Mark Fisher: Analysis Doesn't Matter in This Market

Mark Fisher, inventor of the technical trading method ACD, sees this market as a pure trading market in which analysis does not matter. This was probably not what some of Wharton’s students, attending its first annual Wharton Hedge Fund Conference, wanted to hear. After all, they have committed to spending a six figure amount on learning how to perform just that analysis. Fisher probably also depressed Wharton’s faculty, whose livelihood depends on a steady supply of students willing to pay ever increasing tuition rates. Not to mention that Fisher himself holds a Wharton MBA.

Instead of analysis, all that counts in Fisher’s world for the foreseeable future are market psychology and spotting turning points. Markets are a chess game in which you have to stay one step ahead. Until December, Obama triggered 11 brief market rallies when he appeared on TV. At his twelfth appearance, the market no longer rallied. Fisher shorted the market and sure enough, it dropped a little later. Fisher thinks Bernie Franks might provide a similar trading opportunity: the day the market does not drop when Franks appears on TV, you should go long as much as you can.

We are not quite convinced by Fisher’s trading rules. A money manager we know recently backtested Fisher’s ACD indicator, described in his book “The Logical Trader - Applying Method To The Madness” (John Wiley, 2002). The backtest ran over 15 years or so, but the manager was unable to show that the strategy worked. It did not produce satisfactory results due to excessive drawdowns that made it not much better than holding equities outright. So we wouldn’t bet our retirement savings on Fisher’s Bernie Franks indicator.

For the resolution of the current credit crisis, Fisher has two proposals: first, imitate Canada’s solution to its housing crisis from seven years ago. Canada gave green cards to anyone who bought a house for Cdn$400,000 with cash, no mortgage allowed. Second, remove the stigma from bankruptcy by letting people get credit after they declare bankruptcy on their mortgages. This will force borrowers and lenders to work out mortgages, which is better than giving judges authority to re-write mortgage contracts.

Fisher’s outlook for the hedge fund industry is as somber as that for analysis. He believes that next year the conference will no longer be called Hedge Fund Conference but Managed Accounts Conference, something we agree with. We would add that not only managed accounts provide the level of liquidity and transparency wanted by investors in the post-Madoff world, but any good ‘40 Act vehicle can be structured today to implement almost any hedge fund strategy. Fisher argued that KISS is the way forward for the industry: Keep It Simple, Stupid.

Finally, Fisher gave a hot stock tip: he sees education stocks such as Strayer and (STRA) Phoenix (APOL) as the short opportunity of a lifetime. They still trade near their 52 week highs; however, as more and more graduates find it difficult to get jobs, the appeal of paying for their courses will decrease along with the rapidly diminishing disposable income of its potential students.

Seeking Alpha provides complimentary conference passes to our contributing authors as a courtesy. A list of eligible conferences can be seen on our conference calendar.

Comments

[Dave Wrixon:]

Show me an analyst with a chart, and I'll show you somebody who is totally clueless as to where all this is heading.

We are on the cusp of a major paradigm shift. Plotting trends of past behavior is almost certainly not going to help much predicting future value. You need to understand what is happening and plotting lines on graphs is not going to cut it!

Feb 22 09:46 AM

[Bundee:]

Market psychology or if you prefer, the Fear Factor is in the driver's seat of this market.
Iceland is close to insolvency, Ireland is watching its economic miracle go into reverse, Latvia's government collapsed, rioting in Greece, etc. These are Not normal times and yet analysts expect the markets to remain normal?

"remove the stigma from bankruptcy"-
Don't worry about that. Many Americans feel no shame about their actions anymore so little things like bankruptcy and ruined credit hasn't stopped hundreds of thousands from previously declaring bankruptcy nor will it stop hundreds of thousands from doing so in the future.

Feb 22 10:12 AM

[Jolly_Rancher:]

Value analysis works well in this market. Value investors value stocks based mostly on one of two criteria: 1) NPV of furture cash flows plus salvage value; OR 2) Liquidation asset value. The problem with using NPV is that cash flow estimates are plummeting fast. High government and consumer debt levels and low income/job prospects make future cash flows predictions somewhat somber. That leaves liquidation of assets as the more likely method today, and looks like what the market is increasingly understanding. It's taking companies' share prices down to liquidation value. The problem with this is that all of the assets can't be liquidated at once. So I expect at some point in the next few months, should this economy not improve, to have NO BIDS and so no trade on many stocks. Value analysis works well, but when asset prices are falling so dramatically, you need to be on top of the game. Using the NPV Excel function with recent cash flows from company quarterly reports will burn you.

Feb 22 10:54 AM

[ROLEXDAYTONA:]

All this guys make money selling their books, resumes, software, lectures etc., as traders they are worth zero.

Feb 22 12:43 PM

[OldLimey:]

Could you please explain how you would set about arriving at a meaningful liquidation value for, say, Boeing? (Note that I didn't show a perverse sense of humour by asking you to place a liquidation value on any of the banks.)


On Feb 22 10:54 AM Jolly_Rancher wrote:

> Value analysis works well in this market. Value investors value
> stocks based mostly on one of two criteria: 1) NPV of furture cash
> flows plus salvage value; OR 2) Liquidation asset value. The problem
> with using NPV is that cash flow estimates are plummeting fast. High
> government and consumer debt levels and low income/job prospects
> make future cash flows predictions somewhat somber. That leaves liquidation
> of assets as the more likely method today, and looks like what the
> market is increasingly understanding. It's taking companies' share
> prices down to liquidation value. The problem with this is that all
> of the assets can't be liquidated at once. So I expect at some point
> in the next few months, should this economy not improve, to have
> NO BIDS and so no trade on many stocks. Value analysis works well,
> but when asset prices are falling so dramatically, you need to be
> on top of the game. Using the NPV Excel function with recent cash
> flows from company quarterly reports will burn you.

Feb 22 01:26 PM

[The Spiral ...:]

Value investing is fine if there is someting of relative value to compare it to, I can tell more from a chart. I do agree that most technical analysis looks the past to project the future and that isn’t enough. Experience builds a more crucial skill, not to be confused with being smarter or luckier; it has to do with discipline maintaining clear judgment and even temper. I also think Fisher’s idea is interesting, but impractical.

Feb 22 02:14 PM

[athena:]

This is a momentum market. It is great for shorting. The momentum is down.
Hedge with gold.

Feb 22 02:27 PM

[Urbane Gori...:]

At first I couldn't recognize who you were referring to. Then it clicked. You intended to say 'Barney', not 'Bernie Franks'.

As to the issue of market drops when a government official speaks, that activity has been commented on quite a lot in the last year. I cringe when Bernanke, Obama, Franks, or anyone comes out and begins to speak, and I am not normally surprised to see the market drop. Sometimes it seems to recover, but it sure didn't this last week.

My take on this activity is : When the economy is bad, it doesn't matter who comes out and speaks, or what they say, the market will drop. The lack of acceptable backtested results may just mean that this effect would only be noticed in a markedly depressed economy. Fisher's belief about market turns when the reaction is subdued after a speech sounds pretty reasonable to me. It bears watching.

Interesting article. Thanks!

jegan

Feb 22 03:08 PM

[Fred Voetsch:]

BS!

This market is all about fundamentals and analysis. Basic funamentals have been getting out of whack for decades now and a careful analysis shows that they are coming back to the long term trend level and will likely go far below, in order to comensate, before coming back to it.

Feb 22 03:27 PM

[Fred Voetsch:]

"Finally, Fisher gave a hot stock tip: he sees education stocks such as Strayer and (STRA) Phoenix (APOL) as the short opportunity of a lifetime."


Ahahahahaha!

...so was Citibank just a half year ago; remember that?

Feb 22 03:29 PM

[wise:]

it was worth this article being written to point out how powerfully better the Canadian housing situation is

Feb 22 05:35 PM

[Moon Kil Woong:]

I think it depends on the market sector. Definitely if you are picking tech or healthcare stocks you need to know the technology behind it, the benefits and risks associated with them, cost to market, and business model. If you are in banking or mining/equipment market sentiment dominates more.

If you just want to see what goes up or down or ride the market then yes, you're not a fundamentalist at all and it's not worth arguing the semantics of corporate fundamentals.

Feb 23 01:05 AM

[forprofited...:]

Still too early to short the edu stock, time will come, but not yet. In the interim you will see short term drops & rises, but the real drop wont likely occur till the 3rd qtr.

Feb 25 09:42 AM