The Compound and Friends - Financial Advice Using Technical Analysis

Episode Date: April 11, 2019

Today at the Compound - an all new episode of Talk Your Book with Downtown Josh Brown and Barry Ritholtz talking to Andrew Thrasher, a technical analyst and portfolio manager at a large Midwestern RIA called the Financial Enhancement Group.  Andrew's work look at the structural behavior of prices and volatility in the stock and bond market. In this discussion, Josh and Barry quiz him on the way his firm explains their investment philosophy to clients, the difficulty of marrying technical analysis with fundamental analysis and tons of other stuff.  You can find more of Andrew's writing here: http://www.athrasher.com/  Enable our Alexa skill here - "Alexa, play the Compound show!" https://www.amazon.com/Ritholtz-Wealth-Management-LLC-Compound/dp/B07P777QBZ Talk to us about your portfolio or financial plan here: http://ritholtzwealth.com/ Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/   Subscribe to the mini podcast on iTunes or Spotify Enable our Alexa skill here - "Alexa, play the Compound show!" Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, I'm Josh Brown. We're at The Compound with my friend Andrew Thrasher. Andrew Thrasher writes an analytics note centered around technical analysis. Is that the best way to explain it? Yeah. Probably not, but we're going to go with that. But you're also a portfolio manager at an RIA in the Midwest called Financial Enhancement Group, and we're going to get into that as well. Andrew's here to talk about staying curious and how to use technical analysis

as part of an ongoing advisory business. Let's get into it. Andrew, you prefer Andrew. I know that. My mom does. I call you Andy sometimes on Twitter, but it's not... It's endearing. It's a term of affection. Okay. And you are 16 years old? Close, 32. 32. All right. So you and I met in 2010, I want to say, or 11, like a very long time ago.

Yeah, you slept right. At a big picture conference when Barry used to do the big picture conference. Yeah, that's right. Oh, Barry Ritholtz here with us as always. Lurking in the background. So you were talking about just the idea, the difference between fundamental and technical analysis, and there are a lot of differences, but one interesting one that you brought up, which I'd love to hear more on, is that with fundamental analysis, there are a million inputs, right? You can have all different types of metrics that you're trying to feed into whatever your research is. With technical analysis,

it's really price and then derivatives of price. So does that make your life easier? It's a beautiful thing. Pricing is very said volume. You can throw some volume in there. If you want to do some fancy rabbit reproduction numbers, you can get Fibonacci in there. But yeah, it's pretty much down to price. They're based on price, all of these other things. All day long. But wouldn't

you say market internals are different than price? It's still price if you want to look at the number of stocks that are hitting 52-week highs. It's their price hitting 52-week highs. Advancers versus decliners. Yeah.

The price, it all comes back down to the closing value. Okay. So you're managing a portfolio for wealth management clients without getting into every secret sauce or anything like that. But just broadly speaking, when you meet with one of these clients or an advisor at the firm does and tries to explain your strategy, what are the salient points about how you use price

or how you use technicals? The way we do try to describe it with clients is that we're data dependent. Trying to go beyond what that data is, because we do use fundamentals. We have a CFA on staff. We do think fundamentals do have an input. A lot of it kind of

funnels down to eventually what the price is doing. So just being data dependent, relying on what the market's trying to tell us that we're not trying to main handle the market and force our opinion on it. And how that just often flows back to whatever the price action is doing. Okay. But so is it trend? Is it you're using technical to figure out what holdings to have? Like what's the big picture way that you're using technical to figure out what holdings to have. Like what's the big picture way that you're using it? We do a couple different things. We look at trend, broad trend of the market for our kind of broad risk profile. We do a little bit of mean reversion.

So if things with rubber band gets too stretched one way, that things might pop if we're looking for something to be shorter term. So you'll trade against a trend? Yeah. There's certain setups that I'll look for. And then we often look a lot at relative performance. We want to see how things are performing relative to their sector, to the market in general. So we kind of want to be riding with the broad stream instead of trying to fight the current from a macro standpoint, the large market.

Do you find when you talk to investors that a lot of the terminology that's related to fundamental analysis is more natural for them to understand. It's what they hear. And then in technicals, it's just not. It's what they hear. When they read a news story, if they turn on the news for a little bit, they're going to hear company earnings. It's something they can understand.

If they're in a business world, they understand what earnings are, what revenue is. So it's something they can relate to. Because they're a business owner. So you're talking about profits, right? You're talking about sales. It's like these are real terms that they come into contact with. And then you're talking about volume weighted average price. And they're like, wait, what?

You get into stochastics and their eyes glaze over. Yeah, they're done. So what's the biggest challenge about driving a portfolio with technicals when you have a clientele that might be somewhat sophisticated about the economy, about companies, but they really don't get support and resistance or trends or expanding volume or anything like that. A way to bring it home is they get their connection to the portfolio is their monthly statement. Most of them aren't checking interim month online to see what their portfolio is. Some are, but most of them it's looking at their

weak custody at TD Ameritrade, so getting their TD statements. And we say, when you get your statement, your account's being reconciled based off what the price of that stock is. Your value of your portfolio

is based off how that much of that stock is being determined by the market, which gives you the closing value of the price. That's what we think is significant

and that's what's important. If you want to sell- You're saying results. Results. Like, let us do what our process is. Right. You want to take money out of your portfolio to go buy a boat or take for some retirement

distribution. We can't say, hey, this company's valued at this, so that's what we want to sell the stock at so you can go on this family vacation. We have to determine what the market says it's valued at. So how do you separate wishful thinking and hopes in a client's mind from the actual hard numbers? Sure. You have that with some people that will bring over positions, legacy positions.

Being in Indiana, we have a lot of Ford stock, GM stock. I'm so sorry. We had a client who has been worked at GM and on his deathbed said, never sell this stock. What do you do with that? To his relatives. Yeah, to his spouse. Never sell GM.

Well, now she doesn't have to worry about it because it went bankrupt. She's okay. Can you sell calls against it? I get what you're saying. You're kind of stuck. So in those types of positions, you can help manage it, and we'll try to work with those legacy positions. But it can be a difficult conversation because they really get tied to the company outside of the stock.

They don't view them as the same. What do you do maybe in terms of portfolio construction or in terms of exposure, what do you do when the fundamentals and the technicals disagree? I always ask this question of people that say they use both. So we have, and I don't have a good answer. So we have a position on in the, the two start to diverge or be somewhere we're looking to put on. Okay. So maybe you don't run into this situation, but maybe broadly speaking, right? Like you've thought about this. Like in other words, you say, technically speaking, this group of stocks looks incredible. So right now that would be like utilities, arguably.

But the fundamentals don't justify utilities selling at 16 times forward earnings. So the CFA on staff is like, no, we're not going to be adding to this group. I don't care that it's breaking out. And the technician on staff, hypothetically anywhere, is like, no, no, no. This is what's working. We need to have more of that in the portfolio. Yeah, so we'll use position sizing sometimes for that. If it's something where the two of us disagree, let's say if a standard position is 5%

and the fundamentals just look like trash, then maybe we'll put on 2 or 2.5 and then wait. Or if it's kind of the opposite where the company's printing money but the chart look like trash, then maybe we'll put on two or two and a half and then wait. Or if it's kind of the opposite where the company's printing money, but the chart looks like trash, then same thing, we'll maybe do a smaller position or wait until price confirms. We have a lot of that where he has stocks that he loves, but if I don't think the chart looks good, we'll kind of sit on it and kind of wait for that to improve.

So typically, how much do the technicals tend to lead the fundamentals by? Most of the trigger pulling gets pulled on technicals, on the buy and the sell side. So how long does it typically take for the fundamentals in price to catch up to the technicals in price? So our watch list often gets built on fundamentals for our longer-term positions. So we've had Apple since 2006. So we've held it for a long time, a lot for tax reasons. But the charts looked like perfect. And sometimes it's, it's got cut 50% a couple years ago. So we'll kind of, because the fundamentals kept us in it. And for, for tax reasons, we kind

of held that position and the fundamentals had to carry it for a little while, even though the chart kind of had to, uh, some, some, we saw a pure technician would look at that and say, once it breaks that trend, I don't agree with that approach, but you, but then you have to come back and say, well, look, this isn't a hedge fund. These are separate accounts. These people have tax ramifications and we either need to have broader tolerance bands, or we need to maybe use position sizing rather than buy and sell calls. I mean, it's, it's, it's, we'll use position studies. We also separate our accounts into qualified and unqualified. So we have that ability to, if it's Apple and all IRAs, we can exit that position and not have the tax focus.

So we'll try to do that as strategy, which has worked really well for a lot of the things that we want to get out of, that we built up a large gain in. So I want to ask you about this other thing that you were talking about. You were saying the ability to stay curious and to ask questions, which I don't think is something that's unique to technical analysts, obviously. But I know you wrote a white paper about volatility. You called

it predicting a volatility tsunami. And I tried to read it, but I'm not very bright. But I got the gist. And I think you were kind of saying, like, some of these, they're naturally occurring phenomena. They're almost like akin to a volcano or, excuse me, an earthquake or something. Or a tsunami. Or a tsunami where they were like. That was good. Where there were, like, moments before it erupts. Yeah, kind of the calm before the storm.

But how much time, all right, so, like, without going crazy, how much time do you really have prior to a volatility tsunami, which is what, VIX 30? When all the animals run up the hill away from the shore, that's your warning.

When all the ants leave Manhattan. I wrote a post in September on my blog on athresher.com. Subscribe. Andy. It's called,

I said, don't push it. The volatility clouds that were forming that was in September were volatility really contracted. It was actually contracting from the book. Don't push it. The volatility clouds are forming. That was in September. We're volatility really contracted. It was actually contracting on the weekly. Wait, you called the fall tsunami?

Yeah. Okay. Why aren't I reading you more? Good, great question.