My late father taught me to chart stocks when I was 16 years old. That was 1980. It was one of the greatest gifts he left for me. He was also a Super Bowl fan, and our then-hometown New York Giants (not the ones from the movie “Madagascar”) won 4 of them during this lifetime.Whether you rooted for the Chiefs, 49ers, or just really good chicken wing dip on Super Bowl LIV, I can’t help but think of the parallels between Sunday in the NFL, and charting the markets. Here’s what I mean.
An NFL team prepares each for its games, which typically occur on Sundays. All week, you hear players and coaches talking about what they plan to do, and what it will take to win. This is a lot like turning on the television, radio, social media and podcasts, and hearing a market guru discuss their latest thinking. I do plenty of that in this column.However, the only thing that actually counts in the NFL standings is winning on Sunday. Whatever you did or said during the week, no matter how hard you practiced, it means nothing in the standings. Now, preparation for Sunday is certainly a way to increase your chances of winning. But Sunday is all that counts. As a colleague of mine likes to say, its a performance business. Aren’t they all?
Charting stocks, ETFs, indexes, commodities and other securities and markets has been a 40-year passion for me. And I am certainly not the only one. In fact, technical analysis as it is called, has gone from being considered akin to witchcraft in the 1980s when I first learned it, to perhaps being the key to understanding what drives algorithms and other big-money players in today’s markets. That means you ignore charts at your own risk. And that risk will be great going forward.You see, technical analysis gives us a very good idea of what is likely to happen going forward, or least what the probability of success is. The charts are “Sunday.” After all, we can talk all we want about stock valuations, corporate innovation, economic impacts on stocks, etc. However, price is all that matters to your wallet and investment account.
That’s what technical analysis helps us to see. the only thing that ultimately determines whether money is made or lost is the changes in security prices in the markets. This is why I back up every fundamental and quantitative decision I make in the portfolios I manage with a thorough review of what the charts tell me. This is not only at the stock level, but across the market. There is a story the charts tell about the market’s reward and risk potential at any moment in time. You just have to know how to look for it. If you do, you can be a true risk manager, instead of an educated guesser.
While technical analysis has a psychological component to it, I also pay close attention to traditional sentiment indicators. In particular, I have observed that many well-known indicators are counterintuitive. A common example is the variety of investor and market advisor sentiment indicators that consistently show participants to be most bullish right before declines and most bearish at the bottom.I learned long ago that markets wring out the maximum amount of pain. As we have seen this proven time and again, we try to look ahead to what is likely to happen next, and not get too caught up in what just happened. The recent increase in market volatility tells me that it’s time to take an especially close look at what charts have to say. I will write more about that to you in the coming days.You want to be prepared for addressing the reward potential and major risk areas in your portfolio, know that charting the markets can be a big help on Sunday. But especially Monday through Friday when the wealth you worked so hard to accumulate is at risk.