NASDAQ eked out a little bit of a gain and the S&P was off a fraction. The Christmas in July midyear summer rally that we had warned you about or prepared you for came in bigger than average. But as everyone has learned from the Almanac over the years, August and September are the worst months of the year. We are firmly in the correction camp, as noted by Investors Intelligence — their bullish, bearish, and correction percent of advisors, they've put us in the correction camp. We did some recent posts on the summer break, especially some calculations on the mid-July peak to the end of September, and a little nice chart about August and September being weak. So go check those out on the feed. Go to Stock Trader's Almanac for more details on our portfolio maneuvers and the market outlook.
Now let's bring on my friend John Bollinger. John holds the CFA and CMT designations. He's the president and founder of Bollinger Capital Management, which provides technically driven money management services, and they develop proprietary research for institutions and individuals. He is best known for the Bollinger Bands, developed in the early '80s, used worldwide by everybody — it's on most market charting software. His book, "Bollinger on Bollinger Bands," what a great title, was translated into 12 languages. He has these very prestigious awards: the Technical Securities Analysts Association of San Francisco lifetime award for outstanding achievement in technical analysis.
I can tell everybody that John's daughter Zoe, who is going to be taking over the business at some point — we'll talk about that later — she and I will both be at their annual symposium, annual event in San Francisco in September, along with Katie Stockton, Andrew Moss, and another gentleman, Scott Richter. I think all CMTs. He also has the 2005 CMT Association annual award for outstanding contribution to the field of, you guessed it, technical analysis, and the IFTA 2015 lifetime achievement award. Basically, John is a legend of technical analysis. I've known John for many years. We go way back. He knew my father. He's embarrassed now. It's been a pleasure being part of his markets list, the old-school listserv that we get to talk about very wonky technical things, sometimes beer. And also we've had a couple of nice rendezvous at some events recently. So, welcome, John. Thank you for coming on.
Thank you so much, Jeff. A great pleasure to be with you. We're going to get into some technicals and some market stuff, but first let's talk about the old days. You know, how did you get into the business? When did you start using technical analysis?
I switched over to full-time market analysis circa 1980 or so — '79, '80, in that area. It was a gradual transition. I did so because my mother was retiring and she'd asked me to look after her retirement fund. She knew I was interested in stocks and such, and so I, you know, tried to do it the traditional way with brokerage house research and fundamentals and such, and didn't do so well. And I caught on to technical analysis and I did better with that, and I just never turned back. I've just been a lover of technical analysis and paying attention to what the markets say ever since.
When did you get your CMT?
I'm in the first batch of CMTs. So that's — it was in Camelback. The first test was given at Camelback, which is in Phoenix. God, I don't — I can't remember before...
It was a long time ago. Before the bands, right? Before you created the bands.
No, no, no, no. After the bands.
So, what were you doing before Bollinger Bands?
I was a cameraman in the movie business. I was originally born and raised in New York, and I moved out to California because the sort of work that I liked to do, there was more of it available there. So I've been in California ever since. Then there was this program, this network called FNN, Financial News Network.
Yeah, yeah, yeah, yeah. Tell me about that experience.
That was unbelievable, because the people who ran the network, all of management, all they cared about was good television. They didn't know anything about markets — I mean, nothing. So that meant it was free play for those of us who were interested in markets. We could do whatever we wanted, we could talk about whatever we wanted. I'd gotten there because the chairman of the board of FNN was a guy by the name of Earl Bryan, Dr. Earl Bryan. And when he'd been in college, he had developed a technical analysis program for an old Digital Equipment Company computer, and he wanted to integrate more technical analysis content into FNN's programming. So I was hired to do that. I spent six years there, eventually becoming their chief market analyst.
But it was just an incredible time, and the reason it was an incredible time was because of the people I got to meet. My office was right outside of what we call the green room, which is the room where guests come on. So virtually every analyst — every technical, fundamental, economic, whatever — all the analysts came through that green room, and I'd just go sit in the green room for hours at a time and chat with people. It was just an incredible experience. I got to meet so many fine people. I learned so much from them. I arrived at FNN thinking I knew a fair bit, but after a couple of years at FNN, you know, it really, really sized you up. You really found out that you only knew this much. So that was really incredible.
You used to do a show with Bill Griffith back then, right? You did like a...
I did a show with Bill Griffith. I worked with Ron Insana. I worked with Sue Herrera, Lee, many of the other analysts there. So yeah, the people there were a really, really great crew of people. And we pulled the oars really hard. And I'm sorry that it ended, but for me, the ending was a great event, because even though — you know, what happened is NBC bought FNN for its distribution. That was back in the cable days and such like that, where distribution was really hard to get. So NBC bought and shuttered FNN, and they offered me my job back in New Jersey, but I didn't want to move back east. So I founded my own firm in 1990, and that was an absolute godsend for me. It was the best thing that ever happened.
You know, GE, which owned NBC at the time, buying FNN to shutter it was — you know, I was terrified at the time. I was really hurt, I was really upset, but it turned out to be the best thing ever.
So that's when you started Bollinger Capital Management.
Yeah, 1990. So it's — what's that, 35 years now?
Yeah, yeah, yeah. That's ironically about the time I started full-time with Yale.
Yeah, that's when I... Yeah, yeah. I remember Yale fondly. I mean, we talked many, many occasions. We were on a different listserv together, and I exchanged a lot of email with him. And yeah, I really miss your dad. He was a great, great — as my mom would say of my grandfather, he was a grand old gentleman.
That's very nice. Very nice. You had a newsletter back then, didn't you? Also...
I had a newsletter for many years. I started it actually in '87. Perfect timing, right?
Yeah, right at the bottom.
I started it in '87 and I continued it probably — I should have done maybe eight years ago, something like that. About that time I dropped a lot of things. I had a number of websites: Equity Trader, Funds Trader, Group Power, and Option Trader, and a couple of others. And I just dropped it all to concentrate on investment management. It all seemed superfluous to me, and I really wanted to focus on the core business.
You mentioned my daughter Zoe. So, a little bit more than six years ago, she joined the firm. She'd gotten out of college and had a career in international business development, and looked around and thought it was time for a change. And so she came on just, you know, sort of to see if she would like it at all. It's very hard to work with your parents and such. So, in any case, it worked out really well, and she has just blossomed. You know, I keep saying this, but everybody thinks I'm joshing, but I think she's a better analyst than I am now.
Well, you know, she learned from one of the best. So...
Yeah, I tried, but she's just — it's just like I'm watching a rocket take off.
Awesome. So let's just talk about your process a little bit. I mean, you have a CFA, you have the CMT. Are you using fundamentals and technicals, or...
I am, but I'm using way more technicals than fundamentals. But I have a real focus on earnings and earnings growth. You know, we're primarily stock pickers, stock selectors. You know, we run portfolios composed primarily of stocks. We do use some ETFs and such, but our real business is stocks. So I focus on earnings a lot. And you know, we're interested in companies that have very good long-term track records, and you know, it's sort of a classic what would be called a relative strength approach, and it works really well for us. In addition, we have some systems that we've been developing.
When we — a couple of years ago we had that collapse in the 60/40 portfolio that everybody trusted to keep them out of trouble, and...
Everyone was talking about was that it was 50/30/20, alts was what was thrown around back then.
Yeah, yeah, yeah. So we wanted to give people something better than that. So for the past few years we've been working on developing rigorous systematic approaches to beat the 60/40, but not just beat the 60/40 — to try to cut the drawdowns, you know, by half or more.
Basically, you know, it's a combination of security selection and market timing.
So, I mean, you have this market timing chart pack that comes out weekly, right?
Yeah, yeah, yeah. It's free. It's available on my website, bollingerbands.com. Usually published Saturday mornings.
So, I mean, I've seen there's a lot in there. What's really in there that you focus on? I mean, there's like a list of 50 different categories. There's like almost 100.
Yeah, that's exactly right. There are 50 charts in it. Some cover monetary policy, you know, so it's pretty wide-ranging of charts. Some are Bollinger Bands and technical analysis. The first two charts are the charts that are actually my favorites. The first chart is a chart of the S&P 500 with Bollinger Bands and %B, which is an indicator that tells us where we are in relation to the Bollinger Bands. The second chart is the same chart in terms of price, that is the S&P 500 and Bollinger Bands, and then beneath it is an indicator called bandwidth, which tells us how wide the bands are.
But after that, most of the charts either focus on market sentiment or market breadth. And there's a lot of information in there about market breadth because we really, you know, when we get those divergences, when breadth starts to sour and stocks continue on up, the risk starts to really, really go up. So we focus a tremendous amount of our effort on market breadth. So by market breadth, what do we mean? We mean the number of stocks advancing on the day versus the number of stocks declining, the volume in the stocks going up on the day versus the volume in the stocks going down on the day, and some classic indicators that are created from them.
We've had some discussions recently on the list on your — what I refer to as Bollinger's market list. I think that's — I'm not sure if that's what it's just called, the markets list. Since you took it over, I referred to it as yours. But we've had some discussions on there about breadth and breadth indicators, advance-decline, especially having some — getting impacted by perhaps the less than half the amount of stocks that used to be listed. And I'm wondering if that's — if you see it that impacting. I know Tom McClellan has done a couple of adjustments to things. I'm not sure what he does proprietarily, but how has that impacted your market breadth work?
So dramatically, as you might imagine.
So what we've done is we've converted almost everything to a relative basis. In other words, rather than look at the actual physical number of stocks rising versus falling, we'll look at the ratio.
And we'll do that for volume too. And you know, in every phase of our analysis now, we look at new highs versus new lows. So again, we put that into a normalized framework so that we can see what's going on. That really helps over the long run. It helps you compare, you know, today's action with different periods in the past to try to understand, you know, what market structure is and such like that. The old way that we used to do it, just using the raw numbers when I came into the business, I think that's fraught with trouble now. It just — you know, things change, that's all. They have to change with the times.
I mean, there's like — from what I understand, there's more ETFs than stocks out there now, right?
Well, I don't know the exact numbers, but I know that there are a boatload of ETFs floating down that river.
So, I mean, you're a stock picker. That's what you do. I mean, what's your — what's the comparison? What's your feeling on stocks versus ETFs? I mean, I do some of both.
So I do some of both, too. I use ETFs where they're appropriate, where it's hard to gain exposure. For instance, if I want emerging markets exposure, I'm probably not going to go out and pick a basket of emerging market stocks, right? I'm going to use an emerging market ETF. So I'm not stiff-necked about it, but you know, I came up in this business as a stock trader. There were no ETFs, there were no index futures, there were no index funds, right? None of that existed. So the only thing that really existed were stocks and bonds.
And I was actually really interested in bonds, and they used to be an important part of our business. But what really captured my interest was stocks. And in those days it was very expensive to trade stocks. Commissions were very high, slippage was really big, the market makers were shaving points.
And so very short-term trading, that's so popular today, you just couldn't do this — the expenses were too high. So we were what we called swing traders, which is quite different than the term that we use today. Swing traders, we went for the big moves, the moves that last weeks and months and would go 10, 20, 40% or more. And we used daily, weekly, and monthly charts just because the frictional costs of being a very short-term trader were very high.
But then very shortly after I came into the business, we first got the S&P 100 and the OEX options on it, and we got the futures on the S&P 500. We got the Value Line futures on the Kansas City Board of Trade. And then, you know, it just all started piling on. When I started, I was very interested in options. We did a lot of work in options, and there was a very small universe. By the middle '80s, the universe had expanded dramatically. There were options on most things that you wanted to see options on.
So the tools — the tools that a portfolio manager — you said I was a stock picker, it's true, I'm a stock picker. What we really are are portfolio managers. We pick stocks and put them together into portfolios and run portfolios. The tools that are available to portfolio managers now are incredible. I mean, when I came into business, we didn't even dream of them, right? If you told me that the market would look this way, I would have just said, you know, you're crazy.
I mean, back in the day, we all did a lot of stuff by hand. When I first came up — I first came into business, I used to do the calculations for the Almanac on an adding machine and graph paper that Yale had created. I ended up converting a lot of it to Excel myself. But you still find some value in doing things by hand, right?
So I do find some value in doing things by hand. Just take this example: indicators — you know, we have RSI, ADX, MA, MACD, all these indicators that people use. I really think that when somebody starts to use an indicator, for the first little bit that they start to use it, they should try calculating that indicator by hand so that they can see what happens as prices change and their inputs change. They can see what happens with the indicator.
You don't have to do it forever. I'm not saying you have to sit there with a pencil and a calculator and such like that, but I think it's really, really important to learn what drives those indicators. And if you just calculate each one by hand for just a short period, you'll find that you understand the indicator much better. And so when you reach a market extreme in which you're stressed to make a decision, you're going to look at those indicators and you're going to know them. They're going to be your friends because you understand them, and they will help you out of that extreme condition. So I think that's really important.
I'm not saying that you should have the big polymer pads that we used to use and all that. I use computers, just like everybody else, but if I start something new, I do it by hand for a little bit to make sure that I understand what's going on.
Not even Excel, actually — on paper.
Yeah, I use a combination of Excel and paper. Again, I'm not a Luddite. I don't think you have to have the little pencil, the little pencil sharpener and such. I use technology a lot, and I like technology.
Well, you're a programmer too, it sounds like, right? I mean, from what I hear in some of the discussions, you use — maybe not quite as much as Craig. I got to have him on — Craig Johnson at Piper. He's quite a programmer.
Ah, yeah. So when I started with computers in the late '70s, you had to program a little bit to use a computer. It just was, you know. And so I learned to program a little bit, and I've kept that skill up over the years, adapting from various languages. I use Python mostly now. But I also know all of the platform languages, like the different languages that say TradeStation or TradingView or...
Thinkorswim. Is it Python that you use? Is it most...
My personal choice is Python. I'm a pretty good Python programmer, and I like it, you know. It's easy.
So there's a lot of people say you can't time the market, but what's...
No, no, no. It's simply not true. There's a lot of people that know that they can't time the market, so they assume that if they can't time the market, no one else can. But that's a lie.
I believe it, but I mean...
No, I'm serious. That's a lie.
Your weekly chart pack is called the Market Timing Chart Pack.
Yeah, yeah, yeah, yeah. Exactly. You know...
So tell me why the dynamics are particularly, you know, egregious in this regard.
You know, they go through and they pick an indicator and they test it, and the way they test it — if they can't make it work, they assume that nobody can make it work. Nonsense. All they proved is that they couldn't make it work, right? That doesn't mean that it can't work. They haven't proved the null hypothesis. All they proved is their own inability.
You have to disprove the null hypothesis.
You know who I learned that from? Our friend...
Oh, yeah, yeah, yeah, yeah, yeah. Wonderful guy. He put out that book in — I think it was '08 — that Evidence-Based Technical Analysis.
Yeah, yeah. And it's a terrific book.
It is. And we — when we picked it as our best book, we had him put the best six months through the same paces, and...
You know, I met him years and years and years ago. He was working at a place called Raydon Research — or he wasn't working there, maybe he was consulting with them or something. Anyway, he published a paper at Raydon Research on the High-Low Logic Index, and I thought it was a brilliant piece of work, and I've been an admirer ever since.
Me too, since his book. I thought it was great. But let me just get back to — you had made a comment a little while ago about the expansion of the Bollinger Bands. That's one of the things you look at. Your top chart of your own pack is the S&P. I know we talked about — I was at a New York City CMT event downtown. Ryan Dietrich was there, JC — not PZ — was the other guy, I forget his name, and Todd S was there. So they were presenting and took some questions, and the first question came from a gentleman who was pointing out that the market was at the top of the Bollinger Bands. I think this was, what, July 10th or so, if memory serves.
And he was asking — you know, everyone was so bullish and talking about the breakout and, you know, after the Zweig breath thrust and all that stuff. And one of the responses from the panel was that, you know, when you're above the 200-day moving average, you could, you know, maybe increase the standard deviations for the Bollinger Bands at the top level. And you know, looking at it today as I was preparing for this, it looks like the Bollinger Bands expanded. You were talking about the elasticity, I guess, is what you said before.
So it's almost like your indicator accommodated this bullishness...
...inherently in the way it's built. But looking at the charts, to me it seems like that kind of expansion has preceded a bit of a pullback or a correction or some kind of drop. What are you seeing there?
So what you typically get in the early stages of a move is price will get to the upper band, and the move is strong enough that it will stay there. We call it walking up the upper band. So what we look for is a series of separations from the band that clue you in that there's some internal deterioration, that momentum is dying. So we call it three pushes to a high is the typical pattern that you'll see there.
And then we check some indicators, some supply-demand indicators, accumulation-distribution indicators, and if they're weakening as well, then we'll get defensive. But you know, what you'll typically see is that you'll have a walk up the upper band, and you'll get that separation. It will start to move sideways. We call it a consolidation. Basically the market is digesting the gains that it just made. And if you look down at these accumulation-distribution and supply-demand indicators, and if they remain positive during that phase, then the odds are that you're going to get a positive resolution and another leg up.
So that's one of the ways that you can use market breadth and Bollinger Bands and indicators like that to understand what's actually happening in the market. The problem is most people, you know, they think they know what's happening in the market, and rather than go to the market and ask what's happening, they go to the market and argue with it, which never works out well.
So, agree. So what's happening right now? I mean, I'm seeing a little bit of that separation as I'm looking over my shoulder to the S&P chart. But is there support — the supply that you're talking about underneath there? Supply-demand support.
It looks pretty good. It looks pretty good. And I'll know better tomorrow because Saturday morning I'll go into the office and I'll run the chart pack and take a look at all the indicators and such.
But, you know, and that'll be available at bollingerbands.com. Click on market time charts.
Yes, sir. Free as always. Yeah, there you go.
But, you know, in my normal review, there's a guy on Twitter by the name of David Cox. He's a guy up in Canada and he posts these beautiful little checklists, market checklists, and he's got one for, you know, what's the trend of the market, and he's got another for is it a good time to buy? And there's another one, you know, is it a bear market bottom? So on and so forth.
And that's a lot of what we do as well. You know, we have these little things. Are we above the 20-day average? Are we above the 50-day average or are we above the 200-day average? You know, is it just the S&P 500 or is the Russell 1000, a much broader index, also participating? Things like that. So we have these checklists and, you know, it's the same thing. You see the Bollinger price walk up the Bollinger Bands and the checklists are all positive and you start to get to a top in consolidation and a few of the check marks fall off the list and such like that. So that's our process. We ask the market what's going on and we try to stay in tune with market action.
So as of right now, before we go get your Saturday morning, you know, chart pack done, we're still pretty bullish. You still think there's support and we're not running the risk of any, you know, correction, notwithstanding the August-September stuff that I mentioned in the beginning that we talked about in the Almanac?
Well, last I checked it was still mid-July, and so, you know, another little push to the upside after a little bit of consolidation still would leave plenty of room for what I refer to as a fall correction.
Just that's the way I learned it. It, you know, it's interesting. It's moved around over the decades. When I came into the business, September was a hellish month. You know, you really had to be sharp on September. And then, you know, that became October. And then that became late October and early November. And now it's backed all the way back up. Now it seems like it's August, September again. So these things move around somewhat and, you know, it's crazy not to pay attention to what I call them seasonals. But it's crazy not to pay attention to seasonals. Every bit of environmental information that you can get your hands on, you know, is helpful when you're trying to run a portfolio. And, you know, if you're in a period where the odds of good stock market performance are against you, then I think you ought to be cautious.
Yeah, we do too. We're already cautious.
You know, Yale started, you know, Yale was an enormous influence on many people, you know, getting them to pay attention to this sort of thing. But, you know, even he had heroes like Dewey and such from the Foundation for the Study of Cycles and such. So, you know, the history just keeps on going back and such like that. We're all standing on the shoulders of giants. Every generation stands on the shoulders of the next generations.
Yeah, I'm standing on the shoulders of him and you guys as well. So I can definitely, I'm definitely trying to see farther. So, what are some of the indicators that are no longer working? I know you've mentioned trend or the ARMS index has got some issues.
