500
next 20 years. One part is dedicated to technology, which
million jobs will disappear in the next 20 years. Some new
we all see passing before our eyes. But the fundamental
jobs will appear, but there is a problem. We have gone from
points are also linked to other issues, such as the difficulty
the farm, which in 1800 covered 80% of the USA to the
for humans beings to adapt to the changes that will take
current 2%, and we produce hundreds of thousands times
place. Another factor that complicates matters is the
more than we did 220 years ago. But we have done this
activity of central banks and governments. They create the
over generations. Slowly but surely, people moved from
rules, but they are not doing so well at the moment.
the countryside to the city. The number one job in Chicago
The current issue of central banks’ operations was in the early 20th century was to be a butler because the
addressed through questions that Mr. Mauldin asked middle class grew and people hired others to take care of
the Swiss money-manager audience (at the end of the the house, laundry and wash the dishes. Thirty years later,
article, you can read his comments published later in his washing machines and dishwashers arrived and there
newsletter). How long will it take for the Swiss National was no longer any need for those people who then had to
Bank (SNB) to buy more than a trillion dollars in equities find new work. But it took time. And today this happens
and bonds? It currently owns $831 billion and can be in a finger snap, and we are not ready: this kind of change
considered the world’s largest hedge fund. SNB already is too fast.
owns 3% of Apple. What is SNB doing with 3% of Apple?
Then Brexit, Trump, Macron are part of the frustration of
Norway has almost a trillion dollars of assets in its hands the world’s social mood. There is an epidemic for the first
and Japan’s national bank has finished buying bonds, now time in US history, they are seeing people dying earlier,

while others live longer – males 45-55 years old who use in the bars saying that dogs and Irish cannot enter. They
drugs, alcohol and commit suicide. This is because they were not the favourites because people thought they took
no longer have a job, have no hope, and have given up. all the jobs. Do you know what the Irish did 20 years later?
In Europe, as people vote, it does not seem that things They tried to prevent Italians from arriving. And years
are getting better. We have a society that is increasingly later, the Italians did the same thing to the Norwegians
frustrated and we have to face the two biggest bubbles in and Eastern Europeans. Every generation says: I’m here
world history: the government debt bubble, and the bubble and I don’t want anyone else to come because I don’t want
of government promises. They have promised benefits, jobs to be taken, but that’s not right.
pensions, health care, roads, but are unable to pay. The
All these factors are leading to enormous frustration. Is
USA has an advantage over Europe, taxes are lower and,
the end of this story? Yes, despite the problems that will
therefore, there is still room for raising them. In most parts
arise from the situations described, the result will be good.
of Europe, taxes have reached 45-50% and there is no more
room for raising them. However, pensions and health care Mauldin is now working with a company that studies a
continue to grow. According to Mauldin, the solution will cure for pancreatic cancer and can be used for any other
be that the money will have to be borrowed. The European cancer. You will not lose your hair and there will be no
Union will exist for the next five years, but the only way to side effects.
do this is for everyone to hold hands and move away from
Another company with which he is collaborating is
the abyss together, so that we can take all the debt, all the
studying a method that within the next 10-15 years, with
Italian, German, Spanish and even Greek debt, and give
the use of genetics, a person of 70 will be rejuvenated
it to the ECB and then sell it to all of us. It is then taken
back 10 or 15 years to 55-60. It is not only a question of
away from the state budget, so that governments have the
extending lives, but also rejuvenating the body’s cells to
opportunity to pay and honour their promises. The debt
reverse age back 10 or 15 years.
will not disappear, but it would simply no longer be in the
government budget. Our food will become increasingly abundant and cheaper.
We will soon be able to obtain drinking water from the
The role of money managers will be to take their customers
ocean. The cost of all things is decreasing and we will live
along this path. There will be another recession. Mauldin
in a world of abundance. But until we reach this point,
thinks that what we will have to do in the future with our
we must be able to understand how we can overcome the
clients will be to say the that world has changed: money
obstacles that we are facing, such as politics, public debt
will not have to be managed as usual in different assets:
and pensions that cannot be paid.
it’s all a single large pool of risk and everything interacts.
Trading strategies will have to be diversified to quantify Along the way to this new world of abundance where we
and indicate where to put money and when. will live longer and where health will improve, we will
have to try to find out how to get in tune with each other.
The latest recovery has been slower than in previous
The world is certainly in a deflationary scenario. The cost
years, because the largest debt is an obstacle to growth.
of things continues to fall, which is a good thing.
Therefore, systems will be needed that indicate where
we will grow in the next recovery and we need to have a We need to understand how we can take our customers
global vision. from where they are today to where they want to be in
10-15 years. Because when we come to the end of this
Most of us have a home bias. The Germans want to invest
process to manage, change, frustration, and debt all these
in German equities, the US in American equities, and
problems will be solved. And we will succeed because
so on. But what we will see is that growth will be in the
that’s what the world does, it always pulls forward, it
emerging countries, not the same, not at the same time, but
keeps on always pulling forward, then we will have the
there will be a need for systems that will allow diversified
largest bullish market.
trading in the markets that rise and then define them.
I end this article dedicated to Mauldin’s speech, with the
And this will happen where frustration will be increasingly
his thoughts published in his newsletter of 25 November.
present. In Europe, frustration due to immigration, is in
the US, too. Mauldin said that he is part of the Republican “I spoke to a number of Swiss money managers and family
party, he knows his responsibilities, but no longer offices while I was at the conference, and I can tell you there
understands what is going on. The Republican party wants was not a sense of complacency. They were all very nervous and
less immigration. But there are only two ways to grow the not quite sure what to do – not unlike many of my readers. We
economy: increase productivity, which is not increasing, or took an informal poll, and a majority of the attendees felt that
increase the number of workers. We will, therefore, have the Swiss National Bank’s balance sheet would top $1 trillion
to understand how to have more immigrants. We should in less than a year. They are goosing it in order to keep a lid on
recruit young people. One example is Silicon Valley: how the Swiss franc. Interestingly, 65% of the attendees felt that the
many immigrants have created new companies and jobs. SNB should not be buying US equities (it now owns more than
We are not thinking properly. 3% of Apple, for instance); and while this audience earns their
keep by managing money for mostly non-Swiss clients, they
Mauldin’s ancestors were Irish, and in 1850-1860 there were
were all concerned about the continued strength of the Swiss
a lot of Irish people in New York, and there were posters
currency and wondering how long it can remain so strong.”

interesting for this reason. The
regulators are allowing the experiment
because the situation is new, but in a
few years and maybe after some major
fraud, the regulators will certainly
have to intervene.
The model suggested to banks to
enter the cryptocurrencies business is
to focus on the security issue, which
is fundamental. Service outsourcing
is not recommended. It is better to
have an internal structure, to be built
with real experts and best practices,
as the sector is still very young. So
the solution is to work internally with
external experts.
The real masses of money on
cryptocurrencies will be seen when
responsible investment vehicles will
A good technical analyst needs to know in which market be created. There are still no real investment funds. It
the money flows go so that he knows where to invest. is not easy, for those who are not yet in the blockchain
The same can be said about new topics that will interest community, to understand what is happening now.
people in the coming years and will create future trends.
So in 2 days at the Forum, I tried to understand which Panel #2 - cryptocurrencies and traditional assets: a
were the conferences that had the most public flow. It was winning strategy or a dangerous mix?
not very difficult: in fact, there were only two lectures that Panelists: Maurizio Mazziero (Consulting Partner, Pro Aurum
completely filled the hall with standing room only, and Schweiz AG); Paolo Barrai (CEO, Cryptolab); Leendert Van
these were the two panels on cryptocurrencies: Hoeken (Managing Partner, Colin & Cie, Switzerland);
moderated by Paolo Cavatore (Swiss Finance + Technology
Cryptocurrencies, a New Trend to Watch Association).
Panel #1 – dedicated to cryptocurrencies and banks: The research indicates that Bitcoin are decorrelated in
how banks may play a winning role? comparison to other asset classes, except for some short
Is Bitcoin a business opportunity for banks or a poison periods when the correlation has been low (around 0.1 -
pill? 0.2). But the track record is very short, only five years. In
Panelists: Giacomo Zucco (CEO, Blockchainlab); Lars fact, Bitcoin was created nine years ago, but the first four
Schlichting (Partner, KPMG); Lucas Betschart (President, years were seen as
Bitcoin Association Switzerland) and Daniele Bernardi (CEO, pioneering. Bitcoin
Diaman). were born in 2009,
as a response to the
All the panelists agreed on the paradox that, despite structural crisis,
cryptocurrencies, were born as a means for bypassing with rising public
banks, the latter could be very useful in providing services debt. The latter
in their world. may be erased
In fact, cryptocurrencies were created as an alternative in the future, but
to payment instruments, but also as an alternative to Bitcoin, by its own
traditional investment assets. Banks could play the role of nature, remains outside this problem and could be very
custodian and asset manager. interesting.
However, it is necessary that the phenomenon of Bitcoin appears to be more decorrelated than gold – gold
cryptocurrencies be regulated by the legislators in order works very well in times of geopolitical and market
to understand if Bitcoin can be defined as a security and shock, and with inflation. But currently Bitcoin cannot
consequently regulated. In the case of transferable security, be seen as a real reserve of value due to its volatility. A
it is necessary to identify who takes responsibility for the future regulation and listing with futures could lead to a
asset and takes responsibility for any losses. In Europe, the lowering of this volatility.
mentality seems to be more open than in the US. Not only Bitcoin but its technology, consisting of
Therefore, banks could act as custodians and provide blockchain, could also be exploited in other fields, such
investment services for those wishing to invest in Bitcoin. as the banking sector, where increasingly expensive
Cryptocurrencies are a decorrelated asset and, therefore, regulatory controls for KYC (Know Your Customer) could

take advantage of this technology, which would bring
considerable added value.
The part about cryptocurrencies ended with an original
presentation where a number of selected Crypto-Projects
introduced themselves for three minutes each.
A part of the Forum was dedicated to Fintech and Artificial
Intelligence, with a panel moderated by Luca Maria
Gambardella, Director, Dalle Molle Institute-USI/SUPSI.
A final presentation by Carlo Terreni, CEO, NetComm
Suisse, who has been a witness of the radical change that
technology has brought to the fashion industry with the
birth of e-commerce and other digital applications that in
a few years has revolutionized this sector.
I close my report with thanks for the collaboration of
translators and Cristina Valtorta of Unimoney.
Lantern Fund Forum founder, Riccardo Esposito and
Keynote Speaker, John Maudlin
Lantern Fund Forum Gala Dinner
Photos by Makro Photographers
Mario Valentino Guffanti, CFTe is a Financial Advisor, Certified Financial Technician and Researcher and also
a lecturer in Technical Analysis. He is the Vice President of the Swiss Italian Chapter of the Swiss Association
of Market Technicians (SAMT).

An Interview with Dr. Van Tharp,
founder of the Van Tharp Institute
Ron William, CMT, MSTA
Ron William & Dr. Van Tharp
at the VTI workshop in
London, October 2017
Dr. Tharp is the author of Trading Beyond the Matrix: workshop, which I had the pleasure of just attending here
The Red Pill For Traders, published by Wiley & Sons, in at your Van Tharp Institute (VTI) headquarters in Cary,
addition to four acclaimed books published by McGraw North Carolina, USA, during April 2017.
Hill: Super Trader, Trade Your Way to Financial Freedom,
the New York Times Bestseller, Safe Strategies for Financial
My opening question is about your life story. Dr. Tharp,
Freedom, and Financial Freedom Through Electronic Day
what inspired you on the path of trading psychology and
Trading.
transformation?
Dr. Tharp: Well it’s interesting, because I just learned that
Tharp is the only trading coach Mark Douglas, author of Trading in the Zone, passed
featured in Jack Schwager’s best- away last year. He and I both started at the same time as
selling book, The Market Wizard’s: preeminent people within the world of psychology and
Interviews with Great Traders. trading. Mark was inspired by the Seth Material and I
He has been featured in Forbes, was inspired by A Course in Miracles. I started working
Barron’s Market Week, Technical through A Course in Miracles in 1982, and by the time I
Analysis of Stocks and Commodities, finished, this business was pretty much full-time operation
Investors Business Daily and Futures for me. Even then, when I didn’t know that much about
and Options World, and Trader’s transformation and it didn’t happen that quickly, it still
Journal, just to name a few. felt like my mission was transformation through a trading
Dr. Tharp has collected over 5,000 metaphor.
successful trading profiles by RW: How clear was it this would be your mission in life?
studying and researching individual
traders and investors, including Dr. Tharp: It was more fuzzy then but I knew then that
many of the top traders and investors in the world. From it was my bliss and that I really got a lot out of helping
these studies he developed a model for successful trading people. Now it’s really obvious. In those days, it was more
and investing in which other people can adopt and learn. about simply enjoying that I was helping people transform.
He has developed a five-volume Peak Performance Home In contrast, I didn’t like doing research or working for the
Study Course, teaching the results of this ten-year study. government and that type of thing. Going in this direction
was very much part of my destiny.
He also developed the Investment Psychology Inventory
Profile to help people better understand their strengths RW: What can you tell us about your background in
and challenges in relation to trading or investing. Psychology and Modelling techniques?
He also has developed a course on How to Develop a Dr. Tharp: I always wanted to develop models. Psychology
Winning Trading System That Fits You, and written and is where I started, but I didn’t get my modelling techniques
published The Definitive Guide to Position SizingTM. out of psychology. I learned to develop models from
studying Neuro Linguistic Programming (NLP). The idea
He published the Market Mastery newsletter for over 10 behind NLP modelling is that you find a number of people
years, and now publishes a weekly e-newsletter, Tharp’s who do things well and find out what they do in common.
Thoughts. Dr. Tharp wanted to get the vital information Once you have the common tasks, then you need to find
that traders needed to as many people as possible; the three ingredients of each task which are beliefs, mental
therefore, he decided to offer his newsletter at no charge. states, and strategies.
Before that subscriptions to his newsletters were as much
as $249 per year. I modelled the trading process, the process of developing
a trading system that fits you, and how to use position
RON WILLIAM (RW): Thank you Dr. Tharp for this sizing to meet your objectives. There are probably now
follow up interview opportunity, on behalf of the Swiss around 115 Tharp Think concepts™, which do not make
Association of Market Technicians (SAMT), affiliated with a model exactly but they are more of a set of beliefs which
the International Federation of Technical Analysts (IFTA). came from numerous sources. These concepts really help
We also want to recognize many leading financial market people transform and perform well as a trader. The infinite
professionals around the world that are interested in your wealth model™ is another one. We are working on market
life’s work on trading psychology and transformation. I types which demonstrates that it’s really insane to design
must also congratulate you on a truly amazing Peak 101 a system that is expected to work well across different

market types. If you understand one market type really in his 800+ page book called Science and Sanity. What’s
well, it becomes much easier to develop a system that funny is that he devoted 800 pages of words to explain
works well in that market type. why words tend to mislead us into an illusion. My plan is
RW: Going back to the conventional principles of to write a book about this topic tentatively entitled: Matrix
psychology, how would you explain the trappings of so- Thinking: Going from Force to Power to Awakening. Thus,
called conventional “black-box” thinking, as stated during this question is not easy to answer in a short paragraph or
two, but let me summarize a few principles:
your workshop.
• Our experience of the world comes through our sensory
Dr. Tharp: I’ve always wanted to know how the human receptors. I’ve read that our senses only experience
mind works, whereas the world of psychology has been about one trillionth of the frequencies in the universe.
focused on developing itself as a science. Thus, everything Furthermore, the firing of a particular sensory receptor
needs to be objective and measurable. The problem with is not the same as the energy wave that stimulates
that approach, however, was psychologists didn’t think that that receptor. For example, a long light wave which
the processes going on inside the mind (such as thoughts stimulates the long wave length cones in the retina,
and beliefs) were measurable so they chose not to look at produces an electrical signal in the brain— it does not
such processes. It’s interesting because psychology in those produce a long light wave length. The electrical signal
days was modelling itself as a science, after Newtonian then produces a sensation that we label red.
physics, which had already become obsolete. That seemed
amusing to me. • When we label the sensation red, however, we remove
the experience of the sensation by one more degree.
RW: Walking in the hallways of the Van Tharp Institute, And then we might remove ourselves further from that
I appreciated the inspiring gallery of famous influencers experience by judging it — red is an aggressive color
within the field of psychology and the financial markets. or an angry color. The removal from the experience
Around the corner from the Godfathers of psychology, continues when we think thoughts like red cars are
Carl Jung and Sigmund Freud, was what I understand to more likely to be pulled over for a speeding ticket than
be one of your most favorite thinkers of that time; Alfred cars of other colors.
Korzybksi. He became known for his signature mantra “the
map is not the territory”, a concept that you taught about • We use language to codify our experience and this
extensively in your course. Please explain to our readers process actually shapes the brain as we grow through
what this means and why it is so important for traders to our first five years of life. Through language, we learn to
understand? separate the world into subjects, objects and verbs. But
this is just a map, the world is not made up of subjects,
Dr. Tharp: A number of religions say that our experience objects, and verbs.
of the world is made up. Hindus and Buddhists call it
• When we name a thing, we think that we know it. But
“Maya.” The whole proposition in A Course in Miracles is
naming it almost guarantees that we don’t know it. If
that “nothing real can hurt you and nothing unreal exists.
I say dog, what sort of dog do you picture? Whatever
Herein, lies the peace of God.” The book teaches students
it is, it’s probably not the picture I imagined. Further,
of the course to forgive yourself for having a dream and
what qualities do you give to a particular dog? I call
then forgive your brother for being part of the dream.
my dog Tigger athletic, but that label is based upon a
Korzybski explained how we create our illusion of reality few things he does only occasionally, such as catching a
squirrel. Most of his days are spent sleeping and
begging for food (he’s actually overweight).
• We also take verbs and turn them into nouns
in a process called nominalization. I’ve done that
a number of times in this explanation. Here’s a
good example, “the market” is a nominalization.
Rather than a thing, it’s an ongoing process of
buying and selling perhaps best represented by
tick dots for the price of each transaction. But
then we turn tick dots into a candlestick and
then we turn candlesticks into moving averages
and all sorts of other indicators – all so we can
make some meaning out of the market. But that
meaning is entirely made up.
• Finally, when you understand that you make
it all up, you tend to become more and more
“awake” in the spiritual sense. You can also
use this information to move toward peak
Alfred Korzybski (1879-1950), independent scholar performance knowing that some beliefs (even though
who developed a field called general semantics, as
framed at the Van Tharp Institute.
they are made up) can be much more useful than other

beliefs within the context that we deem important (i.e., became clearer to me. I understand now how the brain has
the context for the market might be making money). to transform.
RW: What have been the key changes in your work The best way to explain the process so that everyone can
since the first interview that you gave in 1989, as part of understand is to remember that key phrase “the map is
Jack Schwager’s best-selling book, The Market Wizard’s: not the territory”. This means that our internal model of
Interviews with Great Traders? how everything is and works has nothing to do with the
external world. We are never going to know the external
Dr. Tharp: In 1989, I was still just scratching the surface world at all but instead, we can have more or less useful
of the impact of psychology as it applies to trading and models on the inside.
one’s life. Since then, I became an NLP modeler and have
modelled several areas previously mentioned such as More to the point, let’s talk about the financial markets.
system development, position sizing™ strategies and There is no such thing as the market. It’s only a word
market types. Now we talk about levels of consciousness that describes a process. At best you can say that it’s a
or oneness, as part of a log scale of combination of price ticks that occur all day long and so it
levels of awakening going from zero to means something different to everybody. The analysis can
a thousand. evolve from observing a single raw price tick, to candle
patterns, then to moving averages and oscillators. We keep
There are about 18 stages of awakening. transforming the data unless we can make some meaning
The first stage is where problems out if it and yet none of it is real. But given that we know
disappear, because you start to think the map is not the territory, we can come up with useful
about solutions more. I remember that it beliefs. No belief is true without a context. But when you
used to be a big deal to be pronounced find and adopt useful beliefs, then you can become a peak
awake and get your first number. Now performer.
I have a pretty high number and at the
same time it doesn’t mean anything RW: What would be a useful belief for traders that want
to me anymore. The biggest shift probably happened to successfully make money?
around 2008 when I became a blessing giver and then the Dr. Tharp: These would be ideas like-
transformations started accelerating.
• Always know where your trade idea is wrong when
RW: What guidance do you suggest to skeptical or you get into a position. We define that as your initial
conventional market participants which are too focused risk or 1R (a positive risk multiple).
on their bottom-line trading performance, and might be
new, or initially resistant, to the idea of applying spiritual • Another one could be — don’t enter a position unless
transformational techniques to become successful traders? your potential reward is at least around three times the
size of your initial risk. So that would mean your gains
Dr. Tharp: Well, here is an interesting thought. What should be 3R and your losses should only be -1R.
if when you died you basically had a conversation with
your higher Self (or with God or an angel), in which you RW: Can anyone be a successful trader? I ask this as part
reviewed your life with a spiritual (oneness) perspective. of the classic age-old debate, popularized by the legendary
Suddenly you could understand your limitations, charges commodity traders Richard Dennis and William Eckhard
and non-useful beliefs. As you looked back at your life, in the early 1980s, with their Turtle Trader experiment, to
you could see how you kept repeating the same mistakes prove that anyone could be taught to trade.
over and over again. The next thing you know, you end Dr. Tharp: Well first, the Turtle experiment didn’t really
up in another body (with no memory of your past life), prove anything. Dennis and Eckhard interviewed a massive
trying to get through it without making those same types number of people, immediately rejected something like
of mistakes. That cycle may be your condemnation to hell. 90% of them, and from the remainder selected a few Turtles.
If that seems like the case, then why not recognize your
Even then, the Turtles had huge differences in their results
mistakes now and get rid of them so you don’t have to
causing some of them to say that even with the thorough
repeat the cycle?
selection process, the experiment didn’t really work.
RW: How would you explain the importance of these NLP practitioners used to say that if one person can do
changes to some of our readers that might be new to something, then anyone else can do it too. I’m one of the
this type of transformation work, both for themselves and few people, however, to have done a massive modeling
their trading? project in just one area – trading (others include Robert
Dr. Tharp: There are 7 billion people in the world and 7 Dilts who has modeled leadership and L. Michael Hall
billion paths to awakening. Most people start by taking the who has modeled coaching). When you have created a
knowledge path of awakening. But for me, things that I massive modeling project for a particular field, you realize
didn’t get at all at first, now seem like second nature. A that someone has to change their identity and take on a
Course of Miracles for example said “its all an illusion”. new role. An identity such as that of a trader, a leader, or
I studied the course for four years and I still didn’t a coach. I’m now pretty convinced that not everyone can
understand that statement. It wasn’t until I read Gary become a great trader, in large part because they are not
Renard’s book (The Disappearance of the Universe) that it willing to change who they believe themselves to be.

RW: In your own extensive research, including the various game in a way which no one would want to trade in
trader psychometric tests that you have developed (e.g. real life.
the Tharp Trader Test) and happiness tests, what certain • The game is about expectancy and probability.
qualities do good traders tend to have that others don’t?
• There is a huge edge in the game that would bankrupt
Dr. Tharp: Sure, it’s similar in some ways to the Myers any casino (and finding such edges is one secret of great
Briggs test. Probably 90% of the people in our Super Trader trading).
program are NTJ profiles using Myers Briggs. N means
they are intuitive. They tend to focus more on the big • There are actually two games going on with different
picture than the details. T means that they are thinkers (in expectancies (as happens in real life for money
their head) rather than feelers (in their body). Most of our managers).
traders are men and 75% of all men are Ts (thinkers) while • You need to plan ahead of time when you might want
75% of women are Fs (feelers). The last one is J (for judgers to change your rules.
versus P or perceivers). Perceivers tend to get caught up • Worst case scenario planning is essential to survival.
in what they are doing (lost in the moment so to speak;
and as a result, they are much more likely to be compulsive • Having objectives and a good plan tends to lessen the
gamblers). Judgers tend to be more organizers. These effects of emotions in trading.
principles, however, are just general observations. • You probably have a lot of non-useful beliefs at work in
I also find that people who are likely to succeed tend to the game that impact your real-life trading.
be committed, willing to work on themselves, and good And as I said, there are many more.
at math, they understand basic statistics and simple
probabilities. They are also good at strategy type games. If I RW: Can you tell our readers who might be relatively new
were recruiting good traders, I’d search for these qualities. to your work, about the Super Trader program? What
was the inspiration behind its founding? How much of a
RW: One of my absolute favourite practical exercises in transformational experience has it been for students over
your Peak 101 workshop was the playing marble game, the years, and what is your vision for this advanced training
based on risk and money management techniques. program in the future? For example, I understand that you
Although, our team were in the lead for the majority of have a goal for Super Traders to reach of a state where
the game, we unfortunately slipped into second position consciousness is permanently over 600 on the Hawkins
after being perhaps too conservative after compounding scale.
a big win. It was during that experience, I learnt first hand
that fear aversion was not only something that traders feel Dr. Tharp: I (and all my staff members) experience great
when their position is under water, but also when they joy out from helping people transform. Transformation
are making money, and at risk of being too greedy. How through a trading metaphor is why I have my business
important is it for traders to find that “zero state”, and and why I created the Super Trader program. What does
what would you say are the biggest lessons that students that look like? There are a number of variations but, say
can learn from the game? someone who is unhappy being a doctor comes to us
and they want to become a trader instead. The beginning
Dr. Tharp: Okay, you’ve asked another question that could lessons for the Super Trader program require that they
take at least a book chapter to answer but let me try to be initiate some massive personal transformations. I want
brief. First, we play games in workshops because I believe to help them change their belief structure and their brain
that games reflect behavior and that people learn best enough to produce a massive shift in consciousness.
through experiences. There might only be a few dollars
I referred to the Hawkins scale which we use to help people
at stake in a game, but people have the same experiences
understand the process of transformation. Dr. David
in the games as in real-life trading, so they can learn a lot
Hawkins developed his useful model of consciousness and
without risking a large amount of money.
said his scale correlated highly with happiness. We don’t
In the game, I want people to develop their awareness. I measure consciousness but we do measure happiness. We
want people to become aware of their thoughts and feelings have a test that scores happiness from minus 55 (depressed
while they are playing the game. Acknowledging and and probably non-functional) to plus 85 (happy all the time
identifying what you are experiencing helps you improve for no reason). Much of the time, people start the Super
your awareness. When you become aware of the beliefs Trader program with a score of plus 20 or less. By the time
that shape your experience and the feelings that might be they complete the transformational phase of the program,
linked to those beliefs, then you are in a position to gain they have increased their happiness score to at least 60 and
control over the situation. This is probably the major lesson they are pretty much happy for no reason. So sometimes,
—awareness. our unhappy doctor has become a happy doctor in the
But there are hundreds of lessons to learn about trading in process and no longer has the desire to be a trader— but
that game. Let me tell you a few more - I’m okay with that. Most of our Super Traders continue on,
however, and trade after doing more work.
• Objectives are all important.
During the second phase of the program I want people
• You achieve your objectives through your position
in the program to develop a handbook for their trading
sizing strategies. You can do that even trading in a
business.

able to trade at 95% efficiency and
better. Making the program better
just makes working on it more fun
for me.
RW: The Van Tharp Institute
is continuing to engage on a
worldwide tour, bringing the best
of your workshops across Europe
and Asia. I understand that you
have already firmed up plans for
2018. For those interested in
attending, please share what key
experiences you feel people can
expect to learn?
Dr. Tharp: Our plans for 2018
include presenting workshops
on nearly a monthly basis at
our North Carolina learning
center in the US. In March 2018,
I will travel to Sydney, Australia
where we will present our Peak
Performance 101 workshop, our
How to Develop Trading Systems
Workshop, and our Infinite
Wealth Workshop. October 2018
we plan to return to London to
present three workshops. We will
teach the Peak Performance 101
Workshop again (a prerequisite
for most of our other psychology
workshops).
For the first time in the UK,
we will teach Peak 203, our
I think this is the most important document that any trader Happiness Workshop (which
can have. It’s a blueprint for building a successful trading requires attending Peak 101 first).
business and we actually have a Blueprint Workshop that My goal in this workshop is to raise each person’s
teaches much of what should be in the handbook. In this happiness score about 20-25 points over the three days. We
phase, they develop their business objectives and apply are usually successful because I designed a lot of exercises
all of the important lessons learned in the trading game to and processes to help people develop a lot of awareness
their trading plans. and remove a lot of self-sabotage. That workshop
In the third phase of the program, Super Traders develop dramatically changes people’s lives. Lastly, we will teach
three trading systems that fit them and that work in our Blueprint Workshop which helps people understand
different market types. Once they have these, they then and plan for everything that’s required for a successful
need to prove to me that they can trade their systems at trading business. This is the workshop I mentioned earlier
95% efficiency for more than 100 trades. By this I mean that that helps you develop a very thorough business handbook
they make no more than one mistake in 20 trades. Mistake which will include a lot of areas which most traders don’t
free trading is critical to succeeding as a trader. Someone even consider when they think about a trading business.
could actually develop a whole coaching program based To help people understand the outcomes intended for
upon the idea of reducing mistakes. One professional each workshop, here are the objectives from each of the
trader told me, “You’ve shown me how I can manufacture workbooks:
R in my trades just through minimizing mistakes. That’s a
huge edge.” Peak Performance 101 Learning Objectives:
And you asked about my vision for the future of it. I’m • Learn the ingredients of success: mental states, beliefs,
pretty happy that we are meeting our objectives of helping and mental strategies.
people really transform their lives and achieve massive • Learn how to change your mental state at will.
increases in happiness. One of my goals is to continue to • Learn how to examine your beliefs to determine if they
make the program more and more effective where more are useful and in what context.
people get massive transformations and more people are

• Learn the tasks of trading well that separate the best • We help you learn awareness of shadow parts, disowned
traders from the average traders and help you eliminate parts that really cause great self-sabotage. Our goal is for
mistakes. you to overcome at least 20 such influences in your life in
• Learn awareness through the trading game we play this workshop and the subsequent homework.
(plus the many other lessons outlined). • We give you a six-week program to take home with
• Learn to overcome inner conflict (a exercise in avoiding you to both improve your happiness and your trading
self-sabotage). profitability.
• Learn how to release stored feelings so that the charged Finally, our Blueprint workshop has the following
emotions to no lock non-useful beliefs in place. objectives:
• Day One focuses on your overall business and developing
Happiness Course (Peak Performance 203) appropriate plans and strategies for that.
The primary objective of this course is to understanding
that your natural state is joy and that if you are not there, • Day Two focuses on systems and how to design systems
then some self-sabotage is going on inside you. that fit you and different market types.
• And Day Three focuses on psychology so that you better
• We then help you discover that that self-sabotage might
understand yourself, and overcome your self-sabotage.
be so that you can overcome it.
• But the overall workshop is to help students 1) learn about
• In addition, we introduce people to a number of
all aspects of trading success and what is really involved
techniques to increase their happiness and their
and 2) develop a business handbook that will become
awareness.
your best friend as a trader.
Interview: November 2017, London
Supertrader Summit 2016
We invite you to read the interview with SAMT VP Mario

Valentino Guffanti and Dr. Tharp on his book, Trading Beyond
the Matrix: The Red Pill For Traders, which appeared in the
Winter 2013 edition of The Swiss Technical Analysis Journal.
Ron William, CMT, MSTA, is a market strategist, educator and trader, with 18 years of financial industry experience,
working for leading economic research and institutional firms; producing macro research and trading strategies.
He specializes in macro, semi-discretionary analysis, driven by cycles and proprietary timing models.
Ron is a board member of the International Federation of Technical Analysts (IFTA), part of their education
committee,Vice President & Head of the Geneva Chapter of the Swiss Association of Market Technicians (SAMT)
and Honorary member of the Egyptian Society of Technical Analysts (ESTA); holding both the MSTA and CMT
professional designations. He is also co-founder of the SAMT CFTe Immersion Course and SAMT Journal.

Investors Make Bottoms;
Traders Make Tops
An Analysis of Technical Indicators that Show How the Attitudes and
Activities of Stock Market Participants Aid Forecasting
Philip J. Roth, CMT
PREFACE
My intention is not to defend or deny the theories of Professors Lo, Mamaysky, and Wang wrote after testing
“Behavioral Finance”. It has long seemed a matter of ten technical patterns: “While human judgment is still
certainty to technicians that the notion of “Random superior to most computational algorithms in the area of
Walk” has been refuted and that fundamental analysis visual pattern recognition, recent advances in statistical
is inadequate; hence, to us it was a matter of time before learning theory have had successful applications in
academia would be searching for new explanations of fingerprint identification, handwriting analysis, and face
stock price movements. Chan, Jegadeeish, and Lakonishok recognition. Technical analysis may well be the next
wrote in 1999: “What has caught the attention of many frontier for such methods.…for NYSE/AMEX stocks, 5 of
investors recently is the predictability of price changes the 10 patterns HS, BBOT, RTOP, RBOT, and DTOP, yield
over intermediate horizons (three months to a year). statistically significant test results…”10
In the medium term, stock prices exhibit momentum
Technical Analysis is based on three premises, which those
(continuation in a price direction). So, for these horizons,
studies support. They are: (1) Information is absorbed
what goes up tends to keep rising and vice versa.”1 Some
incrementally in the market place; it is not “efficient”.
equity market participants believe that stocks trend because
Hence, (2) stocks trend; it is not a “random walk”. And,
information comes to the market place incrementally or
(3) those trends are, in the words of Robert Prechter:
that investors only act on the information incrementally.
“probabilistically determinable”. After writing his book of
However, technicians are primarily concerned with the
conversations with technical analysts (Heretics of Finance,
observation that stocks do trend. Prechter and Parker
2010)11, MIT professor Andrew Lo said in a presentation
wrote: “In finance, uncertainty about valuations by other
to the Market Technicians Association he had a hard time
homogeneous agents induces unconscious, non-rational
trying to quantify the technical indicators, but he was
herding, which follows endogenously regulated financial
convinced traders were seeing something useful in the
fluctuations. This dynamic produces non-mean-reverting
charts and he believed the computers may eventually
dynamism in financial markets, not equilibrium.”2 It is
figure it out. It’s like facial or pattern recognition.
my intention to show that many technical indicators are,
Humans have little trouble distinguishing a cat from a
indeed, behavioral.
dog, but teaching a computer to do that has proven to be
Good news for technical analysis has come in the form very difficult (albeit, probably not impossible) .
of supportive academic studies of those trend and
Long before fundamental analysis was codified and no one
momentum indicators. Such research goes back at least
had heard of “quantitative analysis”, excessive valuations
to 1989 when Andrew Lo and Craig MacKinlay showed
were noted in markets. In 1841 Charles Mackay wrote
with a “simple” statistical test that “Stock Market Prices
about the South-Sea Bubble in London, which occurred
Do Not Follow Random Walks…”.3 Subsequent research
in 1711, and Tulip Mania in Holland, which occurred in
has found “information” (in the statistical sense) in stock
163714. Those, of course, were examples of “irrational
market trading volume ( Lo and Mamaysky, 2000)4,
exuberance”, centuries before the 1990s, which prompted
support and resistance, including “stickiness” at round
Alan Greenspan to coin that phrase15 and Robert Shiller to
numbers and previous significant new highs and lows
write a book with that title16.
(Osler, 2000, 2001 and 2003; Mizrach and Weerts, 2007)5,
moving average trading rules (Papailias and Tomakos, Technicians have called behavioral indicators “sentiment”
2011)6, patterns and trends (Lo, Mamaysky, and Wang, or “psycho-logical” indicators, and “supply/demand” or
2000; Osler and Chang, 1995; Savin, Weller, and Zvingelis, “money flow” indicators. I will not be concerned with such
2007; Weller, Friesen, and Dunham, 2007)7, momentum aspects of Behavioral Finance as the endowment effect,
indicators, specifically RSI and MACD (Lachhwani, loss aversion, anchoring, etc.12 I will only be concerned
Hitendra, and Khodiyar, 2013)8, and Elliott wave analysis with optimism and pessimism on equities per se. In other
(Magazzino, Mele, and Prisco, 2012)9. Magazzino, Mele, words, I am interested in who is bullish or bearish, and
and Prisco wrote: “The major findings of our analysis how bullish the bulls are and how bearish the bears are, not
show that, in the case of turbulent financial markets (such why they may be bullish or bearish. I will refer to “stock”
as we have been experiencing) technical analysis and most of the time in this discussion, but the theory applies to
the Elliott’s theory adequately reflect the realities of the anything that trades continuously in an open market, such
financial markets”. as bonds, commodities, options, futures, and currencies.

INTRODUCTION
By now most equity market participants have learned When stocks have been rising traders get more bullish;
about the notions of over-popularity and over-pessimism. when stocks have been declining traders get more bearish.
They have read “too much bullishness” after big advances. Traders (I am including professional buy-side and sell-
One such example is the book, Dow Jones 40,000 by David side traders, as well as individuals trading for their own
Elias. This book was published in June 1999, after nearly accounts) cannot recognize a final high price as it occurs.
two decades of rising stock prices, and only six to nine In fact, technicians go to great lengths to emphasize that
months before the end of the secular bull market, and a “top”, a reversal of an advance, is not a point in time; it
before ten years of no price progress, interspersed with two is a process that entails a series of weakening rallies and
lengthy, deep bear markets. People have read about “too growing declines. As the process of a top, a distribution
much pessimism” after big declines. An example was the pattern, develops, traders will begin to get the message
famous (infamous?) “Death of Equities” cover of Business and move from a bullish posture to a bearish one. Investors
Week magazine on August 13, 1979.17 The bearish article who have been bearish, who have been supplying stock,
followed a decade and a half of no price progress in stocks. will continue to do so, because prices are still “high”. The
In fact, it appeared near the lows for the next three years supply/demand balance will be tipping to the negative
and was followed by the great secular bull market of the side. A bottom, of course, is the opposite process. Traders,
1980s and 1990s. However, those are anecdotal examples who have been bearish because of declining stock prices,
and they imply “everyone” (I exaggerate, of course; “most need some time to recognize a stabilization pattern
participants” is what I mean) is too bullish at tops and too becoming a base, an accumulation pattern. Investors who
bearish at bottoms. This is not the case, nor can it be the have been bullish, who have been accumulating stocks,
case. Someone is selling the stock that traders can’t get will continue to do so, because prices are “low”. The
enough of late in bull markets and someone is buying the supply/demand balance will be tipping to the positive
stock traders are disgorging indiscriminately late in bear side.
markets.
Therefore, importantly, my sentiment indicators
My sentiment (i.e., behavioral) indica-tors are of two distinguish investor attitudes and actions from trader
types: those that deal with equity market participants who attitudes and actions. “Attitude” indicators include polls
have short term horizons and those that deal with equity and anecdotal information, i.e., what participants are
market participants who have long term horizons.18 I have saying. “Action” indicators are transactional measures,
found that “investors make bottoms” and “traders make i.e., what participants are doing. Together, indicators of
tops”. That is not to say investors are smart and traders attitudes and actions form the framework for what market
are dumb. There is such a thing as “rational exuberance”. technicians call “Sentiment Analysis”, which I believe is a
Both savvy investors and savvy traders can and do show key element in behavioral economics or behavioral finance.
good results. But they are motivated by different things I will start with the longest term indicators and end with
and dominate the buying and selling in the market at the shortest term. While we have all heard many times
different times. Hence, my sentiment analysis is not about that technical analysis is “arcane”, or worse, “divination”,
“contrary opinion”, unless of course, we make it clear who I believe sentiment analysis is reasonable and obvious to
to be contrary to and when to be contrary. knowledgeable market participants. When I have asked
my students, “Whose advice and actions would you rather
During lengthy trends most equity market participants
follow, Warren Buffet or the famous hedge fund manager
get the message and are on the right side much of the time.
they just saw on CNBC”, they always picked Warren, the
However, near turning points we usually find traders on
consummate successful long term investor. And most of
the wrong side for a while and investors on the right side.
them took my course because they wanted to learn how to
In fact, I define a bottom in the market to be that period
become a good trader.
when stocks are stabilizing after a lengthy decline and
investors are buying stocks from traders, and I define a top Sentiment indicators cannot be used in isolation from
in the market to be that period when stocks are faltering market movements. Sentiment indicators are useful only
after a lengthy advance and investors are selling stocks with respect to the trend. During much of a trend, up or
to traders. Of course, there is no way to know what all down, most people get the message and are on the right
investors and what all traders are doing, but we do have side. Too much (trader) optimism is only a negative when
indicators that suggest what the majority are doing. Why price progress is struggling after an advance (and investors
should it be that traders are often on the wrong side at are supplying stock). The opposite is also true. If you bought
turning points and investors are usually on the right side? the first time you heard “There’s too much pessimism” in a
bear market, you would probably be buying in the middle
Investors are motivated by price and value. As a result,
of the decline. The late money manager, Martin Zweig, was
they get more bullish and more active on the buy side
known for saying, “Don’t fight market momentum and
when prices are declining and when stocks are “low”.
don’t fight the Fed”, simple but excellent advice. We would
The opposite is also true; they get more bearish and more
add “Don’t ignore the buying and selling proclivities of
active on the sell side when prices are rising and stocks are
investors and traders, especially when prices have stalled
“high”. Traders are usually not concerned with value; they
after lengthy rises or falls.
are motivated by trends.

PART ONE
Very Long Term (i.e., Secular Trend) Indicators
I have found that different sentiment and supply-demand indicators are useful
for different time horizons. Indeed, the very long term indicators are useless
for short term horizons. The indicators we follow are useful for the very long
term (the secular trend, the trend that encompasses two or more economic
cycles), the long term, (the cyclical trend; one complete bull-bear cycle), and
the medium term, (intermediate term, usually one leg of a bull or bear cycle,
often three to six months). Sentiment indicators are usually not helpful for the
short term (near term, from a few weeks to a few months) and are unlikely to
be useful at all for the very short term, such as day trading. On rare occasions,
however, very extreme readings in medium term indicators may be helpful for
the short term.
Chart 1
1. Our first indicator is the most basic one, the Net Change in Supply of Stock.19 Flow of Funds: Net Change in
The data, derived from the Federal Reserve Flow of Funds series (FRB FOF, Supply of Stock
table F.4, line 12), is quarterly data, at a seasonally-adjusted annual rate
(SAAR)20. The data is released with about
two-and-a-half month delay. With just
four data points a year and a long lag it is
obviously only useful for a very long term
perspective. What does it tell us? When
the series is on the plus side, it means new
equity financing (IPO’s plus new stock
sold by existing public companies) exceeds
corporate buybacks. Who is perhaps the
most important long term investor? The
corporation itself. Corporate activity in
its own stock is by its nature a very long
indicator. When a corporation comes into
the market to buy back its own stock, it is
almost a permanent reduction in supply.
Corporations’ action in their own stocks is
investment activity. Chart 1 shows that the market tends to do relatively well
when buybacks exceed new offerings. The supply of stock is decreasing.
The second half of the 1990s and 2004-2007 are great examples. The market Chart 2
tends to do relatively poorly when new equity financing exceeds buybacks. Flow of Funds: Households
The supply of stock is increasing. 2001-
2002 is a good example. Net corporate
investment demand is bullish and net
corporate supply is bearish. It is Economics
101. Keep the demand for something fixed
and reduce its supply. What happens to
the price? It rises. Keep the demand for
something fixed and increase its supply.
What happens to its price? It falls.
The Flow of Funds reports are also useful
in determining whether individuals and
institutions own “a lot of stock” or “a little
bit of stock”, compared to other financial
assets. Chart 2 shows the value of financial
assets for Households20 and the equity
percent (equities plus mutual funds) of
those financial assets (FRB FOF, Series L.
100, lines 1, 18, and 19), compared to the S&P 500. The Federal Reserve’s All the charts in this paper have
Household series is a proxy for the public. It is not exactly the public, since been produced from my personal
foundations are included in the totals; nevertheless, it is a useful gauge. data, made available to the Market
Note that the secular bull market in the 1980s-1990s started with a “low” Technicians Association Educational
equity percentage (13%-15%) and ended with a “high” percentage (30%- Foundation and its educational
33%). The bear cycles of 2000-2002 and 2007-2009 resulted in retracements programs.

in the equity percentage of no more than half the rise and the post-2009 bull
market has taken the percentage back close to the highs. Assuming that
Households are long term investors (much of the public financial assets are
held in 401K and IRA retirement accounts), we interpret the equity percent
series to be a limiting factor to equity potential. In the 1980s-1990s the great
stock market rise was a function of a lot of new money coming into stocks
and money flowing from fixed income investments into stocks. Therefore,
this class of investors is probably less of a demand force: new cash flow is
still a factor, but asset switching (from fixed income investment to equities)
is probably much less of a factor. This indicator belies the popular notion
that the public has been eschewing stock.
Chart 3 2. Institutional categories give a similar message. Chart 3 is the series for
Flow of Funds: State & Local State & Local Government Employee Retirement Funds20 (FRB FOF, L.
Government Employee 118, lines 1, 13, and 14). It shows that the equity percent (equities plus
Retirement Funds mutual funds) of financial assets soared from below 20% to above 80% in
the 1980s-1990s and that percentage stands at
52% now. We draw the same conclusion as
for Households, namely that a great secular
bull seems unlikely with this class of investors
never having shown a complete washout
from a “high” percentage of financial assets
in equities. The series for Private Pension
Funds (FRB FOF, L.117, lines 1, 12, and 13),
Life Insurance Companies (FRB FOF, L.115,
lines 1, 13, and 14), and Property-Casualty
Insurance Companies (FRB FOF L.114, lines
1, 12, and 13) look similar. This is not to say
stocks can’t have cyclical bull markets with
such a background, but a secular rise like the
1980s-1990s seem unlikely, with important
classes of investors already highly committed
to equities.21
Since there are only 141 observations and the data lag by up to two-and-a-half
months, testing revealed no predictive power for the total financial asset series.
The equity percent would be “predictive” if there were no lag. The equity
percent predicts the next quarter returns (the coefficient for chgep = 0.01897,
significant at the 1% level).
PART TWO
LONG TERM (I.E., CYCLICAL TREND) INDICATORS
A. International Flows
Indicators in Part One dealt with the change in total supply of stock and equity
allocations, indicators useful for secular trends. In Part Two I will discuss
measures that deal with flows and valuations, indicators useful for the cyclical
trend, the long term trend. The long term trend is the trend associated with the
economic cycle, usually four-to-five years. The first series of three charts deal
with international flows. The data come from the U.S Foreign Activity Report
from SIFMA, the Securities Industry and Financial Markets Association22.
SIFMA refers to U.S. Investors and Foreign Investors. Those so-called investors
act like traders, however. The data show the participants seem more motivated
by trend, than value. The biggest net buying has occurred late in uptrends,
while actual net selling has been seen near major market bottoms. It seems
that the further participants are removed from markets the more likely they are
motivated by the previous market action, i.e., they are more likely to be trend
followers than value seekers.
Chart 4 is net foreign buying of U.S. equities. Foreigners are more trading-
oriented in the U.S. market than U.S. participants are in the foreign markets
(Chart 5). Foreigners barely did any buying in the U.S. 1980s-1990s secular bull

market until the last couple of years. They were sellers near the market lows Chart 4
in 2002. Foreign net buying has been erratic since the 2007 market top. The Net Purchases of U.S. Equities
spates of selling in recent years during the post-first-quarter-2009 bull market by Foreign Investors
by these trading-oriented participants is
one argument for extending the life of the
rise. That is, we expect to see traders very
optimistic and, accordingly, sustained buying
late in a lengthy advance.
Chart 5 shows U.S. buying of foreign stocks
for the last 34 years. Note that U.S. net buying
was virtually non-existent in the 1980s bull
market and, except between mid 1998 and
mid 1999 (which encompassed a sizable
market correction), buying was greatest after
the mid 1990s. That sustained net buying
was a record at the time. Buying and selling
were in balance in the 2000-2002 bear market,
with the biggest selling occurring near the
lows in the third quarter of 2002. Post-2002,
the figures show the biggest buying just before the market highs in 2007 (the Chart 5
four quarters from the fourth quarter of 2006 through the third quarter of 2007) Net Purchases of Foreign
and record selling in the fourth quarter of 2008 near the market lows. So far, in Equities by U.S. Investors
the current up cycle the biggest buying was
in the first quarter of 2013, after nearly four
years of market rise, and the second quarter
2013 net buying was the fifth largest ever.
Chart 6 is the most interesting of the three.
It shows net purchases of U.S. stocks by
foreigners minus net purchases of foreign
stocks by U.S. participants, “Net International
Flows” into the U.S. Market. Since foreign
buying and selling the U.S. market dwarfs
U.S. activity in the foreign markets, this chart
has the same shape as Chart 4, but it gives a
clearer picture of excess. It shows sizable net
outflows from the U.S. market until 1997 and
record (at the time) net inflows just prior to
the market top in 2000. It shows net outflows
at the market bottom in 2003 and little net inflows until the 2007 market top.
There have been no sustained inflows in the post-first-quarter 2009 bull market Chart 6
and there were record outflows in the first half of 2013. When we compare Net Purchases of U.S. Equities
international flows in the last decade to previous decades it seems clear that by Foreign Investors MINUS Net
traders (i.e., trend followers), especially U.S. participants, are dominating the Purchases of Foreign Equities by
flows and investors (i.e., longer-term, value- U.S. Investors
motivated participants) are reticent. I interpret
that to mean we should expect the market to
look more like the post-2000 experience, rather
than the 1980s-1990s experience. Bigger bulls
and bigger bears occur when traders produce
the advances and declines, and investors are
not very active. That is, little investment
selling in the face of trader demand and
little investment buying in the face of trader
liquidation results in bigger swings.
This quarterly data, like the Flow-of-Funds-
derived indicators, did not lend itself to
statistical testing. There are not enough data
points. Nevertheless, I stand by the notion

that international flows do provide useful insight into equity demand.
B. New Supply
The very first chart was the Net Change in the Supply of Stock. The data is
quarterly with a lag of two-and-a-half months. It would certainly be useful to
have more current information. The “New Equity Financing” series, while just
the supply half of the “Net Change in Supply of Stock”, is available monthly
with less than a two-week lag, from Source Media (www.sourcemedia.com).
New Equity Financing includes initial public offerings (IPO’s), as well as new
stock sold by existing public corporation. Chart 7 shows the monthly total
and a moving 12-month total, compared to the S&P 500. The 12-month total
mirrors the S&P 500, answering the question, “When do most IPO’s come out,
at bottoms or tops?” The monthly totals almost always peak just before market
peaks and show near zero or zero readings at market bottoms. There is a secular
rise in the data and it is not normalized because I want the magnitudes to be
clear. When prices are elevated corporations (market participants with long
Chart 7 term horizons) want to sell new stock and are able to do it because the outside
New Equity Financing investors and traders have increased appetites for stock. I note that the longer
an advance persists, the more the demand comes from speculative sources
(i.e., traders, short-term-oriented participants.
See “Margin Debt”). After protracted market
declines corporations do not want to sell new
stock (i.e., they perceive their stock to be “too
cheap”) and speculators are not inclined to buy
down-trending stocks. Note the low levels of
new equity financing in 1990, 1998, 2001-2002,
and 2008-2009, with most of the lowest readings
occurring at or near the ends of major declines.
Even 1994, which was essentially a sideways
correction resulted in near zero readings near
the end. Note the very high readings (i.e., the
peaks in the 12-month total) in mid 1983, mid
1987, early 1994, mid 1998, and early 2000. The
only exception of sizable new equity financing
occurring during a major decline and early
in a major advance was during the 2007-2009
bear market and in the post-2009 bull market; this was because of the major
recapitalization in the banking industry imposed by the Fed in the aftermath
of the financial crisis. Testing showed the data to be useful. A regression of
the next 3-month and 12-month returns revealed negative coefficients for both
(i.e., returns were lower following higher new equity financing), although the
3-month return was not statistically significant (p = 0.112).
The 12-month results were better, with the coefficient significant at the 5% level
(p = 0.037), with a higher R-squared.
“Secondary Distributions” is a smaller series than “New Equity Financing”, but
even more current. It is weekly data with little lag. My source for “Secondary
Distributions” is Barron’s weekly financial publication, which gets it from
Dealogic LLC, New York City23. Secondary distributions are often used by major
stockholders to eliminate or reduce holdings, i.e., “investment liquidation”.
Chart 8 shows a 52-week moving average of secondary distributions, compared
to the NYSE Composite Index. With one big anomaly, 2008, the chart mirrors
the market, with a very low reading just after the 2003 market low and very
high readings near market tops. The anomaly is 2008-2009, when, similar to the

“New Equity Financing” data, financial companies were forced to finance in a
depressed market. Dealogic evidently classified some of the bank financing Chart 8
as “secondary offerings” rather than “primary offerings”. Aside from the Secondary Distributions: Value
2008-2009 experience, the message is clear:
investment activity (in this case, corporations’
activity in their own stock) shows liquidation
at high prices, usually against a strong trend.
C. Speculative Demand
Margin debt is a measure of speculative
demand. Traders, professionals (including
hedge funds) as well as the public, often
execute their trades on margin, using the
leverage to increase their exposure. While
a portion of margin debt does reflect short
selling, the bulk of the movement in margin
debt is a function of traders expanding and
contracting long positions. Since traders
are motivated by the trend (my premise), I
expect to see this series mirror the market,
with “low” readings near market bottoms and “high” readings near market Chart 9
tops. Chart 9 shows the market value of margin debt and margin debt as a Margin Debt versus % of
percent of market value, compared to a proxy for total market value, the Dow Market Value
Jones U.S. Total Stock Market Index.24 The
total margin debt series and margin debt as a
percent of market value both show a secular
rise. We expect to see the margin debt percent
to rise more sharply late in a market up-cycle,
reflecting increased speculative demand.25 In
the period from 1950s through the 1980s (not
shown in the chart) the margin debt percent
tended to move between 1% and 2% most of the
time, troughing near the highs of bull markets
and peaking close to the lows of bear markets,
the performance I would expect. Since the
1990s, the margin debt percent peaks were 1.96
in February 2000 and 2.60 in July 2007 (the high
so far in the advance from the March 2009 low
was in April 2013). We note that the low after
the 2007 peak was a 1.94 in July 2012, just under
the 2009 low of 1.97, registered in July 2009.
Chart 10
D. Investment Demand
Insider Activity
Insider activity represents investment demand
(and supply). Insiders, who acquire the bulk of
their stock through new incorporations, rarely
buy in the open market. As a result, there is
almost always more insider selling than insider
buying, with an average of more than four
times as many sales as purchases in the last
10 years. But when they do buy in the open
market, it is usually at a “low” price. Insiders,
by law, are longer term investors; if they take a
short term profit, they must return it. Chart 10
is an 8-week moving average of the sell/buy
ratio of insider transactions, compared to the
S&P 500 (red line).26 The bearish and bullish
lines are 1 standard deviation above and below
the 10-year average. With the 10-year average
rising from below 2.00 to above 4.00 since 2000,

the bullish line has risen from under 1.00 to almost 2.00 and the bearish line
has risen from under 3.00 to over 6.00. Hence, the indicator does not have to
fall below 1.00 (i.e., actual net insider buying on an 8-week basis) for bullish
readings. Note that the indicator is based on insider transactions, not shares
or value. The reason is the number of insiders is considered more important.
That is, 10 insiders buying 10,000 shares each is more significant than 1 insider
buying 100,000 shares. All the low points are near medium term or major
lows. Bullish or near bullish readings were registered in the fall of 2001 (an
interim low in the 2000-2002 bear market), late 2002-early 2003 (a major low),
late 2008-early 2009 (actual net buying at a major low), and the fall of 2011
(an interim low in the post-2009 bull market). There is one anomaly, with
net buying at “high” prices in early 2000, a function of the huge number of
call options granted in the 1990s and the scramble to exercise them prior to
expiration. The bearish extremes are usually just prior to medium term or
major tops. Clearly, these investors tend to be on the right side during reversal
periods.27
I tested the data by regressing future 8-week returns for the S&P 500 on two
dummy variables. The first dummy (BULL) is 1 if the 8-week reading is below
the bullish threshold and 0 otherwise. The second dummy (BEAR) is 1 if the
8-week reading is above the bearish level and 0 otherwise. Hence, the formula is:
The results showed average 8-week returns of 2.9% for BULL and -1.3% for
BEAR. Both coefficients are statistically significant at the 1% level, very good.
BULL is more than twice as effective as BEAR, conforming to my belief that
insider net buying is rare and usually bullish when it occurs, while insider
selling is normal and less interesting.
E. Potential Demand
“Potential Demand” is buying power on the sidelines and funds in other
financial assets, notably bonds. Part One discussed the equity part of the
equation. In this section I look at cash and money market fund assets as a
source of demand for stock. I have created an ‘Individual Buying Power
Index” from the Federal Reserve Flow of Funds statistics, using the Households
Chart 11
and Nonprofit Organizations (L.100) as a proxy for individuals. Individual
Individual Buying Power Index Buying Power is money market fund assets (Line 6) divided by money market
fund assets Line 6) plus equities (Line 18)
plus mutual funds (Line 19).19 Bonds are not
included in the formula under the assumption
that a shift in asset allocations (See Part One,
Section 2) is a different decision than putting
ready cash to work. Logically one would
expect buying power to be highest near major
market bottom areas and lowest near major
market top areas and that appears to be the
case. The secular rise in the buying power
index is a function of the secular rise in money
market fund assets as public “investment”
funds were moved from stocks and bonds.
Nevertheless, Chart 11 shows rising cash into
the market bottoms in 1982, 2002-2003, and
2008-2009, and cash falling into the 1999-2000
and 2007 tops. The 15.84% reading in March
2009 was a record, well above the 13.00% reading of September 2002, near
the beginning of the 2002-2003 market bottom. After declining steadily (and
expectably) since the 2008-2009 market bottom, the latest available reading of
5.34% in mid 2013 is the lowest since mid 1984. On the margin, there appears
to be “public investment” selling at “low” prices and “public investment”
buying at “high” prices, contrary to my belief that investors are usually on the

right side near market turning points, but that activity is probably dominated Chart 12
by professionally-managed foundations and some public trading. The vast Equity Mutual Funds: Cash
bulk of the money, 85% to 95%, remains in stock. Note that the biggest shifts % of Net Assets
in the buying power index occur in the
months right before and after major market
lows when traders (i.e., short-term-oriented
market participants) panic out and rush back
into stocks.
F. Potential and Actual Demand Through
Mutual Funds
Charts 12 to 18 are derived from the monthly
Research and Statistics report from the
Investment Company Institute (www.ici.
org).28 The data show cash and cash flows
for equity mutual funds. The bulk of the
buying and selling in equity mutual funds is
investment (i.e., long term) activity, but just
as I noted for the Individual Buying Power
above, there does appear to be some trading
(i.e., short term) activity. In other words, while the bulk of equity mutual fund Chart 13
activity is conducted for long term objectives (demand for IRA’s and 401k’s, Sales (including Reinvested
for example), a small portion is trading activity, usually by traders liquidating Dividends) and Redemption of
stock during bear markets and replacing stock during bull markets. Chart 12 Equity Mutual Funds
is cash as a percent of net assets, compared
to the S&P 500. The chart shows rises and
falls during bear and bull markets, as one
would expect. The cash percentage generally
swung from 5%-6% at market tops to 12%-
13% at market bottoms in the 1970, and 1980s,
with earlier data in the 1950s similar.29 There
is one big anomaly. Cash fell from 12.93%
in October 1990 to 4.04% in March 2000, but
since then at market bottoms the figure has
been no higher than 5.90% (in February 2009,
during the 2008-2009 market bottom). Fund
managers have been “directed” by superiors
to stay much more fully invested and
investors have to make their own decisions
to raise cash or not, by switching from equity
mutual funds to money market funds. Nevertheless, the data still show “high” Chart 14
cash at market bottoms and “low” cash at market tops, in a new range of 5½% Net Sales of Equity Mutual Funds
to 6% at market bottoms and 3% to 3½% at market tops. It troughed at 3.5% (Including Reinvested Dividends)
during the mid 2007 market top and has been as low as 3.3% in 2013. (Net issuance of ETFs after 12-07)
Cash on hand is important, but cash flows
are even more important. Most of the time
cash flows into and out of equity mutual
funds represent public investment activity.
Chart 13 shows sales (including reinvested
dividends) and redemptions for equity
mutual funds, compared to the S&P 500, and
Chart 14 shows net sales (sales including
reinvested dividends minus redemptions
plus net issuance of exchange-traded funds,
ETFs), compared to the S&P 500. Both sales
and redemptions were in a secular rise in the
1990s (and earlier data shows a secular rise
in the 1950s-1980s as well). All three series,
sales (including reinvested dividends),
redemptions, and net sales (including

Chart 15 reinvested dividends plus net issuance of ETFs) have flattened out since the
Net Exchanges into 2000 market top. Importantly, since the 2007 market top the net sales has
Equity Mutual Funds barely been positive, erratically swing from positive to negative. Chart 14
also belies the notion that ETF demand has
offset the sluggish demand for traditional
equity mutual funds. ETF demand (i.e., the
net issuance of ETF shares), which I contend
is very much the bailiwick of professional
traders, has only partially offset lack-luster
equity mutual fund demand. In 1994-2007,
net flows into equity mutual funds, including
ETFs, averaged $16.5 billion per month. In
2008-2012 (and 2013 through September),
those flows averaged just $6.5 billion. Net
public investment demand (through mutual
funds and ETFs) in the post-2003 bull market
is far below previous cycles, less than 40%.
Chart 15 shows net exchanges. “Net
Exchanges” is the flow from fixed income
funds (bond funds and money market funds)
Chart 16 to equity funds, a positive flow, or the flow from equity funds to fixed income
Equity Mutual Funds: Total Flows funds, a negative flow. Typically, during advances, especially late in advances,
(including ETFs as of 01-08) positive flows are predominant, while during declines, especially late in
declines, negative flows are predominant.
In the up-cycles in the1990s flows were
positive most of the time, but the post-2003
up-cycle does not show persistent flows
into equities, a similar pattern to net sales
previously discussed. However, there were
four consecutive months of positive flows in
2013 (May through August), suggesting some
trend-following demand.
Chart 16 is total flows into equity mutual
funds: sales including reinvested dividends
minus redemptions plus ETF net issuance
(starting in January 2008; prior ETF data
is not significant) plus net exchanges. The
picture shows persistent inflows in the 1990s
up-cycles and in the 2003-2007 up-cycle, but
Chart 17 only erratic inflows in the post-2009 up-cycle.
Equity Mutual Funds: Net The implication is that equity mutual fund managers had sizable impact on
Purchases of Common Stock the demand for stock in the 1990s and during the 2003-2007 up-cycle, but little
impact since. Chart 17, the net purchases of
common stock by equity fund managers, below,
shows just that. Hence, insofar as most activity
in equity mutual funds represents public
investment activity, such demand has been
minimal in recent years. The rest of the equity
mutual fund data reflect public trading activity
late in up and down cycles and professional
trading in ETFs.
G. Valuations
The last indicator in the long term (i.e., cyclical)
category is valuations. Traditionally, valuations
have been the purview of fundamental analysis.
Certainly, for the equity market price/earnings
ratios (P/E’s) have been and remain a critical
input for fundamental analysts and strategists,

and to a lesser degree, dividend yields are important. For the market as a Chart 18
whole, fundamentalists believe that a measure of “fair value” in terms of S&P 500 Index Dividend Yield
P/E’s can be approximated by analyzing earnings growth rates and the level vs. Price/Earnings Ratio
of interest rates. Fundamentalists would
argue that valuations reflect “investment”
attitudes. The market is “worth” a particular
P/E multiple for each combination of growth
rates and interest rates. The so-called
“Greenspan Model” is one such measure,
comparing the earnings yield of the S&P
500 to the rate on the 10-year treasury note.30
There are other models that include inflation
in the formula. Nevertheless, there are
valuation levels that cannot be explained by
those “fundamental” investment formulas.
During periods when traders are extremely
bearish or extremely bullish, they overwhelm
investment attitudes and behavior.
Chart 19 shows price/earnings multiples
and yields on the S&P 500, compared to the S&P 500 index, from 1976 to 2013. Chart 19
Note that in the 1990s the P/E multiple rose to the mid 20s in the middle of
ISE 10-Day Index Put/Call Ratio
the decade and then soared to unprecedented levels above 40 at the end of
the decade. Historically, there were periods
when interest rates were comparable or
lower and earnings growth rates were
higher, yet P/E multiples were far lower.
The 1950s is one example. A clear message
is that there is an important psychological
component to valuations. In the early 1980s
the S&P 500 P/E multiple was below 10
and its yield was over 6%; in 1999-2000 the
P/E multiple was in the 30-40 range and its
yield fell to barely over 1%. Why? Despite
“investment” formulas that said stocks were
very cheap or very expensive, “short term”
participants, motivated by very weak or
very strong trends, sold “cheap” stocks or
bought “expensive” ones. Hence, there are
periods when cheap stocks stay cheap and
periods when expensive stocks get more expensive. Knowing who the traders
are and what they are doing, and knowing who the investors are and what
they are doing trumps the formulas.
PART THREE
MEDIUM TERM INDICATORS
A. Option Volume Indicators
By definition, participants in the options markets are making short term
judgments, trading judgments. Even though they may be using options to
augment a longer term strategy, the limited life of an options contract (most
of the activity in the options market is in contracts that are just two or three
months from expiration) means most participants are making some kind of
a short term decision when they buy or sell a call or a put. I recognize that
option activity includes hedging trades and not just directional trades, so
the movement of put/call ratios is not just a function of market psychology.
Nevertheless, on the margin, I believe shifts in put/call ratios should have a
distinct sentiment component. If option traders are becoming bearish, they
would be expected to be more interested in puts than calls. If option traders are
becoming bullish, they would be expected to be more interested in calls than
puts. That appears to be the case. Put volume increases relative to call volume

when trend-motivated option traders grow more bearish and put volume
decreases relative call volume when option traders grow more bullish. Under
my assumption that short-term-oriented equity market participants are likely
to be overly bearish near lows of consequence and overly bullish near highs of
consequence, put/call volume ratios should often be found high near bottoms
and low near tops.31 In other words, puts garner more attention “too late” in
declines and calls garner more attention “too late” in advances. Remember,
Chart 20 this is not to say options participants cannot be successful; as a group they
ISE 10-Day Equity Put/Call Ratio can be successful most of the time. However, their trend-motivated activities
results in “too much” bullishness near tops
and “too much” bearishness near bottoms.
Much of the activity in the options markets
is professional; professionals succeed by
getting back on the right side quickly.
The four put/call option volume charts
have necessarily limited history since they
are daily charts; they start at the beginning
of 2011 and end in the third quarter of 2013.
Earlier data is similar. I have drawn bull
lines one standard deviation above one-
year averages and bear lines one standard
deviation below one-year averages to give
some approximation of high and low levels,
not because any particular level is a clear
buy or sell signal. The indicators should be
used to increase or decrease confidence in
Chart 21 the trend outlook, not to anticipate imminent reversals. The charts are 10-day
CBOE 10-Day Index Put/Call Ratio moving averages, plotted along with the S&P 500. The four charts are equity
options (opening transactions only) on the ISE exchange (www.ise.com/
market-data/isee-index), index options
(opening transactions only) on the ISE
exchange, equity options (all transactions)
on the CBOE exchange (www.cboe.com/
data/mktstat.aspx), and index options (all
transactions) on the CBOE. I have excluded
the trading in VIX options since it can be
argued that buying VIX calls is a bearish
bet, not a bullish bet. Note that even though
the ISE data are just open-buy-puts divided
by open-buy-calls and the CBOE data also
include sell-to-open calls and sell-to-open
puts, the ratios are similar. The charts
show that put/call ratios usually spike near
bottoms, bullish readings, implying the
option participants are very negative. The
ratios are usually in the neutral-to-low regions during advances (i.e., the option
participants are getting the uptrend message correctly). The combination of
low ratios and faltering price action are bearish readings. Chart 19, the ISE 10-
day Index Put/Call Ratio, gives the least useful information, although the mid
September 2012 very low reading occurred at the inception of a two-month
market correction. The very high readings in mid July 2011 and in the first half
of July in 2013 were not helpful.
Chart 20, the ISE 10-Day Equity Put/Call ratio, was quite helpful, with all the
very high readings occurring near important or interim market bottoms. The
sustained high readings from mid August 2011 through late November 2011
coincided with the intermediate bottom in the market in 2011. The sustained
very high readings between mid May 2012 and mid June 2012, and between
late June 2013 and early July 2013 coincided with interim market setbacks.

Chart 21, the CBOE 10-Day Index Put/Call Ratio, shows two clear, sustained Chart 22
high readings, late August 2011, at the beginning of the market basing pattern CBOE 10-Day Equity Put/Call
that year, and in the second half of May 2012, at the end of an interim correction. Ratio
Once again, I find low index put/call ratios
near interim tops, such as mid March 2012
and mid May 2013, but also in the second
week of August 2012 (the middle of an
upleg) and in mid December 2011 (early in
an upleg).
Chart 22, the CBOE 10-Day Equity Put/Call
Ratio, shows sustained high readings three
times, mid June 2011 (an interim low, albeit
close to a medium term market top), mid
August 2011, at the beginning of a medium
term market base, and the third week of
May 2012, at an interim market bottom.
There are low readings in late March 2012, in
the third week of September 2012, an in late
May 2013, all near the beginning of interim
market tops. There are a series of low or relatively low readings between mid
October and mid December 2013, all near minor tops, but no high readings
near the interim minor bottoms in that period.
I tested the put/call ratios, regressing 10-day returns for the S&P 500 on the
10-day averages for each of the four ratios, the using the Newey West (1987)
procedure. The equation is:
As I expected the equity ratios showed much better results than the index Chart 23
ratios (which I attribute to much hedging activity in the index options and Options Clearing Corp. (OCC)
little hedging in the equity options). For both the ISE and the CBOE data, high Equity Options Premium Put/Call
equity put/call ratios were associated with higher next 10-day returns. For the Ratio (with Bull/Bear Line)
CBOE equity put/call ratio, the coefficient is positive (0.045) and significant
(p = 0.025), and the R-squared is higher than
the index put/call ratio (0.0135, compared to
0.003). The results were similar for the ISE
ratios.
A separation of the data into four quartiles by
levels of the put/call ratios also showed useful
results. Low put/call ratios led to low returns
and high put/call ratios led to high returns.
B. Option Premium Indicators
Option premium indicators are analogous to
option volume indicators. I noted above that
if options traders are bearish, put volume is
expected to increase relative to call volume,
and if option traders are bullish, call volume
is expected to increase relative to put volume,
and the data show both do occur. Likewise,
traders should be expected to pay relatively more for puts than calls when
they grow bearish and they should be expected to pay relatively less for puts
than calls when they grow bullish. Put/call premium ratios should move
similarly to put/call volume ratios, and they do. For those comparisons, I
use the weekly option premium data from the Options Clearing Corporation
(OCC) (www.optionsclearing.com/webapps/weekly-volume-reports). The
OCC provides a put/call premium ratio for the equity options and a put/call
premium ratio for the index options. Charts 23 and 24 show 4-week averages

Chart 24 of the put/call premium ratios compared to the S&P 500. I have drawn bull
Options Clearing Corp. (OCC) lines one standard deviation above the 10-year average of the put/call ratios
Index Options Premium Put/Call and bear lines one standard deviation below the 10-year averages. Chart
Ratio (with Bull/Bear Line) 23, the equity premium ratio, shows several spikes in the 4-week average
during the 2000-2002 equity bear market
near interim lows. Very high readings
were recorded several times during the late
2002-early 2003 basing period and again at
the beginning of the late 2008-early 2009
basing period. Readings were expectably
low during the steady market advance from
the 2009 lows through 2013, although there
was one increase to very high readings in late
June-early July 2013, associated with the end
of a temporary market correction. Chart 24,
the index premium ratio, is similar, but gives
an even clearer message. It shows spikes
to high levels near interim lows during the
2000-2002 equity bear market (and one at
a temporary low during the 1999 topping
process) and near the lows of temporary
setbacks in the post 2009 bull market. The
highest readings, the very high sustained
ratios were registered during the major bases in late 2002-early 2003 and late
2008-early 2009.
C. Sentiment Polls
All of the indicators I have discussed above are “transactional” indicators,
indicators that measure what investors and traders are doing in the market
place. There is another class of sentiment indicators, surveys of equity
participants, polls that measure what those participants are saying about
the equity market. As it turns out, all the polls are surveys of equity market
participants with short term time horizons. Based on my assumption that
short-term-oriented equity market participants, traders, are likely to be wrong
at turning points, I would expect the polls to show excessive pessimism at
market bottoms and excessive optimism at tops. And they usually do. I will
discuss four polls that are widely followed in the financial media: the poll of
stock index futures traders conducted by Consensus, Inc., the poll of stock index
futures traders conducted by Market Vane, the poll of market letter writers
conducted by Investors Intelligence, and the poll of investment club participants
conducted by the American Association of Individual Investors.32
Consensus, Inc. and Market Vane, both polls of futures traders, have a slightly
different methodology so the readings are usually slightly different. Both
surveys are polls of professionals, but Market Vane weights the readings by its
opinion of the impact of the pollee, while Consensus, Inc. gives equal weight.
Notably, both surveys are polls of professional traders, people who make their
living trading stock index futures; nevertheless, they both show “excessive”
optimism at market peaks and “excessive” pessimism at market troughs. Each
week the services poll the traders and report the percentage of bulls. In the
last 10 years Consensus, Inc. reports an average bull reading of 55.2%, with one
standard deviation of 15.5%, and Market Vane reports an average bull reading
of 58.4%, with one standard deviation of 9.9%. The Consensus, Inc. data in
Chart 25 shows a four-week M.A. of the bullish percentage, with a bullish line
drawn in one standard deviation below the 10-year average and a bearish line
drawn in one standard deviation above the 10-year average, compared to the
S&P 500. As I would expect, weak markets (and, therefore, market lowpoints)
are characterized by little optimism and strong markets (and, therefore, market
highpoints) are characterized by great optimism. After the major stock market
top in 2007, the indicator reached extremely low (i.e., bullish) levels as early
as the end of January 2008 and remained at or near such levels throughout the

2007-2009 bear market. The absolute lowest reading of 20.3% was registered Chart 25
a week after the final market low was reached in March 2009. Expectably, Consensus Inc. Bullish
the indicator has been neutral most of the time during the post 2009 bull Percentage: Equities
market, with all but one of the “excessively optimistic” readings leading to
consolidations or interim setbacks, including
October-November 2009, April-May 2010,
January-May 2011, mid January-mid May
2012, and September-October 2012. The
exception was mid February-mid June 2013,
during which the market zigzagged higher.
Interestingly, the only fully bullish (i.e.,
“excessively pessimistic”) reading during
the post 2009 bull market was after the
biggest correction in that bull market, late
August-late October 2011.
The Market Vane readings have been far less
volatile in recent years, although they have
a similar pattern to Consensus, Inc. Chart 26
shows that the Market Vane bullish percentage
reached its most negative levels during the
2006-2007 major equity market top, remaining at “excessively optimistic” levels Chart 26
from October 2006 through June 2007. It did not reach bullish (i.e., “excessively Market Vane Bullish
pessimistic”) during the 2007-2009 bear market, but its lowest reading was Percentage: Equities
34% right at the bottom in March 2009, very
near the bullish band, which stood at 33% at
the market bottom. This indicator has been
neutral all the time during the post 2009 bull
market, with a brief bearish exception, 1%
above the bearish band in the spring of 2013.
The oldest of the popular sentiment polls is
the survey of market letter writers conducted
by Investors Intelligence. For over 50 years
Investors Intelligence has been reviewing
market letters weekly and assigning a bull
or bear or neutral opinion rating to each
comment and a giving aggregate figures. I
have constructed a four-week average of the
ratio of bulls to bears; it is shown in Chart 27,
compared to the S&P 500. The bearish line is
drawn one standard deviation above the 10-year average bull/bear ratio and
the bullish line is drawn one standard deviation below the 10-year average. Chart 27
I call readings outside the bands “extreme” or “excessive”. This indicator Bull/Bear Ratio from Investor’s
is popular because of its long, readily available record (it was carried in Intelligence
Barron’s for most of its history) and because
it has often been a contrary indicator. For
example, Chart 27 shows extreme pessimism
(i.e., a bullish reading) during the market
basing patterns in late 2002-early 2003 and
late 2008-early 2009. Most letter writers
claim to be giving long term advice, but
clearly they are very influenced by short
term moves in the market. The chart shows
that as the market started up from those two
bases, letter writers quickly became more
optimistic, typical of short term traders. The
charts do show extreme optimism at the 2000
and 2007 tops, but they also show periods
of great optimism prior to interim setbacks
during the 2003-2007 and post 2009 bull

Chart 28 markets. Hence, no “formula” is going to provide a clearly profitable trading
Bull/Bear Ratio from American rule. Nevertheless, I believe this indicator can be used like other sentiment
Association of Individual indicators, to increase or decrease confidence in a trend interpretation. In other
Investors (AAII) words, when excessive optimism appears after an advance, look for a setback.
If the ratio drops quickly back to levels of extreme pessimism, it probably
means the setback was a minor, temporary
affair. Such was the case in the summer of
2010 and in the fall of 2011. The opposite
is also true. When excessive pessimism
appears after a decline, look for a rebound.
If the ratio rises quickly back to levels of
extreme optimism, it probably means the
rally is a minor, temporary affair. Such was
the case in July 2001, in January 2002, and in
April-May 2002.
The final poll is the survey of investment
club participants conducted by the American
Association of Individual Investors (AAII). The
AAII surveys investment clubs weekly and
tallies the number of bulls, bears, and neutral.
The poll is “flawed” compared to the other
three polls above, because the list of pollees
is not the same every week. Nevertheless, since the results are similar to the
other polls and because of the accessibility of the data (it appears in Barron’s
every week), I include it in this paper. Chart 28 shows a four-week moving
average of the bull/bear ratio compared to the S&P 500. The bearish line is
one standard deviation above the 10-year average and the bullish line is one
standard deviation below the 10-year average. The results are comparable to
the other polls with one exception. It is true that the most sustained negative
readings (i.e., excessive optimism) were recorded around the 2000 major stock
market top and sustained positive readings (i.e., excessive pessimism) were
recorded at the major bottoms in late 2002-early 2003 and late 2008-early 2009,
and the indicator did not reach levels of extreme pessimism (falsely) during the
2000-2002 bear market. However, this indicator did not give a negative signal
(i.e., did not register extreme optimism) at the 2007 major equity market top.
To test the series, I organized the 1987-2014 weekly data by deciles for both the
percent of bulls and the percent of bears. The top decile of bulls and the bottom
decile of bears were considered “excessive optimism”. The bottom decile of
bulls and the top decile of bears were considered “excessive pessimism”. I
tested short term periods (1, 2, 4, and 8 weeks) and, with some overlap,
intermediate term periods (1, 2, 3, and 6 months). The results were favorable for
both bullish and bearish signals in the intermediate term horizon and favorable
for the bullish signals in the short term horizon. Only the bearish signals in
the short term horizon showed unfavorable results. The best results were for
bullish crossovers in the intermediate term horizon, with 80% of the signals
registering positive results, for a cumulative gain of 459% in the whole time
period. If a few anomalous readings in August-October 1987 are disincluded,
the short term bearish signals would have been much better. Those results
were in line with my expectations: I believe bottoms form quickly and tops are
drawn out.

SUMMARY AND CONCLUSION
The Relationship Between Sentiment and Supply/Demand Indicators and Other Technical Measures
It was not my intent to produce a stock market trading in the durability of the uptrend. If those indicators look
model based solely on sentiment and supply/demand more or less like they did at the inception of an uptrend
indicators. They are, after all, supporting indicators to months after the uptrend began (I.e., bullish investors and
the basics of technical analysis, trend and momentum reluctant traders), I continue to have high confidence in
indicators. I would never “require” all the sentiment that uptrend. If a setback results in a quick, sizable increase
indicators to reach extremes at the same time to reach a in trader pessimism, I have high confidence the setback is
conclusion, nor would I expect them to do so. They are, likely to be a brief, temporary affair. If traders are slow to
after all, samples of attitudes and behavior, and any get pessimistic in a downtrend after a stock market top
indicator could at times be distorted and misleading. I is completed, I have high confidence in the sustainability
believe there are four kinds of technical indicators. Trend of the downtrend. If the indicators look more or less like
and momentum indicators, the most important technical they did at the inception of a downtrend months after a
indicators, illustrate the direction and force of a move. downtrend began, I continue to have high confidence in
But they often do not tell much about where the market that trend remaining down. If a rebound results in a quick,
is in a trend. The second or third leg of advance, or the sizable increase in trader optimism, I have high confidence
final leg of advance, may not look much different from the rally is likely to be a brief, temporary affair.
the first leg. Sentiment and supply/demand indicators,
There is a fourth kind of stock market technical indicator,
the second and third kinds of technical indicators, give
with which I am not concerned here: intermarket analysis,
such insights and, accordingly, add to or subtract from
the relationship between equities and bonds (actually all
confidence in a trend. The sentiment and supply/demand
fixed income investments), commodities, and currencies.
indicators discussed above underscore the difference in
All other things being equal, the change in price of an
attitudes and behavior between investors and traders.
alternative to equities will change the supply/demand
The indicators show extreme investor optimism and
picture for stocks. For example, if the price of bonds goes
excessive trader pessimism at stock market bottoms and
up, the supply/demand curve for stocks will rise (i.e.,
they show excessive investor pessimism and extreme
bonds become relatively more expensive); if the price of
trader optimism at stock market tops. The best example of
gold goes down, the supply/demand curve for stocks will
that notion is to compare insider activity (see Chart 10) to
fall (i.e., gold becomes relatively cheaper). A thorough
option activity (see Charts 19-24). Bottoms of consequence
discussion of intermarket analysis can be found in John
are all characterized by insider optimism, low insider
Murphy’s Intermarket Analysis, and additional comments
sell/buy ratios, and option trader pessimism, high put/
are available in John Murphy’s Technical Analysis of the
call ratios. If traders stay cautious and investors stay
Financial Markets, and Martin Pring’s Technical Analysis
bullish in an advancing trend, I have more confidence
Explained.33
FOOTNOTES
1. Chan, Jegadeesh, and Lakonishok, Financial Analysts 9. Magazzino, Mele, and Prisco, Journal of Money, Investment,
Journal, November, 80-90, 1999. and Banking March 2012.
2. Prechter and Parker, Journal of Behavioral Finance, 84-108, 10. Lo, Maymaski, and Wang: Foundations of Technical Analysis:
2007. Computational Algorithms, Statistical Inference, and
3. Lo and MacKinlay, May 1989. NBER Working Paper No. Empirical Implementation. Journal of Finance v55 (4 Aug.)
w2168. pp. 1705-1765. HS=Head-and-Shoulders, BBOT=Broadening
Bottom, RTOP= Rectangle Top, RBOT=Rectangle Bottom,
4. 3. Lo and Wang, The Review of Financial Studies Summer
and DTOP= Double Top. The other patterns tested in which
2000. Vol. 13. No. 2, pp.257-300 © 2000 The Society for
they found no significant results were IHS=Inverted Head-
Financial Studies.
and-Shoulders, BTOP=Broadening Top,TTOP= Triangle
5. 4. Osler, Carol L., Economic Policy Review, July 2000, Osler Top, TBOT=Triangle Bottom, and DBOT= Double Bottom.
Carol L., Journal of Finance, Vol. LXIII, No. 5 October 2003,
11. Lo, Andrew: Heretics of Finance, 2010.
and Mizrach and Weerts, Highs and Lows: A Behavioral
and Technical Analysis (November 27, 2007). 12. A brief discussion of academia’s Behavioral Finance
terms can be found in Thinking, Fast and Slow by Daniel
6. Papailias and Thomakos, September 2011.
Kahneman, pages 119-128, 154, 284, 289-299, 349, 417-418,
7. Lo, Mamayski, and Wang March 2000, NBER Working Paper 427-430, 444, 445, and 471-472. Farrar, Straus, and Giroux,
No. w7613, Osler and Chang August 1995 FRB of New York 2011. Nobel Laureate Kahneman is generally credited with
Staff Report No. 4, Savin, Weller, and Zvingelis Journal of being among the first to define “anchoring”, along with
Financial Econometrics Spring 2007, and Weller, Friesen, Amos Tversky.
and Dunham University of Nebraska-Lincoln August 2007.
13. A fascinating look on the life of Jesse Livermore is
8. Lachhwani and Khodiyar, Quest-Journal Of Management Reminiscences of a Stock Operator by Edwin Lefevre.
and Research August 2013. Wiley 1997.

14. Mackay, Charles, Extraordinary Popular Delusions and the 26. Vickers Stock Research, Weekly Insider Reports.
Madness of Crowds. pp. 28-50 and 50-54. 27. Pring, Technical Analysis Explained, pp. 492; Kirkpatrick
15. Greenspan, Alan, Speech to American Enterprise Institute, & Dahlquist, Technical Analysis, 118; and Wilkinson,
1996. interview with Philip J. Roth, Technically Speaking, p. 336.
16. Shiller, Robert, Irrational Exuberance, 2000. 28. Investment Company Institute, Research & Statistics,
17. Paul Macrae Montgomery (Montgomery Capital Monthly Trends in Mutual Funds Investing; and Monthly
Management) popularized the notion of the magazine Exchange-Traded Fund Data.
cover indicator. Paul Krugman was quoted on March 28, 29. Pring, Technical Analysis Explained, pp. 499-501;
2009: “Whom the Gods would destroy, they first put on the Kirkpatrick & Dahlquist, Technical Analysis, pp. 108-109;
cover of Business Week”. and Wilkinson, interview with Philip J. Roth, Technically
18. Commentary on many of my key indicators outside the Speaking, pp. 326 and 328.
behavioral area, such as trend, momentum, relative strength, 30. Kirkpatrick & Dahlquist, Technical Analysis, p. 192,
and intermarket measures, can be found in an interview attributing its discovery to Ed Yardeni (www.yardeni.
with me in Technically Speaking, by Chris Wilkinson. com). Additional comments on valuation as a measure
Traders Press 1997. of psychology can be found in Pring, Technical Analysis
19. Kirkpatrick & Dahlquist, Technical Analysis, Second Explained, p. 522 and Wilkinson, Interview with Philip J.
Edition, pp. 181-182. Roth, Technically Speaking, pp. 324-325.
20. The data for charts 1, 2, 3, and 11 come from the Federal 31. Kirkpatrick & Dahlquist, Technical Analysis, pp. 97-
Reserve Statistical Release, Z.1, Second Quarter 2013. 100; Pring, Technical Analysis Explained, p. 506; Pring,
Investment Psychology Explained, pp. 134-153; and
21. I credit investment strategist Michael Sherman, with whom Wilkinson, interview with Philip J. Roth, Technically
I worked in the 1980s at Shearson Lehman Hutton, for
Speaking, pp. 333-334.
pointing out to me the utility of some of the Flow of Funds
statistics from the Federal Reserve. See also Technically 32. Consensus Inc., Independence, Missouri; Market Vane,
Speaking, p. 324. Pasadena, California; Chartcraft, Investors Intelligence,
New Rochelle, New York; American Association of
22. SIFMA U.S. Foreign Activity Report Second Quarter 2013.
Individual Investors, Chicago, Illinois.
23. Kirkpatrick & Dahlquist, Technical Analysis, p. 110, p. 180.
33. Murphy, Intermarket Analysis; Pring, Technical Analysis
24. New York Stock Exchange, Fact Book, 2013. Explained, pp. 559-661; Murphy, Technical Analysis of the
25. Pring, Technical Analysis Explained, pp. 501-505; Financial Markets, pp. 413-431.
Kirkpatrick & Dahlquist, Technical Analysis, pp. 110-111
and 179; and Wilkinson, interview with Philip J. Roth,
Technically Speaking, p. 332.
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Philip J. Roth, CMT, was the chief market technician at Miller Tabak + Co., Morgan Stanley, Dean
Witter, Shearson Lehman, EF Hutton, and Loeb Rhodes. He is a current Board member and three-time
past President of the CMT Association (formerly Market Technicians Association-MTA) and a former
director of the New York Society of Security Analysts (NYSSA). Roth is currently Vice President of the
MTA Educational Foundation (MTAEF). He is an Adjunct Professor in the Graduate School of Business
at Fordham University and at the IE Business School in Madrid. He received a BA in Economics from
the University of Notre Dame in 1965 and his MA in Economics from Rutgers in 2015. This paper is
his master’s thesis. Phil can be reached at philroth65@aol.com.

The SAMT Zurich chapter held a joint event with Global Advisory Partners (GAP)
SAMT on 21 September. The event was organized and moderated by Henrik Mikkelsen
(SAMT Vice President).
SPEAKER Speakers were:
Martin Goersch, (below ) Head of Trading at Global Advisory Partners LLC, who
SERIES spoke about Futures Screenings and a short term outlook which included: Criterias
and methodology used based on COT’s Advanced Strategies. Presented with the
Q3 2017 AgenaTrader platform.
Medium- and Long-Term Outlook - Rolf Bertschi (Financial Market Advisor) gave
an inside look in his analysis methods and an market outlook based on his current
technical work.
SAMT’s second Q3 event, in Zurich and Geneva (10-11

October), came ahead of this year’s IFTA Milan conference.
Robin Griffiths, Head of the Multi-Asset Research &
Advisory team at the ECU Group; a London-based global
macro hedge fund, shared market insights for the final
quarter of 2017 and beyond, based upon his signature
“Roadmap” cycles model.
SAMT members can access Robin’s presentation on the
website.
Below: Après the Geneva event.

SAMT
BOARD OF
DIRECTORS &
OFFICERS
Patrick Pfister, CFTe Cristina Alvarez
President & IT Webmaster Treasurer
patrick.pfister@samt-org.ch cristina.alvarez@samt-org.ch
The Swiss Association

of Market Technicians
Established 1987
www.samt-org.ch
Henrik Mikkelsen, CFTe Ron William, CMT, MSTA

The Swiss Association of Market Technicians (SAMT) is Vice President Zürich Chapter Vice President Geneva Chapter
and IFTA Liaison
a non-profit organisation (Civil Code Art 60ff) of market henrik.mikkelsen@samt-org.ch
ron.william@samt-org.ch
analysis professionals in Switzerland, founded in 1987.
SAMT is a member of the International Federation of
Technical Analysts (IFTA).
Technical analysis is the study of prices and markets. It
examines price behavior on an empirical and statistical
basis. It extends to the study of all published information
on price trends, volatility, momentum, cycles and the
inter-relationship of prices, volume, breadth, sentiment
and liquidity. A comprehensive understanding of
technical analysis requires a knowledge of statistics
and pattern recognition, a familiarity with financial
history and cycles. Mario Valentino Guffanti, CFTe Alberto Vivanti
SAMT encourages the development of technical Vice President Vice President Graubünden
analysis and the education of the financial community Swiss Italian Chapter and Liechtenstein Chapter
mario.guffanti@samt-org.ch alberto.vivanti@samt-org.ch
in the uses and applications of technical research
and its value in the formulation of investment and
trading decisions. SAMT has a wide range of activities
including:
n Organising meetings on a broad range of technical
subjects encouraging the exchange of information

and knowledge of technical analysis for the purpose
of adding to the knowledge of its members.
n Technician (CFTe) exams and the Masters level
degree Master of Financial Technical Analysis
(MFTA) in Switzerland. These exams are controlled
by IFTA. Barbara Gomperts Marco Zahner
Social Media Manager Auditor
n Developing CFTe preparatory courses which are barbara.gomperts@samt-org.ch ma_zahner@bluewin.ch
given twice yearly in advance of the IFTA exams.

THE SWISS We would especially like to see
contributions that draw from areas
not previously examined, and/or
TECHNICAL topics tangential to technical analysis.
The topics list is just a guide and should
ANALYSIS in no way be considered restrictive.
We wish to make the Journal open
JOURNAL to new and innovative ideas from all
areas of technical analysis and those
that connect with it.
Submitting Contributions
The Swiss Technical Analysis Journal Submission of contributions to mario.
is a quarterly publication established guffanti@samt-org.ch
by The Swiss Association of Market Language
Material deadline for
Technicians (SAMT). It is compiled Contributions must be submitted the Spring 2018 issue
by a committee of SAMT colleagues. in English with British grammar
The Swiss Technical Analysis Journal required. 15 March 2018
is essential reading for academics,
students and practitioners of technical Writing Style
analysis in all arenas. It is an excellent Papers should be written in a thesis Advertising
reference source for anyone interested style.
The Swiss Technical Analysis
in technical analysis, containing a References Journal is a quarterly publication
wealth of resource material. All texts referred to in the paper must which is published in A4 size, in
Credibility And Recognition be appropriately referenced with a pdf format only. SAMT will accept
The Swiss Technical Analysis Journal bibliography and endnotes (footnotes advertisements in this publication
has original contributions from its will not be accepted.) if the advertising does not interfere
members covering developments in Responsibility for the accuracy of with its objectives.
technical analysis in global markets. references and quotations is the The appearance of advertising in
The Journal’s aim is to reach leading author’s. We expect the authors to SAMT publications is neither a
practitioners and students of technical check thoroughly before submission. guarantee nor an endorsement by
analysis throughout the world. All references are to be included SAMT.
The Swiss Technical Analysis Journal as endnotes. No separate list of Advertising Policy
is a professional resource. Its online references or bibliography should be Advertising is subject to approval by
publication on the SAMT website provided. SAMT. All advertisements must be
will make its work available as a non-discriminatory and comply with
future resource to the community of Figures, Charts and Tables
Illustrations and charts must be all applicable laws and regulations.
technical analysts. SAMT reserves the right to decline,
referred to by Figure Number and
Topics source (when applicable). Tables withdraw and/or copy edit at their
SAMT is seeking papers that cover must be referred to by Table Number discretion. Every care is taken to
developments impacting, either and source. avoid mistakes, but responsibility
directly or indirectly, on the field of cannot be accepted for clerical error.
technical analysis; they may be drawn Length of Contribution
Papers should be approximately Advertising Rates
from such areas as:
1,200 to 3,000 words, with supporting Rate Size
• Basic market analysis techniques graphs and charts. Inside covers CHF 750 21.0 x 29.7 cm
• Indicators—sentiment, volume Format Full page CHF 500 19.3 x 26.9 cm
analysis, momentum, etc.
We ask for submission in MS Word 1/2 page CHF 350 19.3 x 13.4 cm
• Global and intra-global technical or other text format. PDF format will
analysis not be accepted. Charts and graphs Payment
• Styles of technical analysis may be in gif or jpeg, but we ask that Pre-payment by wire transfer is
authors also keep a tif format in case required for all ads. Bank details will
• Data it is required. be provided upon request.
• The changing role of technical
analysis in the investment
community.

SAMT encourages the
SAMT development of technical
analysis and the education
MEMBERSHIP of the financial community
The Swiss Association in the uses and applications
of Market Technicians of the technical research and
its value in the formulation
Established 1987 of investment and trading
SAMT Disclaimer www.samt-org.ch decisions.
(SAMT) is a not-for-profit organization that does
not hold a Swiss Financial Services License.
It is the aim of the SAMT to promote the theory
and practice of technical analysis, and to assist
members in becoming more knowledgeable and
competent technical analysts, through meetings Benefits of Membership
and encouraging the interchange of materials,
ideas and information. In furthering its aims the
• The organisation of meetings on a broad range of technical subjects
SAMT offers general material and information encouraging the exchange of information and knowledge of
through its website and publications therein. technical analysis for the purpose of adding to the knowledge
The information provided on the SAMT website of the members.
has been compiled for your convenience and
made available for general personal use only. • These meetings provide an excellent opportunity to meet and
SAMT makes no warranties implied or expressly, socialise with other traders in your local area and thus develop
as to the accuracy or completeness of any friendly and professional relations among financial market
information contained on the SAMT web site. The specialists.
SAMT directors, affiliates, officers, employees,
agents, contractors, successors and assigns, will • The organisation of presentations from guest speakers from
not accept any liability for any loss, damage or around the world.
other injury resulting from its use.
SAMT does not accept any liability for any • SAMT is affiliated with the International Federation of Technical
investment decisions made on the basis of this Analysts (IFTA). All SAMT members are, therefore, colleagues
information, nor any errors or omissions on the of IFTA and are entitled to attend the annual IFTA conference at
SAMT website. This web site does not constitute reduced rates.
financial advice and should not be taken as such.
SAMT urges you to obtain professional advice • The “IFTA Update” - the quarterly newsletter from the
before proceeding with any investment. International Federation of Technical Analysts.
The material may include views and statements of
third parties, which do not necessarily reflect the • The possibility to sit for the Certified Financial Technicians (CFTe)
views of the SAMT. Information on this website at a discounted rate. These exams are controlled by IFTA.
is maintained by the people and organization
to which it relates. The SAMT believes that the • Members receive discounts on a range of products and services
material contained on this website is based on related to technical analysis, including software, tuition, seminars
the information from sources that are considered and reference books.
reliable. Although all care has been taken to
ensure the material contained on this website is • Only fully paid-up members have access to the member area and
based on sources considered reliable we take no SAMT events.
responsibility for the relevance and accuracy of
this information. Cost of Membership
Before relying or acting on the material, users
should independently verify its accuracy, • Initial one time registration fee of CHF 50.
currency, completeness and relevance for their • The membership cost for each subsequent year is CHF 150. (The
purposes. Before making any financial decision
it is recommended that you seek appropriate
total cost for the first year is CHF 200).
professional advice. The SAMT website may
contain links to other websites, these are inserted Membership Payments to Join or Renew
merely as a convenience and the presence of To renew your membership or to join online, log onto our website.
these links does not constitute an endorsement
of the material at those sites, or any associated
organizations, products or services.

takes place in major cities throughout (NTAA) and have been awarded
the world. Additional fees apply to the designation of Chartered
IFTA CERTIFIED candidates requesting the exam in a Member of the Nippon Technical
non-English language or non-IFTA Analysts Association (CMTA)
FINANCIAL proctored exam location. IFTA will are also exempt from both levels
attempt to accommodate any exam and may proceed to the MFTA
TECHNICIAN location request. Program.
In preparation for the exam, n Beginning January 2013, individ-
(CFTe) PROGRAM candidates should use this Syllabus uals who have passed the STA
and Study Guide (CFTe II). Register Foundation and Diploma Courses
here for the next CFTe II on 19 April offered by the Society of Technical
2018. The deadline to register for this Analysts (STA) and have been
exam is 9 March 2018. No registrations awarded the designation of Member
will be accepted after this date. No of the Society of Technical Analysts
registrations will be accepted after (MSTA) are eligible to receive
this date. Download practice (mock) the CFTe certification (please
CFTe II examination. contact STA’s Administration for
procedures) and may proceed
Curriculum with IFTA’s MFTA Program. Prior
Examinations
The program is designed for self- to January 2013, holders of the
Passing the CFTe I and CFTe II study. Local societies may offer Society of Technical Analysts (STA)
culminates in the award of an preparation courses to assist potential Diploma are exempt from Level II,
international professional qualifi- candidates. but must pass Level I (a multiple-
cation in technical analysis. The choice test) before qualifying for
exams are intended to test not only Exemptions the CFTe certification.
your technical skills knowledge, but n Individuals who have successfully
your understanding of ethics and the Additionally,
completed IFTA accredited
market. certification programs through: n Individuals who passed the Market
Level I: This multiple-choice exam Australian Technical Analysts Technicians Association (MTA)
consists of 120 questions covering a Association (ATAA), Egyptian Chartered Market Technician
wide range of technical knowledge, Society of Technical Analysts (CMT) levels I and II on, or before,
but usually not involving actual (ESTA), Nippon Technical Analysts 28 June 2013, are eligible to receive
experience. In preparation for the Association (NTAA), and Society the CFTe certification. Please sub-
exam, candidates should use this of Technical Analysts (STA) are mit an application and provide a
Syllabus and Study Guide (CFTe exempt and may proceed directly pass confirmation from the MTA,
I). This exam is currently offered in to the MFTA program. See below including dates attained. There is
English, German, Spanish and Arabic. for more details: a one-time application fee of $550
It will be offered in Chinese at a later US. No future fees or membership
n Individuals who have successfully
date. Download the CFTe I practice requirements apply.
been awarded the Diploma in
(mock) examination (English) or Technical Analysis (DipTA)
CFTe I practice (mock) examination Cost
by the Australian Technical
(Arabic). Analysts Association (ATAA) are IFTA Member Colleagues
Level II: This exam incorporates a considered to have the equivalent CFTe I $US 550
number of questions requiring an of the certificate and may apply for CFTe II $US 850*
essay based analysis and answers. the MFTA Program.
For this, the candidate should Non-Members
n Individuals who have successfully CFTe I $US 850
demonstrate a depth of knowledge
completed Levels I, II, & III of the
and experience in applying various CFTe II $US 1,150*
Certified ESTA Technical Analyst
methods of technical analysis. The
Program (CETA) through the
exam provides a number of current
Egyptian Society of Technical *Additional Fees (CFTe II only):
charts covering one specific market
Analysts (ESTA), and have been
(often an equity) to be analysed, as n $US 100 applies for non-IFTA
awarded the CETA diploma, are
though for a Fund Manager. proctored exam locations
exempt from both levels and may
The CFTe II is a paper and pencil exam proceed to the MFTA Program. For more information on the program
that is offered in English, French, please email admin@ifta.org
n Individuals who have passed Level
Italian, German, Spanish, and Arabic,
bi-annually, typically in April and I and Level II of the certification
October. It will be offered in Chinese program offered by the Nippon
at a later date. This exam regularly Technical Analysts Association

SAMT Swiss CFA Society
International Federation of
The Swiss CFA Society boasts over
PARTNER Technical Analysts (IFTA)
2,400 members in Switzerland, against IFTA is a non-profit federation of
barely 100 in 1996 at inception. It is 26 individual country societies who
SOCIETIES the largest CFA Institute society in individually and jointly dedicate
continental Europe. With more than themselves to
2,000 candidates taking the rigorous n Research, education, camaraderie and
Chartered Financial Analyst® (CFA®) dissemination of technical analysis
exam in Switzerland each year, of world markets. The IFTA societies
the society’s impact on the Swiss support sharing technical analytical
investment community is self- methodology that at its highest level
evident. is a valid, and often-indispensable
It was the first society of CFA element in the formulation of a
charterholders in the EMEA reasonable basis for investment
region to be directly affiliated decisions.
Groupement Suisse des Conseils with the prestigious CFA Institute, n Promotion of the highest standards
en Gestion Indépendants (GSCGI) which includes more than 110,000 of professional conduct, international
CSCGI is a group of economic members in 139 countries. cooperation and scholarship between
interests formed by specialized The vision of the Swiss CFA Society is all its Member and Developing
independent financial intermediaries to be a leader in fostering the highest Societies within all arenas of technical
who are confirmed professionals in level of knowledge, professionalism, analysis.
the financial services industry. The and integrity in the investment n Providing centralized international
group is open to contacts with any business. exchange for information and data
person interested in the business
www.cfasociety.org/switzerland of various financial centers while
of wealth management seeking to
respecting individual country and
promote dialogue with the banking
Society business practices, legal
partners and authorities at all levels.
structures and customs.
Their goals are to:
n Encouraging the standardization of
n Promote contacts between
education and testing of its constituent
professionals motivated by the
members in technical analysis, making
same desire for independence,
sure that each individual country’s
wishing to maintain and develop Swiss Futures and Options security analyst licensing, legal and
relationships with counterparts. Association language /communication priorities
n Find common ground for The Swiss Futures and Options continue to be individually accepted.
exchanging experiences and ideas, Association (SFOA), previously the n Fostering the establishment of
a field where diversity and novelty Swiss Commodities, Futures and individual societies of technical
are prevailing. Options Association, was founded analysts without bias in regard to
n The enrichment of the links that in 1979 as a non-profit professional race, creed or religion. It supports the
can be forged on a friendly and association for the purpose of promot- need for maintaining a free and open
professional level within a well ing derivative financial instruments, worldwide markets under normal,
defined and recognized framework particularly standard futures and and in particular crisis periods.
to favour professional consultation options contracts on financial instru-
As a growing bridge of communication
and close dialogues. ments and commodities, to the widest worldwide, IFTA remains open to
www.gscgi.ch possible audience, and to serve the methods of technical analysis, while
interests of its members. SFOA serves encouraging the consideration and
users of commodity and financial support of membership for both
derivatives, as well as professionals, developing and established societies.
their institutions and the exchanges.
www.ifta.org
www.sfoa.org
Journal Media Sponsor
Training: www.technicalanalyst.co.uk/courses/calendar/
Awards: www.technicalanalyst.co.uk/awards/the-technical-analyst-awards-2016/
Research: www.technicalanalyst.co.uk/research/

ZÜRICH • GENEVA • LUGANO • CHUR


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THE SWISS

The Swiss Association of Market Technicians

ZÜRICH • GENEVA • LUGANO • CHUR

Willkom men Chur

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 3

Volume Five • Issue 2

A KEY THEME AT THE 30TH IFTA

REVIEW: THE 7TH ANNUAL LANTERN

4 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

INVESTORS MAKE BOTTOMS; TRADERS

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 5

6 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 7

Wyckoff Power Charting

Dr. Henry O. (Hank) Pruden 1936-2017

SAMT and Swiss TV Interviews

SAMT interviews Hank Dukascopy TV interview Interview with Ron William on

8 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 9

John Bollinger and Kathryn Kaminski Alberto Vivanti

Click to watch a memorable video that recaps the Milan Conference.

10 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 11

We all know that putting uncorrelated stocks, or uncorrelated assets into

+0.50 to +1.00 Very strong correlation

We see strong positive correlations between interest rate vehicles, such as

12 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

ETF) for the 20 years beginning 1998.

Table 2. Rolling correlations,

During July and August 2017, the market moved slowly

Correlations During a Crisis

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 13

Price Movement in a Crisis

Chart 3. Prices of the four

Table 2. Rolling correlations,

14 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

Chart 6. The Internet

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 15

Chart 7. Defense stocks rally during the

16 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

Then, a combination of a broad market index, or diversified individual

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 17

18 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

Robert R. Prechter is known for developing a

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 19

20 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 21

22 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 23

24 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 25

For more about Socionomics, visit www.socionomics.net.

We invite you to read the Review of Robert Pechter’s book,

26 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 27

Table 1 – Simulated returns of equal weighting of 18 Stoxx sectors, constantly rebalanced,

Table 2 - Equal Sectors Distribution with Volatility and Trend Filters

28 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

Figure 2 – The simulated equity curves of €100 invested in 2000 in the

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 29

30 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal

The Swiss Technical Analysis Journal • Autumn-Winter 2017 • 31

32 • Autumn-Winter 2017 • The Swiss Technical Analysis Journal