The Corner

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by Bart Ward

Some investors select stocks to buy and sell and analyze the market on the basis of technical analysis. This is the examination and use of historical market data to project future price movements of individual stocks and the market as a whole.

Technical analysis frequently takes the form of analyzing charts and graphs of historical price and trading volume data which includes the daily or weekly high, low and closing price for a stock or market index. Professional analysts who use technical analysis are called market technicians.

They believe that a stock’s or market’s price movements, trading volume and other market data are clues to the stock’s future price movements. Over time, this data plotted on graphs and charts form familiar patterns that indicate whether a stock or market index can be expected to rise or fall in price.

Other technical analysis includes the examination of stocks or market indexes that are being actively traded to determine if there is excessive speculation. Market technicians are also interested in the investment activities of small investors, who they believe tend to make bad investment decisions. According to this rule, it is time for you to sell stocks when small investors are buying common stocks.

Another technical rule concerns the actions of investment advisers: If an unusually large number of investment advisers are bullish (they expect the market to rise), it is time to sell stocks. Conversely, if a large number of investment advisers are bearish (they expect the market to drop), you should be buying stocks.

Dozens of stock-price formations and literally hundreds of other technical rules are used by market technicians to decide which common stocks or market indexes to buy and when to buy them. Technical indicators can also be used to determine when to sell common stocks or market indexes. This is all based on pattern recognition.

A less classical and prominent technical theory is that a cadre of informed market participants at the center of market trading, possess important information relative to common stock values that is unavailable to the general public. By tracking these folks one can gain insight into the market by determining what actions are being taken by them.

Thus, if these folks at the very heart of the market are buying shares of XYZ, then they are signaling that they expect to see XYZ’s stock rise. The opposite is true in the case where they are selling XYZ. This concept is where the art of reading the tickertape has its origins.

Tape readers have been legendary in the investment world dating to the first quarter of the 20th century. People like Joe Kennedy, Art Cutten, Bernard Baruch, Gerald Loeb and much later on, Richard Ney were among those in high ranks of tape readers. Loeb once said, “In my opinion, far and away the most important thing to master in Wall Street is the tape. It is possible to see only the tape, and nothing else, and make a lot of money. It is the safety valve and the automatic check on everything you do if you understand how to read it.”

Some investors use a combination of fundamental analysis and technical analysis to construct a portfolio of common stocks. Analyzing the fundamentals of a company and the overall economy takes into consideration the underlying business and financial statements within the context of the where the economy is in the business cycle. Fundamental analysis, or at least reliance on investment decisions that are based on fundamental analysis, is used to select stocks that should be purchased or sold. In this case, technical analysis is used to determine the best time to purchase or sell these stocks.

Hundreds of books have been written on the subject of technical analysis. This column is only meant to give a broad definition to this popular and interesting art and a flavor for what the term means.

Technical analysis as a tool for determining when to buy and sell securities has as many virtues and pitfalls as both fundamental and quantitative analysis does. It is totally legitimate to be aware of the technical reasons why stocks go up and down, however, the market is not a science — it is an art. Be careful not to try to find the “golden goose” that will make investing easy based on technical, fundamental or quantitative patterns. These are tools. As a legendary specialist and floor governor friend of mine at the New York Stock Exchange once told me, “Patterns are meant to be broken.”

Quote of the Week: “The men who can manage men manage the men who manage only things, and the men who can manage money manages all.” — William Durant.

Bart Ward is chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.