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Market Breakdown

|Includes: iShares 7-10 Year Treasury Bond ETF (IEF), SPY

Over the past few years, I have spent more time than I'd like to admit reading books on historical market patterns. One area that has become very clear to me, is that during cyclical bear markets, following chart patterns works very well. 

Many of today's legendary hedge fund managers started their careers during the cyclical bear market of 1966-1982. Fund manager Paul Tudor Jones, who correctly predicted the 1987 stock market crash in the PBS documentary Trader and according to, his fund has averaged 20% a year since 1980, is a proclaimed "tape reader".

From his 2008 interview with AR Magazine:

Is it possible to teach someone to be a tape reader - what some might call a trend follower or technical analyst? Certain people have a greater proclivity for it because they don’t have the need to feel intellectually superior to the crowd. It’s a personality thing. But a lot of it is environmental. Many of the successful macro guys today, they’re all kind of in my age range. They came from that period of crazy volatility of the late ’70s and early ’80s, when the amount of fundamental information available on assets was so limited and the volatility so extreme that one had to be a technician. It’s very hard to find a pure fundamentalist who’s also a very successful macro trader because it is so hard to have a hit rate north of 50 percent. The exceptions are in trading the very front end of interest rate curves or in specializing in just a few commodities or assets.  
What’s your take on the next generation of managers? I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust the price action. The pain of gain is just too overwhelming for all of us to bear!   I too prefer to look at charts first, fundamentals second. Charts typically show us a breakdown before the fundamentals catch up. Fortunately, at the start of my career I had someone who started his career in the 70's point me in the right direction. The point is, more investors follow chart patterns than you think. It is a great gauge as to what the rest of the market is thinking. If a pattern is broken, it is an indication that the majority of investors believe something fundamental is about to change. That takes us to today - the US stock market is declining due to the devastation in Japan. Last week it was because of the rise in oil prices. Before that it was the threat of rising interest rates. Investors are tired and want to take a break. In my March podcast I mentioned the changing patterns in the market and that I was expecting a decline to the 200 day moving average. I still expect that to happen. The 200 day moving average is the "line in the sand" for many investors. If market participants don't start looking for opportunities at the 200 day moving average, it is because they expect something much worse ahead - i.e. a double dip recession. I would expect to see money flowing into US Treasuries  as investors look for a temporary safe haven while they wait the equity markets out.


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