Technical Analysts: who needs them? You do. Fundamental analysts do.
We read a lot about the great debate of inflation-depression today. Are we entering an inflationary or a deflationary period? Well, if you have read my articles, you know that I think we have just endured (and not so successfully) a prolonged inflationary period (1982-2001) and we are about in the middle of a prolonged deflationary period (2001 - 2019). ('Inflationary' and 'deflationary' in terms of bubble production, debt production, not necessarily in terms of monetary policy.)
So, now that that's settled, we can move on to the other great theoretical conundrum batted about (unnsuccessfully also) for millenia: who knows more about the markets, and who is more valuable, the fundamental analyst or the technician? To ask the fundamentalist, this dilemma was resolved long ago. The Wall Street joke (instituted by fundamentalists of course) is: 'Show me a rich technical analyst.' And there is something to be said about this.
Technical analysis is the 'art' of financial analysis; fundamental analysis is the 'science'. When is fundamental analysis most correct, most useful? When the market is going up. When the market is going up -- I call these inflationary 'Day-Cycles' -- inflationary in the sense of 'bubble manufacturing' -- fundamentalists are in control. That is, fundamentalists think they are in control. During Day-Cycles 90% of stocks go up. There is a pretty good probability that, when 90% of the boats are rising, that your prediction that a boat will rise will prove true (and, for you, provide proof of a kind of genius).
And here are the silly technicians, describing tops, and head-and-shoulder tops, and penant consolidation formations, and gaps, and on-balance volume irregularities, and support levels and resistance levels, and gaps, and inside days and outside days....the Fundamentalist just laughs and congratulates himself on his acumen, considering his half-brother, the Technican, slightly mad and, well, in all honesty, rather ridiculous. Why sell at all? Nike's profits are increasing by 35% annually, its PE is still reasonable, it is expanding in to new markets. Who in their right mind would sell this stock? Just put the money in the bank, buy that yacht (take out a loan that is), and trust in God that all weill be well.
The strength of the technician is at night. The technician can see in the dark. In the Night-Cycle, the buy-and-hold position is a disaster, as we've seen recently. The fundamentalist cannot 'predict' the top of the markets very successfully, because he is dependent on old data, old reports from the company -- the fundamentalist studies always the PAST. Some fundamentalists who are very skilled can, indeed, 'see' individual corporate deterioration in earnings, in expansion rate, in confidence through insider selling...but most can't. That's why the world lost trillions of dollars in wealth this past year or so, because the fundamentalist is like a scientist who watches everything from the outside, measuring bodies, measuring rates of momentum, through data provided by the company.
Heat, passion for wealth, greed, positive energy, drives the market up in the same way that breath fills up a balloon or a bubble. When this is happening, almost all boats are lifted as the sea builds to a high tide. That is the description of a Bull Market. But when does it end?
The technician, like propets in the Old Testament, are obsessed with the end of the world. They predict it constantly; and wind up being correct about it eventually -- but they are like the boy who cried wolf. People don't listen to the prophet in a world defined by peace and prosperity. (Who needs the artists in the practical world, anyway? We need scientists, engineers, financiers, builders, construction workers, doctors, mathematicians... Artists, what good are they anyway?)
The trouble is, only the artists can see in the Deflation Cycles. The fundamentalists rule the Day-Cycles, when credit/debt are being expanded, when bubbles are being blown. Technicians rule the Night-Cycles, when credit/debt is being unwound, when bubbles have broken and matter is colliding with antimatter; and the financial world is being destroyed.
Entropy. The world runs down. The world runs down an incline. Matter collides with anti-matter. That defines the Bear Market. That explains where we are now. We have rallies (giddy bear traps) during the Night-Cycle: but they don't last. Fundamentalists are giving us readings on earnings projections, growth projections, future earnings PE's....based on what? Based on scenarios of normal Day-Cycle business activity. Check the fundamentalist's who analyzed General Motors in 2001 and see how many predicted that GM (or GE for that matter, or Bear Stearns or Lehman Brothers) would be defunct today, or nearly defunct. How many fundamentalists warned investors that GM would be worth 35 cents in 2009? But quite a few technicians were warning in 2001 that the world economy (via the technical stock bubble) was dangerously overpriced and heading into serious trouble.
Bear Trap rallies don't last. And the fundamentalists are hard-pressed to tell an investor when to sell. Selling, in fact, is very hard for the fundamentalist -- because the fundamentalist's mind-set is that selling is a negative act, something they are psychologically conditioned against. Short-selling is a learned behavior -- but a behavior most fundamentalists don't trust, consider un-American, or consider a betrayal of the positive spirit of America. (It's true, some fundamentalists become excellent short-sellers. But you can bet that they also employ a division of technicians to help them with their timing.)
The fundamentalist needs the technician to know when to sell (and even when to buy during a Bear Market.) (Imagine the value investor seeking a bottom during a Bear Market. Eventually, every stock that is traded will show up on his screen as a value. A value today, however, in a debt depression, is a bankrupt company tomorrow. Earnings divided by price looks wonderful today....and when the earnings diminish tomorrow, and the price dwindles to almost nothing it might still look like a pretty good value.) The value investor's tools DO WORK during the Day-Cycle, when the water is rising, when almost all the boats are rising.
In many ways, the fundamentalist is like the good, clean-living protestant who believes in the orthodox life-style, and in the orthodox religion: positive rational thinking will make you rich because God likes positive rational thinkers. The technician is like the prophet or mystic, who warns that positive rational thinking will not save the world from destruction. God gives and God takes away. The society despises the prophet, because his vision is cyclical, not eternal. God would not punish good positive rational thinkers. Everything goes up. That's the law of life. Not so, says the prophet. We are approaching the 'End of the World' -- the legendary cosmic 'Head and Shoulders Top'. God gives us the Day; but God also gives us the Night, when the material world literally disappears in the darkness.
Those who have read my articles understand that I have come to believe that Nature's historical manifestations are orderly, if one can find the numerical rhythms. I believe American cycles of expansion and contraction fall into 18 year patterns. Debt expansions are like the Day: they are bright, clear, understandable, respond to reason and causality, flatter the eyes (make things easy to see) -- they are fueled by a common desire: everyone wants to and believes they can become rich and heroic, conquer the world, build a personal empire. These debt expansions have a psychological side which I call Ego Expansions. Debt contractions are like the Night: they are dark, obscure, mysterious, do not respond to reason and causality, flatter the mind through the ears (the eyes cannot see in the darkness) since the Night-Cycle becomes 'dreamlike' -- they are fueled by a common fear: everyone begins to understand that they might become poor, homeless, tragic. These Debt contractions (think of how the world 'debt' relates to the old Aryan concept of karma) are Ego contractions, spiritual deaths, resulting in a loss of identity, a loss of self-confidence.
This fear of the future leads to the contraction, indeed, IS the contraction. People no longer believe in the future. They look back, into the PAST, which is quite literally the Land of the Dead; they see darknenss, depression, shadows, history: the future, the Land of the Living, is no longer visible. People hold on to their money like it is a life-raft. Spending money requires a faith in the future, which they no longer have. The Sun is gone. The Moon appears.
The Moon is the patron saint of the Technicians (loony, remember). The Sun is the patron saint of the Fundamentalists -- the Sun is quite literally the energy that organizes matter. But when the Sun is gone, nothing brings it back but time.
1713 Night Cycle Debt Deflation begins – 1731 Day Cycle Debt Inflation begins
1749 Night Cycle Debt Deflation begins – 1767 Day Cycle Debt Inflation begins
1785 Night Cycle Debt Deflation begins – 1803 Day Cycle Debt Inflation begins
1821 Night Cycle Debt Deflation begins – 1839 Day Cycle Debt Inflation begins
1857 Night Cycle Debt Deflation begins – 1875 Day Cycle Debt Inflation begins
1893 Night Cycle Debt Deflation begins – 1911 Day Cycle Debt Inflation begins 1929 Night Cycle Debt Deflation begins – 1947 Day Cycle Debt Inflation begins
1965 Night Cycle Debt Deflation begins – 1983 Day Cycle Debt Inflation begins
2001 Night Cycle Debt Deflation begins – 2019 Day Cycle Debt Inflation begins
Why does God provide the world with prophets, artists, technicians? These 'loony' creatures (who use their minds as instruments of vision, instead of mere machines for crunching numbers, adding machines, subtracting machines) lead the society through the invisible, dark landscape that leads to the New World. Remember, Moses led the Israelites to the Promised Land, but he did not go there himself. Moses was a prophet; and prophets are not very popular in heaven...they are popular only as a means of getting to heaven.
In political terms, the fundamentalists are largely Republicans -- those who cheer the expansion, and take credit for it, like those who roll a large boulder off the top of a high hill, creating 'positive energy' or momentum, and then cheer and congratulate one another, taking credit for the boulder's powerful movement. Until the boulder comes to rest at the bottom of the hill. Technicians are largely Democrats -- those who are obsessed with the contraction, with death, and who are required by God's law to lead the nation through the contraction. Those who, by law, are required to push the boulder back up to the top of the hill in the moonlight.
This debt depression we have entered still has a decade to go. There will be a LOT of destruction and change. Attempts to 'fix' the problem in a rational, 'manly' way will fail. Sometimes endurance is all we have. Endurance and faith. One step in front of the other.
Another way of looking at these cycles of Day and Night is that the Day-Cycle is exemplfied by Private Enterprise and the Night-Cycle is exemplified by Public Enterprise. The Day is individual-centered; the Night is group-centered. The Day is the time for individuals to follow their own ambitions and dreams; the Night is the time for individuals to follow the ambitions and dreams of their social group, their nation, their clan, their family. The Day expansion is dominated by Life thoughts, things always getting better; the Night contraction is dominated by Death thoughts, the death of the nation, the death of the world, and one's own personal mortality -- things always getting worse. The Day has relatively no boundaries -- one is just going to get richer and richer, more powerful, more successful; the Night has very clear, very localized, boundaries and limitations (impressed on the soul as the money begins to vanish).
Those who do not believe in God's rationality (18 year cycles) should tune in for Part II of this article, as I will look at both Day-Cycles and Night-Cycles in American history to see if they DO, in fact, correspond to my rather poetic descriptions of the Fire Expansion (masculine debt inflation) and the Water Contraction (feminine debt deflation). Note, also that the 'water contraction' implies a re-birth, in that the 'feminine water contraction' implies equally the Flood, the disappearance of matter back into a seed, and the eventual re-birth symbolized by the birth-process, contractions followed by the 'breaking of the water' followed by the birth of the new idea, and the re-appearance of the Sun, a new Day-Cycle.
Michael J. Clark
CGTS -- Wednesday, 7 July 2009: