David Lundgren, CMT, CFA | David Keller, CMT | Behind the Charts (04.26.21)

My pleasure, Dave. Great to see you. Thanks so much.

Things are good, things are busy. Yeah, gotta keep 'em busy. Yeah, believe it.

I'm originally from a place called Sutton, Massachusetts, which is just outside of Worcester.

A dubious honor. That's tough.

My first experience was actually with my mother in the late 70s, early 80s. We used to spread out what was then the local newspaper, the Worcester Telegram, on the kitchen floor, and we would pick stocks together. Of course, given the timeframe at the time, you can imagine most of what we were buying were gold stocks and things like that. So that was a good indication early on that I had a trend following interest. But the fact that I still own some of those certificates today tells you that in the early going I didn't do so well with risk management. So I kept the certificates as a reminder that you gotta have an exit plan.

Oh wow, she's super passionate about it. Whenever I go over to visit our house, one of our favorite things to do is play cribbage. And we would play cribbage for hours and in the background would be CNBC, and she'd be simultaneously harassing me in our cribbage game and making comments about what she's hearing on CNBC. So she's pretty passionate about it.

I studied finance and investments at Babson College. My first job out of college was actually up in Canada, right where my wife... my wife to be actually was still finishing out her school, so I went up there. I planned to go up there for an eternity, nothing to do with being married, but going up there just to move out there and stay there. My first job there was a stock broker actually. And it turns out that the gentleman who I sat next to at Dean Witter, his name was Kaldi Braheel, and he managed a pretty sizable book back then, and he relied heavily on technical analysis, which I had up until this moment... the only experience I had with technical analysis was my professors at Babson telling me that it was useless and didn't work and spent all of three seconds on it, which is no different today than it was back then. That's right. My son, I was teaching the technical analysis course at Brandeis which I took over from you, which was a great experience, and I was in the middle of teaching one of the classes and I got a text from my son Eric, who was at the time at Colorado University and he was in his investments class, and he said, 'Hey Dad, we just covered technical analysis. It took about five minutes and the professor says it's BS.' So you know, the more things change, the more they stay the same. So that's still the academic mantra that it doesn't work and they've got a vested interest for saying that that's the case. But at any rate, what I saw in the early part of my career was somebody really using technical analysis the right way. And as soon as I saw him generate ideas, manage risk, it was just I was hooked from that moment forward. Once I came back to the U.S., my first job when I came back to the U.S. was a technical analyst, and I've been either a technical analyst or a portfolio manager using technicals ever since.

That was a company at the time called Technical Data. It all changed after I left. It ended up being part of Reuters via Thomson. So that was my first job. And it was not too late in the history of markets: it was like 1990 I think. But back then we were still maintaining some charts by hand. So one of my jobs, the actual job was called 'updater', and one of my jobs was to update the point and figure chart of the bond futures contract up on the wall every day, and then manually input the hourly ranges of the bond futures contract. We would then update that and send it to the Telerate system back then, which is now no longer in existence. It was usurped by Bloomberg. When it first came out I looked at it and said this is never going to work, and of course Bloomberg is what it is. So that's a lesson learned: stick to your knitting.

I got married in '89, so it was... my first job was with Dean Witter in 1989. And two or three months after I started, we had the mini crash in 1989 if you remember that. In isolation of all other time periods, that crash would have been considered to be horrific and very alarming. But of course it happened two years after the '87 crash, so that's why we call it the mini crash. It was a pretty serious slide and it was kind of an ominous way to start your career. One of the things I've noted is that if you do a chart of the market since I got in and you point to all the points along that chart where I've made a career change, every career change I've ever made has happened at a major turning point in the market. So I'm just giving you the heads up... I just left Wellington in December. I'm immediately thinking about the current market environment for that David.

One of the things you highlight was the '94 bear market. If you use the traditional definition of a bear market which is down 20%, that particular year I think it was down 9% or 9.8% or something like that close to close as the worst case scenario. So that would not pass muster by anybody's definition if you hold into that 20% definition. But if you actually look beneath the surface, that was a horrific bear market. If you look at the advance-decline line, that was a meaningful bear market and it had a lot to do with what happened with interest rates. So what I learned then was that the index often lies. It conceals the truth. So it's important to do top-down work, but you have to do bottom-up work to connect the dots. Oftentimes you'll learn a lot more about what's actually happening within the market by doing that bottom-up work. And today is like a perfect case in point.

Right. That's really interesting. So tell me about soon after then, the period we were talking about. As you came back and worked for Technical Data, from there what was next? I know you've spent time at some of the largest buy side institutions that explicitly use technical analysis. Talk about your career path from there.

My career path went from Technical Data to Fidelity. At the time I was at Technical Data, I was also, believe it or not, reporting from the Boston Stock Exchange floor every morning. That's awesome. The exchange is gone, it doesn't even exist anymore, but that was a lot of fun. I unfortunately had to give that up when I went to Fidelity, as you know Dave, having worked there yourself. You can't report from the Boston Stock Exchange and work at Fidelity at the same time. So it was an easy decision. I made that transition and I was on the technical research team from '99 to '02. That was of course an incredible experience. That was really where my analysis transitioned from predominantly futures, the S&P index, the 10-year Treasury, Eurodollars, and FX, which is what I really focused on at Tech Data, to equities. My primary focus has been equity since then.

A number of us from Fidelity left Fidelity to start a hedge fund. That was another... it's funny, when you take chances, you can pretty much rest assured you're going to learn things. But sometimes you learn things in areas you weren't expecting. Of all the experiences I've had in my career, that was probably the most formative for me just because the team that we started the fund with was very talented. The lead manager is to this day I would consider him to be one of the best portfolio managers and stock pickers I've ever worked with. But I just noticed there's a lot to be said for the impact of behavioral bias on the whole process. No matter how good you are, you're exposed to it. So my learning lesson there was to see how powerful things that have nothing to do with investing can influence you to do things that in a vacuum would never come up. Ever since then, I've just been very mindful of always listening to myself talk. When I say something, be aware that I just said that because oftentimes what you're saying in your mind, certainly the market doesn't know, the market doesn't care, but it has an awful lot of influence on you as an investor and how you behave. That whole process... I managed a slice of the fund and did really well on my slice of the fund, but that was my biggest awakening to the importance of self-awareness. Everybody's fallible. No matter how good you think you are, as soon as you think you figured it out, that's when you need to concern that the other shoe is about to drop. I decided from there to launch my own research firm, which I had for about three years. Through that process, I created a bunch of models that I still use to this day, and they were foundational to the research product that I developed. That's how I came to get to know Frank Teixeira better than I had known him from my Fidelity days. We had met a couple times but we didn't know each other too well. Through my research product he became a client, and after a number of years of him asking me to shut everything down and come join his team, I finally decided to acquiesce. I was at Wellington from '07, which you'll note was a major turning point. I joined Wellington pretty bearish actually because again, the S&P was saying one thing but the internals were saying something quite different. The number of primary timeframe tops in the consumer discretionary space and of course financials were just doing terribly. By the end of that move, which is very traditional, very classic, the only thing that was working was energy. That was the leadership for that bull market. When I joined Wellington I was pretty bearish to start. I just finished up about a 13-year career there this past December.

It's funny. On our podcast which we do with the CMT Association, we just interviewed Walter Deemer and I asked him that question. I said, 'What distinguishes a PM, a portfolio manager, from an analyst?' And he said that to be a portfolio manager you need to have ice in your veins. And I think that is the difference. I'm not saying that I necessarily have ice in my veins, but it's important to be able to weather the storm and endure the pressures of managing money, especially if it's not just your money, if it's somebody else's money and everybody can see your performance. It again has nothing to do with investing per se but has everything to do with performance because you have all these other stresses that come into your decision making that actually have nothing to do with the analysis. That's why I think you can find some incredibly talented technicians out there who can actually really truly help a portfolio manager manage a portfolio because they're not managing money. There's actual value in finding a good technician who doesn't manage money because they'll give you the most pure read on what's happening that sometimes you struggle to see because you have all these other things filtering your view.

It's really an opportunity for me to find a home to really go after my lifelong goal which is to advocate for technical analysis because I've been doing it for so long. The organization is right out there front and center trying to accomplish the same thing and they've just done an incredible job in what they've done in the past 10 years in terms of ramping up their testing process, the quality of the testing, and their support for the CMT charter and charterholders, it's just really incredible. I'm personally very honored to be a part of it. It turns out I'm on the board of directors right now, but within that I'm also the head of the Advocacy Committee. Hence the podcast. The whole purpose of the podcast is to shine light on the value of technical analysis, the CMT Association itself. Then really what I want to do... and this is my veiled invite to you Dave... is to bring people onto the podcast who have their CMT who are thriving one way or another, either managing money or as an analyst. Bring the folks we've brought on so far. Some of the more marquee names: we have Jeff DeGraff coming out this month in April, we then have Frank Teixeira coming out after that, and then we have others. We want to start to really build out a list of guests that have the commonality of technical analysis, but I want to bring them in from portfolio management, analysts, content providers. One of the things you do a great job with, and Jeff DeGraff does a great job, and I think I've seen others as well, but they just do a great job with data visualization. I think that's one of the next frontiers of technical analysis. That's what technical analysis has always been: data visualization. But now we have opportunities to really take that same core tenet of what we do, which is look at charts, and look at them differently and to glean different insights. If we can bring in guests from that perspective as well, at the end of the day, to add value to the technical community, I think that's an important way to do it. And you mentioned Walter Deemer and Bob Farrell. That was a fantastic experience. That was an incredible rare treat.

First of all, I have to tell you thank you very much for tapping me on the shoulder to take over for you because it was a great honor for me to do it. And what it ended up doing, I'm sure you can say the same, is that it was an opportunity every semester to reground myself in basic principles. One of the great strengths of technical analysis is all the tools we have, but that's also one of the weaknesses: we have a lot of tools. They're all backtestable, you can determine which ones add value and whatnot. But at the end of the day, you still have to get to the core principles of what you're trying to accomplish before you start to try to improve upon your analysis with these other indicators. So it's always returning yourself back to the basics. Through that process, I think it's made me a better portfolio manager, a better idea generator, and a better risk manager just by making sure that I'm not deviating too far from price itself. The questions that I was asked were just... one of the best ways to learn is to teach. In the process of having to go back and re-root yourself and reground yourself in those basic principles to re-explain them again and again, it just really embeds it further and further in your psyche so that when you're sitting there executing in actuality, you have these things more front and center as you're executing a portfolio.

I can tell you that I'm very risk aware, almost to a fault, to the point where it causes me to miss opportunities. I don't think I've ever made big mistakes. I've never lost a lot of money. I've had years where the market went up a lot more than I did, but I've never lost a lot of money. Mine's more like death by a thousand cuts. I've never made a massive mistake. If you think about the end result of your portfolio, the performance of your portfolio is the expectancy formula: how often are you right and how much do you make when you're right, how often are you wrong and how much do you lose when you're wrong? Simple math. Put it together, if it's a positive number, wash, rinse, repeat. So when I look at that formula, I can't recommend this enough to your listeners and viewers: do this with your portfolio. Take all of your trades you've done and find out what your expectancy formula looks like because it'll give you tremendous feedback. If I think about mistakes that I've made, it's not always mistakes that cost you money. It could be mistakes where you lose on the upside. In that expectancy formula, where I have had some... I was on Bitcoin from 350 to 20,000. That was a great trade, but that was a good example of a mistake I made: it should have been way bigger. But the reality is, mistakes are important to learn from as much as you can. But what I've always felt is that this is a regret business. No matter what, you're going to regret. If you buy it and it went up a lot, you regret not buying more. If you buy it and it goes down, you regret buying it at all. You're always going to regret whatever decision you make, so you have to be careful of that. As you're trying to learn from your mistakes, just be mindful, don't be too hard on yourself because nobody's perfect. For me, and I think Frank Teixeira would probably agree with this because he's the opposite of me in this regard, is that when my analysis is really aligned and I can tell that things are going to work out well, I don't make big enough bets. That's just my personality. I'm working on it. As I'm trying to find my way through that darkness, I can just say that in the interim, I should not lose a lot of money.

The number of people that when asked to quote somebody say something from Jesse Livermore is incredible because it's almost annoying that everybody goes to Jesse Livermore. On the one hand, it's annoying. But on the other hand, the fact that most of what he said he said over 100 years ago and everything he said is still as relevant today as it was back then is the thing we should be mindful of. That just underscores the idea that things haven't really changed. That's why your process should be as simple as possible and don't overcomplicate it, because nothing's really changed. I'm going to be that guy and I'm going to quote Jesse Livermore. I have it written down here because it's a bit of a longer one: 'When you're doing nothing, those speculators who feel they must trade day in and day out are laying the foundation for your next venture. You will reap benefits from their mistakes.' I think that's an important thing to think about. It goes back to what Charles Dow talked about with the Dow Theory where he broke the market down into three time frames: the ripples, the waves, and the tides. Long term, medium term, and short term. It's why he tended to stay in that primary timeframe analysis, which is where I stay as well, because all the mistakes are made in that short term timeframe. So let that play out. Don't overreact to what happens on any given day and always try to reflect back on that monthly chart. I know JC Parets likes to say on Twitter at the end of the month, he puts out a tweet saying, 'It's the end of the month. It's my favorite time of the month because you get to look at the monthly charts.' I'm the same. Today was a really important day for me because not only was it an opportunity to look at monthly charts, but it was also quarterly charts. That's the timeframe I try to stay in. Again, Charles Dow said this: those short-term time frames are driven by emotions and because it's emotional, that's where all the mistakes are made. Let those mistakes play out. Let other people do them and you just stay focused on the timeframe that matters most to you, which is the primary fundamentally driven timeframe. Hold your breath and hopefully everything works out. Something I hope everyone keeps in mind for right about now, an uncertain time.

My pleasure, David. Thanks for everything you're doing with StockCharts. StockCharts is incredible. I look at all your videos and we really appreciate the opportunity to join you today.