Personal Finance: Pay close attention to the chutzpah of chartists

The Jonathan Davis Column The US stock market is still in a strong secular uptrend, and fears of a global depression are proving to have been displaced
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What does it take to become a successful technical analyst in the hard-nosed world of Wall Street and the City? Beyond a sound knowledge of charting techniques, it helps to have a genuine feel for the short- term direction of the markets and the ability to turn a happy phrase.

I have been looking at Robin Griffiths's charts on and off now for something like 15 years and always found his analysis lively and helpful: despite continuing to profess publicly (as all self-respecting followers of the markets do) that charting has no real value as an investment technique.

The truth is, of course, that all serious investors look at charts of past price performance. Nobody can buy a share or investment fund without taking a look at how it has fared recently. At a basic level, all that price charts do is provide a visual picture of recent market action, information which could be gathered and presented in less obvious ways. The price movements captured in charts are, as Anthony Bolton of Fidelity puts it, the footprints that buyers and sellers leave behind them when they venture in to the market every day.

Charts can therefore give you a useful snapshot of the fluctuating balance of advantage between buyers and sellers. As such, they are an important adjunct to whatever other stock or fund selection method you yourself prefer.

The real high priests of technical analysis in investment have always claimed much more for their methods than this, of course. Their view is that share prices generally follow predictable patterns which, when subjected to the right analytical techniques, allow you to determine how they will perform in future.

This is a much more contentious issue, on which the evidence seems fairly clear. The scientific basis for believing that technical analysis can successfully identify market turning points is very limited. In practice, the most successful technical analysts are simply market strategists who make more good calls than bad ones. How and why they justify their conclusions is really neither here nor there. It is a marketing, not a methodological, point. For a pragmatic investor, what counts is how often they are right.

In my view, the one huge advantage which technical analysts do enjoy over fundamental analysts is that their methods allow them to reverse tack completely overnight, without feeling any embarrassment. In Robin Griffiths' phrase, the role of technical analysis is to listen to what the market is telling you to do, not to try and tell the market what it should so. If the market's message changes, so too should you - even if it means doing and saying the complete opposite of what you said only the other day.

Not surprisingly, given the remarkable mood swings we have witnessed in the world's stock markets this year, most chartists have been on a rollercoaster ride. Having been bearish in the early summer, and sharing in the doom and gloom that afflicted everyone at the time, most of them are now picking up and responding to the current bullishness.

Having hit a low in mid-October, it is now clear, says Griffiths, that the US stock market is still, as he always suspected, in a strong secular uptrend and that fears of a global depression are proving to have been misplaced. (From around June onwards, despite the gathering gloom, I have to record that Griffiths consistently and impressively predicted in his circulars that the second half of October would be the time to buy again in both American and European stock markets).

That means the recent rally has plenty of scope to continue, in his view. He expects the Dow Jones index to go on from its current level and top 10,000 before the next setback. Given that the market tends to hit new lows roughly every four years or so, having touched bottom this year, he is increasingly confident that the bull market will run, albeit with inevitable hiccups, all the way through until 2002.

He also now thinks that the Japanese market, after many false dawns, may finally be close to bottoming out. It is no longer safe to be out of that market if you are an international investment institution.

Two factors in particular will continue to drive the US market up, he thinks. In the short term, Alan Greenspan, the chairman of the Federal Reserve, has demonstrated yet again with his timely interest rate cuts (probably not yet completed) that he appears to have the measure of the markets, including the ability to manipulate investor expectations.

Longer term, the powerful demographic factors, which have driven millions of individual Americans to plough more and more of their pension fund money into stock market mutual funds, have yet to play themselves out. Having moved his base from HSBC's London office to New York two years ago, Griffiths has been able to observe at first hand the powerful shift in investor behaviour and sentiment. He says he finds it easier to explain why so many European investors have been slow to grasp the importance of the demographic factors which have driven the recent bull market to its fresh peaks.

Turning to specific sectors, Griffiths says he is bullish about the telecoms and drugs sectors. European car manufacturers, many of which have fallen 50 per cent from their highs, are also worth buying. He also thinks that the oil companies, like commodities generally, are also now very close to the bottom of their cycles. A golden rule in charting, says Griffths, is that falls of 50 per cent are invariably watersheds, from which either large gains or complete despair result.

The world will not be the same after the summer's crisis of nerves, Griffiths thinks. From now on, instead of "dog eats dog", investors face a climate of "capitalism with a pooper scooper" - more interventionist government, restrictions on short selling, and so on. But the overall message from the charts is simple, however: the bull market is intact, and the summer crisis of confidence is over.

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