The Street's Technicians Take Center Stage
Ralph J. Acampora is a man with a mission. As Prudential Securities' chief technical analyst and someone who has spent more than 30 years poring over charts to spot trends in the movement of stock prices, Acampora is a vocal champion of a field that, over the years, has been scoffed at by academics who disagree with its basic tenet--that studying past patterns of trading volume and price reveals supply and demand trends that can be regularly exploited. In any case, for much of the 1990s, solid fundamentals such as declining inflation and lower interest rates were all the explanation needed for the stock market's rip-snorting run up the charts, and fundamental analysts held sway.
In these far more volatile times, however, with the long-term outlook so murky, Acampora and his ilk are getting more respect. "In times of market turmoil and extreme volatility, technical analysis can be more helpful, because fundamental analysis, in the short term, doesn't particularly help you," says Robert Doll Sr., executive vice-president of equities for Oppenheimer Funds Inc. "I've owned stocks where earnings are coming through, everything seems in place, but the stock kept going down. The market is telling you that something is happening that you haven't incorporated into your analysis, and sometimes you can't figure it out until it's too late." Also helping the reputation of technical analysis is that some recent calls, such as Acampora's on Aug. 4 for a big decline, have been on the money.
What do the technicians think will happen now? In the short term, some prominent techies think the market will fall further. The good news, they say: It's a prelude to another leg of the long bull market--though no one is willing to pinpoint when that will begin.
Unlike fundamental analysts, technicians don't obsess over earnings or inflation- ary pressures. They examine price patterns of stocks and stock indexes to see whether the internal dynamics appear healthy according to, say, the way the stock has behaved over the past 200 trading days, or if a pattern seems to be unraveling. Increasingly, technical analysis is becoming intertwined with the increasingly popular field of behavioral finance, or the study of investor psychology, says Paul F. Desmond of the Market Technicians Assn. (MTA): "We're using technical indicators to measure the emotion of investors."
Salomon Smith Barney's Alan R. Shaw is the dean of the market technicians. Shaw, who sits on the firm's investment policy committee, enjoys an unusual position among his peers. While some Wall Street firms don't have an appointed technical analyst, "at Salomon Smith Barney, the technical discipline is integrated and coordinated on a policy level with the same weight and voice that the fundamentalists and economists may bring to the table," says Shaw. His motto: The trend is your friend. He believes that focusing on funDamentals caused many people to flee the market thousands of points ago. "My discipline has nothing to do with value," he says. "As a result, we've been permitted to take part in a great deal of the upside" in the long bull market, rather than bailing out because some fundamental analysis pointed to overvaluation.
Shaw expects the stock market to consolidate between 7500 and 8000. In fact, he gives that a 45% probability. Next, at 25%, is a market falling to 7000. The least likely move, at 5%: a race to 10,000 or higher within six months. Shaw thinks the market needs time to repair the damage done before it can move much higher. All in all, he Gives it a 70% chance of trading flat to moving lower over the next six months.
Shaw keeps fairly aloof from the media, but one of his proteges, Prudential's Acampora, seeks the limelight. The title of an upcoming Acampora speech: "The Market, the Media, & Me." The telegenic analyst is a regular panelist on Wall Street Week with Louis Rukeyser. It was on CNBC, however, that he made his biggest splash. On Aug. 4, Acampora, who had been calling for Dow 10,000, said the Dow could fall 20% from its high. By day's end, the market was down 300 points and is now down about 746 points from Aug. 4. Says Acampora: "It was a painful call, but in hindsight--what a beautiful call!"
LEG ROOM. Acampora's view today is that the market might bottom out at around Dow 7400. He will not speculate about what happens if the Dow goes below that. His favorite sectors: drugs, biotech, electric utilities, and tobacco.
One technical analyst who thinks a market bottom is still a ways off is Richard McCabe of Merrill Lynch & Co. "Early next year, the focus will be more and more bearish," he says. "That will be the bottom and the foundation for the next leg up to start in 1999 or 2000." Like Acampora, McCabe thinks we are seeing a cyclical bear market within a secular bull market. His view of the next upswing: "Even greater public enthusiasm, where the public says they're not happy with the 20% to 25% gains they made in 1996 and 1997--they want to double their money in six months." He thinks small-cap, and even speculative issues, could lead the market up in the next leg.
Most professional investors use both fundamental and technical analysis. Kenneth G. Heeb-ner, a portfolio manager at Capital Growth Management, says technical indicators can be helpful when they give extreme negative readings. If the put/call ratio (table) showed strong negative sentiment, "I might wait to sell something and see if the market would bounce." Martin G. Hurwitz, a senior portfolio manager at American Express Financial Advisors, uses technical analysis to spot groups seeing more "accumulation" (where investors appear to be buying the stock and putting it away) and so may outperform in the short term. They include supermarkets, food and health-care distributors, and gold.
Many academics maintain that technical analysis is of little use. Burton G. Malkiel is an economist at Princeton University and author of the influential book A Random Walk Down Wall Street. The random-walk theory posits that past prices aren't useful in forecasting future price moves. Malkiel says he understands why techies are in the news: "It's only natural at times like this that you search for ways you might have avoided the unpleasantness," he says. "I agree, the market is not a perfect random walk. But whatever regularities there are are very small and very undependable from period to period."
Perhaps the increased interest in tech analysis will prove to be a short-lived trend. But a lot more people are being exposed to its rigors. "Within the last year, technical analysis, bar none, is the hottest-selling course here, out of 160 offerings," says Chris Genera of the New York Institute of Finance. Academe is taking more notice, too: The Market Technicians Assn. recently held preliminary talks with the University of Pennsylvania's Wharton School about doing conferences and studies together, says the MTA's Desmond.
With investors awash in a sea of uncertainty, looking for an edge via technical analysis is seductive. "In price there is knowledge," insist the technicians. From that knowledge, they and their proponents hope, come profits.