The Compound and Friends - Why Technical Trading Signals Stopped Working (with Barry and John Roque)

Episode Date: November 19, 2019

John Roque joins Barry Ritholtz at The Compound to explain why technical trading signals stopped working and how he has adapted his trading style to the new landscape. Follow John Roque on Twitter: https://twitter.com/WolfeDailyHowl 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   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/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

I'm here with John Roque, a famed technical analyst who used to work for Soros Fund, consistently top ranked in the institutional investor technical group. John, welcome to The Compound. Thanks for having me here, Barry. So let's talk a little bit about the sort of technical analysis you do. I've described it as one part quant, one part technicals. Tell us a little bit about your form of technical analysis. So I hope I'm not an apostate by saying this,

but what I figured out over time is that most technical indicators don't have the gravitas that they had in prior cycles. And the reason I believe that is because in prior cycles, it was mostly a retail business, and most of the trading was done on the floor. So all the indicators that were developed were developed in prior cycles when all that occurred and that no longer occurs. So we've tried to eliminate our reliance on indicators and concentrate more on price. And that's the reason we have this four input item that just is based on price alone. What sort of indicators do you think have lost their resonance with the trading crowd? Well, for example, very often you will get

deterioration in momentum indicators and long-term momentum indicators, which historically would have said, wait a second, the environment is changing. But with 15% of the volume coming from active managers and 85% of the volume coming from, let's call them passive or not active managers. Is it that much? That's a giant discrepancy. I've heard the numbers. I don't keep those numbers, but the numbers I've heard are of that magnitude. We figure that the indicators have less importance because there's less people

creating what's occurring in the indicator. For example, it used to be fairly easier to divine market sentiment. I think it's very difficult to divine market sentiment now because there are fewer people playing. What about algos and computer-based trading? How much does that impact either technical indicators or sentiment indicators if it's not a human but just a piece of software? I think it affects everything. And I think we are still using human language to describe what goes on in the market, where very often what is going on is not because a human created it, but because some algo has responded to a tweet or to some Federal Reserve press release and has bid up

stocks or sold them off based on what they're interpreting. So I think much of what is occurring is not very well described using human language. So how has the practice of technical analysis changed since you've been in the business? And you've been practicing for what, 30 years? Is that a fair number? Yeah, I'm still practicing. You were Lehman Brothers from 94 to 98, is that right? That's right, yeah. And then I went to work at the old Arnhold and Espelijsra, which was perhaps the most wonderful move I could have ever made at that point in my career. John Arnhold was a

gentleman, still is. So I think what has occurred for the business is that it makes more sense for us to pay attention to trend. We think that's how we can do better than most and to admit to ourselves that we're not traders because nobody could trade as fast as a machine. So we're more than likely to take a step back and consider weekly charts more than we would daily charts and take a step back even further to consider monthly charts more than we would weekly charts. We think the most powerful signals come out of monthly charts. So this move towards trend following, can I say that?

Yes. And towards looking at longer-term charts, is that consistent with what you see from your peers in the world of TA? Or is this something specific to what you guys are doing? Tell us a little bit about the state of the art in technical analysis today. I think in general, not just for people who practice TA, but for people who are investors, probably think they're much better traders than they actually are. And we think that the more often you trade, the more likely you are to make a poorer decision.

For example, my father used to say to me when I was playing baseball, don't have rabbit ears, which means don't listen to your opponents because they were much ruder then than they are now. And so I think when you make a decision on an investment basis or you buy something, you're always challenging yourself every single day. And sometimes you're hurting yourself by doing that. And I like to use a line that I used many years ago, I think what I thought, meaning there's no information for me to change my opinion now.

I'm going with what I originally thought. And I think by stepping back and taking a trend approach, you allow yourself more leeway in that regard. So one of my favorite things about technical analysis, I used to always ask this question to people who tell me charts don't mean anything. All right, if you can only have one piece of information, which would you prefer? A Wall Street research on a company or a look at the chart? I think most people would want to see the chart. I mean, if you're going to buy a house and I'm your realtor, you say to me, John, what does it look like? If I want to introduce you to a classic car and you're a classic car enthusiast, you would say, John, what does it look like? And the chart does that for

you. And it's remarkable to me that people still have this sort of feigned indifference to the charts. But I think behind closed doors, they're more than likely to look at them and look at them in a rather sort of interested fashion. So let's talk for a moment about the fundamental analysts, the people who are researching specific companies. Are these people actually ignoring charts or are they looking at the technicals whether they admit it or not? I think on the buy side, for example, I had some very good clients over the years who trusted me, so to speak. And so I'd say, for example, hey, Barry, this is showing up on my work. It's very strong. The score is very high. You should probably do some fundamental work on it. And you might say something

to the effect of, I'm going to start a position now. I'll start a small one. Then I will check the fundamentals. If the fundamentals match, I will make this position bigger. But if they don't match, the chart's good enough for me to be involved anyway. I think people who have enough experience in the business or a good deal of experience are more likely to understand that there's a lot of ways to win. And I'm going to use a rotten metaphor, but I'm going to use it anyway. There are a lot of grass eaters on the Serengeti. The reason they're all allowed to thrive is because they eat different parts of the grass. Some eat the top of it, some eat the middle of it, some gnaw it all the way down to the nub. The reason they can all survive is because there's many different ways to eat that grass, much like there's many different ways to win in our business. And I think the people who

will employ different inputs tend to win at a more frequent rate than others. What are some of the misconceptions about technical analysis? I hear all sorts of rumors from people who aren't practitioners or even traders. When you're out trying to convince a client, here's why I want you to buy this stock, what sort of pushback do you get? I think the pushback is you don't know. And the answer is nobody knows, right? Yes, we don't know.

We're trying to base our call, so to speak, on that item's history or the history of items that resemble that. Because if you see enough charts over time, you will know that this looked like that or that looks like this. For example, right now, we sent out a chart over the weekend that showed how the Nikkei 225 in Japan in yen looks a lot like Caterpillar does right now in dollars. So we said, sort of in a wry commentary, we find them, you figure them out. So what does that mean if Caterpillar in dollars looks like the Nikkei in yen?

We tend to think that there's some cyclicality to the move here and that the move for the Nikkei and Caterpillar have some commonality and that there's a cyclical recovery sort of on the come or occurring right now. In fact, we put together a Wolf Technical Analysis Japanese Technology Index some months ago. It's up 40 plus percent. This is not U.S. tech. This is Japanese tech. And that's in yen. up 40 plus percent. This is not US tech. This is Japanese tech. And that's in yen. In yen. We put together a Wolf Tankers Index. You know about the tanker stocks. They were down 99%. They got crushed last year. Destroyed. I mean, 99% from their peaks. This is up 50% year to date. So there's some cyclical changes going on that are not necessarily being reflected because part of the issue is that the energy stocks have not

yet turned. But the industrial group of which CAT is a part looks very healthy to us. And I recall not just the tankers, the Baltic Dry Index was left for dead. That was up tremendous too. Right? And I didn't realize that. That came up with the tankers also. That's correct. Without a doubt. Yes. So, John, if people want to learn more about what you do or follow you or read your research, how can they get a hold of you? So we now have a Twitter presence, and it's called at Wolf, W-O-L-F-E, Daily Howell.

Of course, they can find us by contacting Wolf Research and certainly talk to us about technicals. We'll talk to anybody at any time. Charts are our life. And I formerly had a Twitter presence, which was known as at the chart life. And because I'm now at Wolf Research, I'm sort of embargoed, but I will retweet what we're sending out from Wolf Daily Howell. So that's how people can contact us.