MARKET

TECHNICIANS
ASSOCIATION

JO UFINAL
lssue 23 February 1986
MARKEX'TI!CHNIC~AssocIATIONJ~
Issue 23 February 1986

Editor :
Henry 0. Pruden, Ph.D.
Adjunct Professor
Golden Gate University
San Francisco, CA 94105
Manuscript Ikviebers:
Arthur T. Dietz, Ph.D.
Professor of Finance
Graduate School of Business
Administration, EXxy University
Atlanta, Georgia
Frederick Dickson
Portfolio Manager
Millburn Corporation
New York, New York
Richard Orr, Ph.D.
Vice President for Research
John Gutman Investment Corporation
New Britian, Connecticut
David Upshaw, C.F.A.
Director of Portfolio Strategy Research
Waddell dnd Reed Investment Management
Kansas City, Missouri
Anthony W. Tabell
Technical Analyst
Delafield, Harvey, Tabell
Princeton, New Jersey
Robert T. wood, Ph.D.
Associate Professor of Finance
Pennsylvania State University
State College, Pennsylvania
printer:
Golden Gate University
536 Mission Street
San Francisco, CA 94105
Publisher:
Market Technicians Association
70 Pine Street
New York, New York 10005

ran Journal/February 1986

 TABLEOFCONTENTS

FROM THE EDITOR: A WELCOME TO ACADEME ........

MTAOFFICERS ANDCOMMITTEECHAIRPERSONS. .......

MEMBERSHIP AND SUBSCRIBER INFORMATION. ........

sTyL;E SHEElT FOR SUBMISSION OF ARTICLES ........

THE ART OF TECHNICAL ANALYSIS

HarryW.Laubscher................ 7

RUMINATIONS ON '86
David Upshaw, C.F.A.. . . . . . . . . . . . . . . 11

AVERYVOLATILEYEAR
Stan Weinstein. . . . . . . . . . . . . . . . . . 16

THEVALUELINEMYTH
Don Dillistone. . . . . . . . . . . . . . . . . . 21

S'IWZHASTICS???
Arthur Merrill. . . . . . . . . . . . . . . . . . 31

STOCK MARKET TIMING: AN EMPIRICAL EVALUATION

Michael J. Flanagan, Ph.D.. . . . . . . . . . . . 33

2
M'A Jourrd/E'eb~ 1986
 AWELCOMETOACADEME

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MIX JournalDeb- 1986

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4
MIZI Journal/Ekbruary 1986
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 MTA Editorial Policy

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MI!A Joumal~ebmary 1986

 By Harry W. Laubscher

Having spent almost twenty-nine of the last thirty years working in the
stock market's highways and byways, I hope that I have learned something.
We all manage to learn a great deal, regardless of what field we work in,
butalltoo often many of us tend to forget many of the things that were
learned and which should not'have been forgotten. It has been often said
that the stock market, along with drink and women, is one of the great
levellers of our time. Many of the important pieces of market lore that we
learned along the way, and then in later years tended to forget, nodoubt
could have saved many of us from experiencing many of the mistakes that,all
of us make. I am reminded of this lately as I see a great rush on the part
of inexperienced brokers and traders to be "in the crowd" regardless of
where that crowd is headed. For some strange reason, the more the stock
market rises, the more bullish many of us tend to become, finally resulting
in a great rush to own shares right at the top of the market. On the other
hand, it usually works out that the lower the market goes in bear markets,
the more bearish more people tend to become. It has always been so, and as
long as people are the driving force behind all market movements, up or
down, it will always be so.
We have all heard some of the sayings for which Wall Street is so well
known, such as "sell on the good news and buy on the bad news." I've found
that this does, indeed, work out to one's benefit more often than not.
During the Union Carbide fiasco in India when the shares of the company
dropped sharply to near 33, the wise people were there buying all they
could get, knowing full well' that the lemming instinct had once again taken
things too far. The recovery in price of those shares since then is in the
record for all to read and great profits have been made in what "everyone
knew" was going to be a disaster for the company. More recently, we have
the situation of Texaco and Pennzoil. The rather silly awarding to Penn-
zoil of several billions of dollars was recognized by many savvy traders as
an opportunity to acquire an historically "good" company at what appeared
to be bargain priced levels. As of this writing, the shares of Texaco are
still floundering near the 30-31leve1, and although my point and figure
work suggests a potential downside count to approximately the 29 level, I
am advising investors with some patience to start acquiring Texaco shares
in the 30-31area. In time, this should work out tobe a good buy. I use
it as another example of the unsophisticated atmosphere that appears to be
so prevalent today.
And yet, I stop to wonder if I ever really did meet anyone at all who could
accurately be described as sophisticated in the stock market. Being
sophisticated in the stock market probably is as out of place as being
logical. And we all know that in order to be successful in the world of
investing, logic has tobe left outside the door. This brings me around
to the inevitable question: "Is understanding the stock market now
becoming more of a science and less of an art?" No doubt, it is a question
that has troubled the minds of many marketeers for many years. I know, as

7
MI24 Journal/February 1986
a result of my recent trip to Japan, that the Japanese believe that
scientific applications can be applied to the stock market and they have
gone to great lengths in employing those applications. More than any group
I know, the Japanese are attempting to make it more of a science than it
has been. And yet, I know that whenever you have to deal with something
that involves people to any great extent , science can only be carried so
far before art has to take over. Thanks to many of the new inventions that
have come along over the years, such as the price quoting machines,
information is much more readily available, making the formerly onerous job
of keeping up to date much less so. may, a great deal of information is
quickly available -- perhaps too much so -- and thus the odds in decision
making have increased on the side of error. Now I know that that last
sentence doesn't seem right somehow, but then you are still thinking _
logically, aren't you? And that doesn't work in regard to the market. Too
much information, too easily obtained leads one into too many possible
byways, and therefore, increases the chances for error. Too many people
believe that the more you know about something, the better off you are apt
to be. I thoroughly agree, except in the stock market. In this arena, one
often can lose sight of the forest for all the trees that are available and
it often helps touse less data and a bit more gut feel. And, very often,
who you know is just as important, if not more so, than what you know. How
else do you explain the success levels of those who tend to make it in the
market?
And this brings metooneof my favorite sayings about the market. It is
one in which I thoroughly believe and have seen the workings of it spread
far and wide, among all types of marketeers. "The stock market is one of
the easiest places in the world to get rich.“ All you have to do to make
it so is to avoid what most of the others are doing. For example, I long
ago gave up buying The Wall 'Street Journal. It has too much information of
too little worth and not enough of the really valuable stuff. Barrons is
somewhat better in that respect, but the new newspaper Investors Daily has
it allover both of the Dow Jones papers. Once you start getting really
good news on what is going on in the market, the path to wealth is soon
beneath your feet. It helps also to look around you, ask the man in the
street what he thinks about the economy, or whatever, and when you have
determined what the general drift of conventional wisdom is, go the oppo-
site way. One of the biggest obstacles to obtaining wealth in the stock
and bond markets is to fall prey to the enticements of quick profits. Of
course, they are grand to have but more often than not it pays to "let your
profits run, while making all endeavors to cut losses short." Tbo often,
technically-oriented traders and investors see more in the chart than
really is there to be seen. False breakouts, upor down, make us nervous
and we jump, only to find out later on that there was no alarm except in
our own minds.
I also believe that it is a bit wise to be skeptical of almost everything.
At times you will have to depend on what appears to be the wisdom of those
around you, those in whom you have faith to do the jobs with which they are
involved. But one also should take the time to hear what others have to
say,,and then go and do a bit of "checking itout." It can't hurt. I also
believe that too many investors fall prey to the belief that information on

8
IWA Joumalfiebruary 1986
revenues, management, contracts, industry items, sales and earnings are
what makes stocks move up and down. They seldom stop to think that all
that kind of information only has todo with the company itself, NOT the
shares of the company in question. The only thing that makes shares move
up or down in price is buying or selling pressure outweighing one another.
If nobody sells, then all the good information on dividends- and earnings
isn't going to move shares upward. If all the bad news makes buyers
disappear, then shares can't move downward. So trying to gauge what the
buying pressure is probably is the most important thing that anyone can do
in the search for profitability. At Paine Webber, every week we publish a
relative strength analysis of over 4000 issues that when taken in
conjunction with some other information, a ffords a very good indication of
whether or not buying, or selling, pressure is rising or_ declining. Once
you have that tool in your hands, the game becomes a lot easier. Over the
last ten-eleven years, every single issue recommended in my TRENDS &
OPPORTUNITIES MARKETLEXTER has been based on my reading of the buying or
selling pressures. That has helped us achieve a 95% success ratio in those
recommendations, 250 profits, nine losses and three unchanged since 1974,
regardless of whether a bull market or abear market was in the driver's
seat. Get to know what direction the pressure is moving in and you are
halfway to your objectives. And that goes just as importantly for short-
selling.
While we are on the subject of short-selling, technical analysis can be of
great help in helping clients make money on the short side. Once you find
a chart pattern that is descriptive of distribution, move on to find out if
the selling pressure has been increasing, or if the buying pressures are
ebbing. If both suggest you should be shorting the stock, go a step
further and check out the short-interest. If it is high, so much the
better, since most of the shorting is still done by professionals. And
don't fall for that old saw about stocks with high short interest holding
up well, because there is a buyers' floor under the price. It is quite
truethatthose who sell short must sooner or later buy back in again in
order to take their profit, or their loss. But a check of past bear
markets will show that stocks that had the highest levels of short-interest
usually sold off quite nicely, enabling those who sold short to repurchase
shares AT LOWERIXVELS. A floor under stocks with high short-interest is
about as fleeting as support levels in a bear market. I always try and
remind brokers who ask me about support levels in a bear market that
support is only a seven letter word and usually doesn't afford the support
sought. Support, on the other hand, is much more important, technically,
in a rising market. The same goes for resistance levels. In bull markets,
those resistance levels usually provide only fleeting roadblocks to ad-
vances. In bear markets, upside resistance takes on much more power, on
average. There always are exceptions, of course.
I guess if I had only one tool to select from all those that are available
among the various charts and chart services, I would come down on the side
of a good weekly bar line service. Something like Mansfield that provides
the relative strength indicator graphically presented, various moving aver-
ages, and then throws in upside volume and downside volume to make it a bit
easier. If you like having the fundamentals, those are provided as well.

9
m Jotim-d/February 1986
They once used to give earnings' estimates, but not anymore. Too bad! It
helped to gauge things better if you knew what the "street" was expecting.
Then, when the winds of winter were blowing and I was all snug by my
fireside, I'd take out my barline book of charts and go through it every
week, looking for those seven cardinal patterns that indicate either accum-
ulation or distribution. You all know what they are. You don't need me
taking up valuable space to repeat them again. Once I was able to cor-
rectly identify some of those patterns, I would put some of my funds to
work. I guess that when push comes to shove, those important patterns of
accumulation or distribution are the most important things in our world of
Technical Analysis. Without the knowledge of them, we're always back at
square one.
Now I certainly don't mean to knock point and figure analysis. I have
found it tobe too helpful over the years to give it a position below the
salt. It is an invaluable toolin trying to gauge just how far a move is
going to carry ONCETHAT MOVEHAS STARTHD. But, if pressed, I still would
have to say that a bar line chartwill tell you when the move is going to
start. Thenyouwould moveon to aP&F chart. If anyone out there wants
to make a lot of money in this business, I would suggest that they start a
point and figure weekly chart service of the 500 most actively traded
listed bonds. As far as I know, there is no such service available. Since
we are in the still early stages of a super cycle bull market in bonds,
their price performance will become increasingly important as the next five
to seven years roll by. And their volatility also will increase, making a
point and figure analysis far more valuable. I've thought of doing it
myself, but am just too tired to take on another chore.
The twenty-nine years will soon be rolling into a nice round thirty. I
came to Wall Street intending to stay only twenty years, but the work was
so interesting and the people with whom I worked were so pleasant and
helpful, that I stayed on and on and on. This has been the most fascina-
ting of my three careers and I am wondering if the fourth and next career
will be as rewarding.

Harry W. Laubscher is a member of the MTA and a Technical Analyst at Tucker

Anthony, New York, New York.

10
m!A JournalDeb- 1986
 RuM1NAmm ON '86

By David Upshaw, C.F.A.

Another Icok At The Four-Year Market Pattern Gives 1986

Low odds Of Being An Up Year

Unless the SPII collapses between now and December 31, the year 1985 will
go into the history books as the fourth year of consecutive price gain for
the index, as follows:

1982 +15.0%
1983 +18.2%
1984 .l%
1985 Jl9.0% as of 11/20

This fact may be a useful piece of information to know as we assess the

1986 market outlook. From 1920 to date, the SPII [Standard & Poor's Indus-
trial Index] gained for four consecutive years in only five instances.
They were the four-year periods ended in 1927, 1928, 1945, 1952, and 1961.
Here's how the SPII performed in the years following those four-year gain
periods:

1928 +40.7%
1929 -18.5%
1946 -12.2%
1953 - 7.5%
1962 -12.8%

In the 1920-1985 period, the SPII wentupin five consecutive years only
once, from 1924 through 1928:

1924 +16.2%
1925 +26.7%
1926 + 6.6%
1927 +36.8%
1928 +40.7%

Then the market went down for four consecutive years for the only time in
the 1920-1985 period:

1929 -18.5%
1930 -30.0%
1931 -46.9%
1932 -18.0%

For this study, I looked at more than the sequences just described. The
period 1920-1985 was broken down into overlapping four-year spans: 1920-
1923, 1921-1924, and so on, upto1981-1984. I noted the number of years
that the SPII gained in each of those 61 four-year periods. For example,
there were 7 four-year periods in which th,e SPII gained in 2 out of 4
years. There were 31 four-year periods in which the SPII gained in 3 years

11
MI'A Jourrd/E'ebm 1986

.
out of 4.
Next, I looked at what the market did in each of the 61 years that followed
those 61 four-year spans. I found that the market rose 24 times and
declined 7 times in the years that followed the four-year spans in which
the market rose 3 out of 4 years. The market rose in only 3 of the years
that followed spans in which the SPII rose only 1 year out of 4. The
record of all the years that followed the four-year spans is shown here:

# of Times % of Years
Market Gained Market Gained
Market Gained # of Times the Following the Following Year
0 out of 4 years 1 1 100%
1 out of 4 years 7 3 43%
2 out of 4 years 17 11 65%
3 out of 4 years 31 24 77%
4 out of 4 years 5 1 20%

TOtdlS 61 40 66%

Historically, by far the best outlook for a given market year has been when
the market has gained in any three of the previous four years. The SPII
has gained in 77% of the years following such a pattern.
On the other hand, the SPII has only gained in one year following a string
of four consecutive gaining years. You may argue that1984, with its .l%
gain, was not really a gain year. Well, it wasn't a loss year, and for the
purpose of this study, a gain is a gain is a gain. The year 1985 had a 77%
chance of being a winner according to this history, and it has been. (The
year 1985 followed a four-year span that had three gain years.) The year
1986 has a 20% chance, according to this study.
Surely, something is different about every cycle, and history is only a
rough guide. Butdon't ignore the immortal words of Irene Peter: "Just
because everything is different doesn't mean anything has changed."

"When We're Out Together Dancin' Peak to Peak"

The chart on the reverse side shows how much the S&P 500 gained from the
peak of one bull market to thepeak of the nextbullmarket, beginning in
1962. I see the chart as showing five bull markets. The peak-to-peak
gains are as follows:
1962-66 +32%
1966-68 +15%
1968-73 +11%
1973-80 +17%

12
ran J-/E'ebruary 1986
 1962-80 Mean +19% Standard deviation 9 percentage
points
1980-86 +52%

1962-85 Mean +24% Standard deviation 14 percentage

points
The current peak-to-peak measurement of +52% surpasses the 1962-66 gain of
32%, and is over twice the +19% mean of the 1962-80 period.

I measured only complete bull markets , which is why I did not use the 1983
high of 172.65 shown on the chart. The 1983-84 decline was the intervening
corrective leg of the current two-legged bull market, in my opinion.
To go back to the great 1962-66 bull market (32% peak-to-peak): the peaks
were four years apart, almost to the day. We are now more than five years
past the 1980 peak, and the gain from that peak is 44%.
Henry Ford said, "History is bunk."
Shakespeare penned, "What's past is prologue."
Upshaw once wrote, "The past never repeats exactly. If it did, history
professors would make great money managers." Even so, these historical
figures are worth writing -- and thinking -- about.

'First Five Days' Indicator Bearish on 1986: Don't Laugh

The SPIC [Standard & Poor's-Composite Index] closed at 207.97 today, the
fifth trading day of the new year. The loss from the close on December 31
is 1.6%; thus this rather arcane indicator has predicted that 1986 will be
a down year.
How good has this indicator been? Well, darn good, whenitwas bullish,
and pretty good, when it was bearish. Here is the record for the 55-year
period 1931-1985:
The SPIC advanced in 34 of the 55 years, or in 62% of the years. A
forecaster like, say, Barton Biggs, who was bullish all the time would
have been right 62% of the time.
The "first five days" indicator (FFDI) gave 39 "up market" signals. The
market gained on the year in 29 years, or 74% of the time.
The FFDI gave 16 "down market" signals, which were followed by 11 down
years; so when the FFDI was bearish, it was correct 69% of the time.
In its Bull and Bear modes combined, the FFDI has been correct on 40 out of
55 forecasts, for an accuracy record of 73%. That's much better than the
62% accuracy record of the eternal bull. It's odd, kooky, and baffling,
but there it is.

13
MJX Joumal/Febmary 1986
The most notable failure of the FFDI was its 1985 forecast, which was
bearish. The SPIC gained 26.3% in price during the year just ended. Even
so, if one invested in the SPIC using only the FFDI as a timing guide since
1950, one would have been invested inonly 23 years ofthepast36 years,
and would have had an annual compound rate of return of 11.8% (not includ-
ing dividends) for those 23 years, in spite of being out of the market in
1985. By contrast, a buy-hold strategy would have produced a compound rate
of return over the 36 years of 7.3%. (I have ignored taxes, and I have not
computed interest income earned during the 13 years one would have been out
of the market.)

David Upshaw is a member of the MTA and Director of Portfolio Strategy

Research, Waddell and Reed Investment Management, Kansas City, Missouri.

14
MI’A Jou.n-d/‘l?ebrua~~ 1986
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m Journal/E’ebruary 1986
15
 By Stan Weinstein

While the major trend of the market is still bullish, I do not expect 1986
to be an "instant replay" of 1985! I know that many analystsare talking
about a non-stop continuation of this rally that will take the market to
2000-perhaps even closer to 3000, but I feel that the probabilities favor a
very different type of year. I expect a very choppy market that is likely
to make a high within the first 90 days of 1986 (on this side of 1700).
After that I feel that a decline toward the 1300-1400 area is a real
possibility.
There are several reasons for my projected scenario, so let's go through
them one at a time to see why I feel exactly as I do. (1) First of all,
there's the reality of the 4 year cycle which is no longer getting very
much press (and as a contrarian I feel that's significant). As you know,
there was an important bottom made in the late 1957-58 period, then again
in 1962, 1966, 1970, 1974, 1978, 1982 and we'll see about 1986, Obviously,
if this pattern holds true to form, an important decline must first precede
an important low , so that's point number 1 to consider. But there's much
more involved in my viewing this as a late bull move than cycles, so let's
look at the additional evidence.
(2) Another compelling reason for advocating a selective and cautious
approach to the market at this point in time is the action of my
proprietary NYSE Survey. I feel that any stock, commodity, or market
average can be classifiedas being in one of four stages (see Chart 1).
State 1 is the basing phase that takes placebefore an important advance
gets underway. Once the base is completed and the stock breaks out above
its resistance level, as well as its moving average, it enters.State 2 (pt.
A) which is the Advancing phase. As long as all rallies move to new highs y
and reactions hold above prior lows (as well as the 30 wk. moving average),
I consider the stock to be in Stage 2 and feel that investors should stay
with the position. Eventually, a pattern starts to unfold which is just
the opposite of what took place in the Stage lbase. Now it trends side-
ways as it nears the moving average and rallies no longer move to new
highs. A Stage 3 potential top formation is now unfolding and once it
breaks below its support level, as wellasthe moving average (pt.B), it
enters State 4 which is the declining phase.
Each week I calculate the percentage of technically healthy NYSE stocks (in
Stages 1 and 2) and chart that percentage against the DJ Industrial Average
(Chart 2). Usually the two move pretty muchin gear, but when this gauge
starts to diverge (by refusing to confirm downside Dow movement which is
favorable), the odds are strong that a change in market trend will soon
unfold. Note how in late 1974, after the worst crash in a generation, this
gauge moved higher while the Dow continued to decline (pt. A). This action
foreshadowed the 1975-76 bull market. Then in late 1976 as the DJI topped
out near 1020 (pt. B), notice how this gauge had already shown weakness for
several months as it once again correctly forecast trouble ahead of the

16
KI'A Journal~&ruary 1986
 1977 bear market. The next clear-cut signal was the sharp reversal from
very low levels to far healthier readings in the late 1978 (pt. C), this
time pretty much coincident with the turn in the averages. Then in early
1980 (pt. D), as the Bunker Hunt panic hit the street, this gauge held far
above its 1978 low even though the Dow average dropped below its 1978 low
which was a very positive divergence and a new 14-month advance was soon
underway. By mid-1981 (pt. E), the market was near its high for the past 5
years, but the NYSE Survey wasn't able to better its 1980 high. Soon
thereafter, the June 1981-August 1982 bear market was a reality. This
indicator really did its thing as the 1982 bottom was forming. For several
months (pts. F, G, and H), the Dow dropped to a series of new lows while
this fine technical tool not only refused to confirm, but actually started
trending higher. By the time the Dow hit its final August1982 low near
772, the NYSE Survey had improved to the point where 50% of all NYSE stocks
were rated healthy (versus 25% several months earlier). This extreme
divergence was then followed bythepowerhouse August1982-January 1984
bull market. As the market neared 1300 in January 1984 (pt. I) and bullish
sugarplums were dancing in traders' and investors' heads, the Survey went
into a tailspin.

After reaching a peak reading of over 90% a year earlier and then declining
throughout all of 1983, it broke below the 50% level and the January-July
1984 mini bear market unfolded as the Dow lost over 200 points. Then in
July (pt. J) of that year as the market bottomed near 1080, this gauge once
again registered a positive divergence as it moved up to the 50% level
after having been below 30% just a few months earlier. The July 1984-???
advance from 1079 to close to 1600 was soon underway. Now let's look at
the recent action of this gauge which is once again giving us a loud and
clear message. In late July,(pt. K), the Dow moved to yet another new high
at 1372, but this indicator only moved to a position slightly above 80%
(versus its reading of 95% in early 1983). That was strike one. It then
deteriorated quickly during the July-September intermediate term decline.
Then when the new rally got underway, the Dow once again moved to yet
another new high (pt. L). However, once this gauge failed to better its
prior peak and there are now 3 clear declining peaks (pts.M,N,O). That's
strike two. Strike three will occur when renewed weakness once again drops
this gauge below the 50% level.

(3) The next reason to be on guard againstan important topin the coming
months is the fact that our Secondary Offerings guage (which is simply a 10
wk. total of the number of such offerings that are listed in the Market
Laboratory section of Barrons each week) is weakening (see Chart 3). While
this is not a pinpoint indicator, history shows that when there are very
few such offerings, the overall market is usually close to an important
bottom (such as was the case in early 1980, the summer of 1982 and the
summer of 1984). Conversely, when a relatively high level of secondary
offerings come to the market (40 or more on a 10 wk. basis) showing that
big money feels that it's time to start bailing out of stocks, the market
is usually approaching a top area (second quarter of 1981 and summer of
1983). It's therefore cause for concern that this indicator recently moved
into sell territory in total agreement with the warning being flashed by
our NYSE Survey.

17
Km Journal/February 1986
 (4) Finally, there's the reality of the lagging number of stocks hitting
new highs (see Chart 4). In the late 1980-81period,this phenomena went
on for quite a while but eventually took its toll as the June 1981-August
1982 bear market unfolded. Again throughout1983, this pattern could be
observed and once again there were problems as the secondary market topm
out in June of 1983 and the DJI hit its peak in early January 1984 and then
both sectors sold off until they made their low in July. Once again, this
pattern is making itself felt as the latest peak was lower than the Decem-
ber 1985 peak which was slightly lower than the February 1985 peak (which
were all lower than the 1982 peak) despite the fact that the popular
averages continue to move higher.
Therefore, while there is likely to be further upside action over the next
few months, the market is obviously becoming far more selective, and it is
vital that we concentrate new buying in only the technically strong sectors
(such as Homebuilding, Home Furnishings, Mobile Homes, Papers, Savings &
Loans, Technology and Truckers) and in addition, that we keep a very close
watch for signs of an important top in the not-too-distant future!

Stan Weinstein is Editor & Publisher of The Professional Tape Reader.

18
MICAJou.rrd/Februa.Ky 1986
 Chart 1
.
STAGE i
“Ideal”

Chart 2

STAGE 1 and STAGE 2 STOCKS ,

Chan 3

MTA Journal/February 1986 19

 Chart 4

550

500

450

400 D.J.I.
350

300

250

200

150

100

050

000
NYSE HIGH-LOW
950 DIFFERENTIAL
(COMMON STOCX ONLY-WEOCLY)

900

850

800

+600
+400
+200
0
-200

-400 i82 J 1’83 I 1’84 .I A’85 .h J’86

N Y a ‘il k Y N L ia

20

MB Jou.rnal/E’ebrUary 1986
 By Don Dillistone

At the Hilton Head Conference of the Market Technicians Association, one of

the speakers made an off-the-cuff comment that he wouldn't use the Value
Line Composite Index in his technical work because of its so-called down-
ward bias. This myth has been around for some time, but I found it a
little surprising that it still is not realized throughout the technical
communitythattheideathat a geometric average has a downward bias is
indeed just that, a myth.
The Value Line is one of several developed over the years to provide an
unweighted average or index to track the overall stock market. An un-
weighted average treats each and every stock exactly the same, so that a
one per cent move in stock A has exactly the same weight on the result as a
one per cent move in stock B, no matter what the underlying prices of the
two stocks happen to be. This is in contrast with the such averages as the
Dow Jones Industrials, which simply adds up all the prices and divides the
sum by a particular divisor. There are 30 stocks in the Dow Jones
Industrials, but the current divisor, rather than 30, is 1.116, reflecting
adjustments over the years to take into account stock splits, additions and
deletions. But no matter what the divisor, the calculation means that a
one per cent move in a hundred dollar stock has twice the weight on the
result as a similar one per cent move in a 50 dollar stock. It was to
avoid this that the concept of unweighted indexes or averages was born.
Simply put, the idea is to zero in on percentage changes rather than dollar
changes.
I have no intention to denigrate the work of Norman G. Fosback, but it is
only in his otherwise excellent book, Stock Market Logic (l), that I have
found a fully documented attack on geometric averages in general and the
Value Line Composite Index in particular. So I have referred to his
arguments so as not to be accused of setting up a "straw man" in order to
knock it down.
An arithmetic average is calculated by adding up n items and dividing the
sum by n to obtain the arithmetic average. On the other hand, a geometric
average is calculated by multiplying n items together and then taking the
nth root of the result to obtain the geometric average. In his book, Mr.
Fosback states that "a geometric stock market average will always (sic) be
below a simple average" (2), and because of this, argues that the best
unweighted stock market average should be calculated by taking the
arithmetic average of the per cent changes of every stock price over its
previous day's price and that the new level of the stock market average
should be adjusted by a similar percentage. This is in contrast with the
Value Line method of taking the geometric average of the same percentage
changes and using the result to calculate the current day's index. (Value
Line's average has been indexed).
In Mr. Fosback's book, he compares the difference using as an example an

21
ME4 Journal/J?ebruary 1986
equal dollar amount in each of two stocks, one of which subsequently moves
up by 25 per cent while the second one drops by 25 per cent. Using the
arithmetic method of averaging these changes, since one stock moved up .25
per cent while the other moved down 25 per cent, the average change would
be zero. On the other hand, the geometric calculation shows the first
stock up by 1.25 and the second by 0.75. The geometric average of these
two, the square root of (the product of 125 divided by 100 times 75 divided
by 100, or 1.25 times 0.75), is 0.96824584. Thus, the geometric average
would show a decline of more than 3 per cent even though the total value of
the two stocks remained unchanged. From this, he develops the proposition
that the geometric average has a downward bias.
This proposition is then promoted to the rank of a premise to illustrate
that the Value Line has a downward bias. Unfortunately, the proposition is
built upon sandy soil. It is always dangerous to argue by analogy unless
the analogy is rigorously pushed to extremes, i.e., reductio ad absurdum
to show that it remains true.
To illustrate this, let us take as being self-evident that if a given
method provides a downward bias for 1,700 stocks, itwillalso provide a
downward bias for two. We can then assume a universe of two stocks, A and
B, each one trading on day one at $100, an unweighted average calculated by
using the average arithmetic changes and a geometric index, both at 100 on
day one, along with a mythical portfolio manager who owns a single share of
each stock.
On day two, after A had appreciated to 125 and B depreciated to 75, Mr.
Fosback would point out (quite correctly) that the total value of the
portfolio had not changed. This would be reflected in the arithmetic
unweighted average remaining unchanged at 100. But the geometric average
would show a loss to 96.82. Butifthe same two stocks on day three were
to return to 100, the arithmetic unweighted average would show Stock A down
by 20 per cent but stock B upby 33.3 per cent- the result being that the
average arithmetic change would have been plus 6.67 per cent and the new
average value would be 106.67. Cm the other hand, the geometric average of
the same change would show that the change would have been the square root
of (100 divided by 75) times the square root of (100 divided by 125), or
1.0327956. Multiplying that factor by the previous, unrounded value of
96.824584 results in a new value of precisely 100.
Stretching the analogy this far leaves our portfolio manager with a share
in two stocks, eachof whichistrading at 100. The geometric average of
the two-stock market universe shows that the market average has returned to
100, but the arithmetically unweighted average shows that the market has
gone up to 106.67. The analogy has clearly brokendown: in one instance
it seems to show that the arithmetically calculated unweighted average
better reflects the action of a mythical portfolio, in a second instance,
the one calculated geometrically appears superior.
But now the odds that a geometric averageof changes has a downward bias
are becoming very long indeed. If the Value Line had set its index at 100
on day one, it would be back to 100 on day three. Furthermore, no matter

22
PII% Journal/February 1986
how many times werepeatedthe above exercise with stocks Aand B, every
time they simultaneously returned to 100, so would thevalue Line'Index.
But using the impeccable logic based on his premise that the Value Line has
a downward bias, Mr. Fosback points out that this bias would have shown up
every day since its inception, leading to the obvious conclusion that after
hundreds of daily calculations "the cumulative consequence is that the
Value Line Average is so biased downward that its current level, placed in
the perspective of its own history, is utterly without meaning".

In reality, the mathematics used in calculating the Value Line Index cannot
possibly lead to a cumulative error.

The geometric method involves, throughout, commutative calculations. That

is, it is a matter of complete indifference as to the order in which the
various calculations are carried out. (A numerator that calls for the
multiplying of 4 times 3 and a denominator calling for the result to be
divided by 6 is always going to result in the answer 2 no matter in which
sequence we carry out any of the called-for operations. It doesn't matter
at what point we divide by 6). The arithmetic averaging of per cent
changes in non-commutative. (The price of stock A must ALWAYS be divided
by yesterday's price of stock A and the result added to the price of stock
B ALWAYS divided by yesterday's price for stock B).

That doesn't make one method true and the other one not, but it does give
us a powerful tool in simplifying the geometrical method.

To start with, and I hate to belabour this, but one other algebraic truth
should perhaps also be mentioned. If we have a series of commutative
calculations and each element is raised to the same exponent, then the
calculations can be carried out first and then the result raised to the
same exponent. (5 times 5 times 7 times 7 provides the same result as 5
times 7 times 5 times 7, or more apropos to the following discussion, the
square root of 4 times the square root of 9 gives the same result at taking
the square root of 36 would).

The calculation that I outlined above for the Value Line called for the
dividing of today's prices by yesterday's prices by the day before's prices
and so on. The fact that the Value Line calculation is commutative,
though, means that it can bedone in any order. The significance of this
is that I don't have to divide today's price of a stock by yesterday's
price, as long as some time in my calculation I do indeed divide the
calculation by yesterday's price. That means that the time sequence of
price changes is irrelevant. Furthermore, even the level of yesterday's
index becomes irrelevant when the entire calculation is simplified.

In the example to calculate a Value Line Index (I) for the two stocks, A
and B, I used the following general equation:

23
MI!A Journal/February 1986
For simplicity's sake, I started my index at 100, but to that in a general
way, I would have to make use of a constant (K) so that: -

100
K=-
(AlBl) l/2

Thus my index on day one, besides being 100, could also be expressed as:

l/2
I1 = K (AlBl)

But I can also use a new constant (C) such that:

C = K2

Then

I1 = (C Al Bl) u2 . . . . . (2)

Now if I use the general equation (1) to calculate the Index for day 2, I
have:

12 = 11

But substituting for I2 from (2)

Similarly

0 v
A3B3
13 = I2
A2B2
Substituting for I2 from (3) .
w
A2B2 A3B3
I3 = P.V
AlBl A2B2 . . . . .(4)
>

24
~124 Jourrd/February 1986
If we build our general equation (1) from day one, then, we would have:

A2B2 A3B3 AN-PN-1

IN = CAIBl.-.-....
AIBl A2B2 AN-2%-2
But the above equations can be simplified such that:
.
l/2 .
I2 = K A2 B2)

I3 = (C A3 B3)
w
‘N-1 l = (c Ati-1 s-1) 1’2
IN = (C AN s) J-i2 . . . . . (5)

From this, it is evident that no cumulative error can arise from the method
of calculating theValue Line Index. Italsobegs thequestion as to why
Value Line bothers to use the previous day's prices. There are probably
two reasons for this:

The first has to do with "significant figures". A figure calculated by

multiplying the prices of 1700 stocks with each other (or using logarithms)
is enormously larger than that for 1700 rates of change (virtually all of
them between something like 1.05 and 0.95 and most between 1.01 and 0.99).

The second may well be a case of mathematical fastidiousness. Assuming

there are 1,700 stocks in the Index, a three-for-one stock split in one of
them, if accounted for by -a change in the constant, would affect that
constant by a factor equivalent to the 1700th root of 3, whatever that
might be. It could, in fact, be safely ignored, as it could in any
unweighted averageof1,700 stocks. But Value Line may well have viewed
that idea with distaste, along with an equal distaste in having to calcu-
late the constant to enough significant figures to reflect the change. But
by using rates of change for their stocks , it becomes a simple matter to
change thepreviousday's price so as to reflect the split and go on with
the calculation.

Whatever the reason, I understand that Value Line uses equation (1) rather
than equation (5). But as we have seen, they would both give exactly the
same answer. In any case, a double top at 209, for example, even though
the two events might be over two years apart, would still be a double top.

That still leaves the question unanswered as to whether the 209 is a good
measure of the market's level. Unfortunately, the answer is a subjective
one and trying to remember how to do high school algebra doesn't help. But
a computer simulation does.

In this simulation, I have used the same universe of two stocks (A and B)
and the same mythical portfolio. Stock A and B each start out at $100. A
was allowed to increase by a steady, arithmetic increment and B to decrease

25
MI24 Joumal/E'ebruary 1986
were allowed. to return by the same increment to $100. The portfolio was
unweighted after each change. That is, if at the start, A moved from $100
to $110, then enough A was sold and B bought so that each represented an
investment of $105. In each "trading day", there was one transaction in A
and one in B, involving two calculations to unweight the portfolio. At the
end of each day, an arithmetically unweighted average (AUA) was calculated
using the closing prices of our universe of two stocks. Once $125 and $75
for A and B had been reached and again after their return to $100, the AUA
was again calculated and also a Value Line Index (VLI). (Since both stocks
started out at $100, the indexing factor was 1). In addition, an index (P)
for the value of the portfolio was also calculated for those two points,
also initialized at 100. P could be regarded as a weighted index, weighted
by the shares held in each of A and B, but since the calculation calls for
equal dollar amounts in each stock then it actually is also an unweighted
index.
The calculation was done on a Commodore 64. Truncation and possibly the
fact that A was always calculated ahead of B led to some suspicion about my
own "significant numbers". This particularly showed up after A and B had
retuned to 100, when logic dictates that the holding should have been
exactly one share in each. But this does not reflect on the practicality
of the results. The increment chosen was one-tenth of one cent.

PoF?IFoLIO
S'IWKA . S'I0CKB mAL
SHAE7EsowNED 0.77459985 1.29099084
PRICE! 124.999678 , .75.0003219 193.649456

MARKEZINDICAT0RS
DISTANCE FROMP
P 96.8247281
VLI 96.8246668 .0000613
AUA 96.8247955 .0000674

26
KCAJ oumal/E'ebruary 1986
 PORTFOLIO

STCCKA S'IOCKB mAL

SHARES OWNED 1.00000126 1.00000126

PRICE 100 100 200.000252

MARKET 1NDrcAmRS

DISTANCE FROM P

P 100.000126
VLI 100 .000126
AUA 99.996712 .003414

The perceived problem with the VLI apparently arose from using the analogy
that if a mythical portfolio of equal amounts of dollars in each of two
stocks saw one appreciate by 25 per cent and the second decline by 25 per
cent, then a Value Line Index showing that a market made upby a universe
of those two stocks showing that the market had declined by over 3 per cent
had a downward bias. This Was because both P and AUA would have shown no
change. But a more accurate calculation of a truly unweighted portfolio
(Table One) shows that when the two stocks did (approximately) that, a
decline of over 3 per cent would be what an unweighted index should show.
In the analogy, had P and AUA remained constantly unweighted throughout the
pair of 25 per cent moves,' they too would have shown a decline of over 3
per cent.
If our mythical portfolio had truly been instantaneously and always
unweighted, (ie an infinite numberofcalculations ratherthanlOO,OOO),
then it would have ended up worth exactly the same $200 it started out at.
Instead (Table Two), it was worth a quarter of one cent more than that
which meant that P was out by a factor of one-half of that. Not bad, but
it should be noted that the Value Line wasn't even out that much. In fact,
it was dead right! For that matter, the AUA was also virtually the same as
the VLI.
For practical purposes, all three ended up at 100. This should dispel any
notion that the VLI has a downward bias, unless at the same time P and AUA
also have a downward bias. This raises the question as to whether all
unweighted indexes might have a downward bias, but that is beyond the scope
of this paper.

27
MI!A Journal/R&~ 1986
The reason that both P and AUA more accurately reflect (in Table One) the
more than 3 per cent decline in the market, was due to a factor peculiar to
each. By the time A and B had reached (approximately) $125 and-$75, the
relative shareholdings in the portfolio of A and B had been adjusted 50,000
times. Each one of these involved reducing the holding in a rising stock
(A) and increasing the holding in a declining stock (B). Thus, P, which
reflected the total market value of the portfolio, both declined and at the
same time more accurately reflected an unweighted portfolio. In the origi-
nal analogy, it reflected a portfoliothathapppened to be unweighted at
the start, but was a weighted one at the end.
The increased accuracy of AUA was not due to the number of its calculations
(25,000), but to a reduction of an error in the calculation itself. In the
analogy, when stock A had gone up to $125, that represented a factor of
1.25 (100 x 1.25). But when stock B declined to 75, that represented a
factor of the inverse of 1.333 (100/1.333). The calculation for AUA
though, treated the two as if they were exactly the same (25 per cent
either way). It thus did not reflect the greater proportional downward
move. In other words, the error introduced an upward bias. In a move from
$100 to $75, the error is significant. In a move from $lOOto $99.999,it
is trivial, even though it is cumulative. Thus, as shown in Table One, AUA
provides a reasonably accurate answer.
If this thesis is true, it should follow that the greater the number of
calculations and the smaller the incremental changes, the greater the
accuracy of both P and AUA.

A - 125 B - 75 A - 100 B - 100

VLI - 96.8245837 VLI - 100
INCREMENTS P AUA P AUA

-logy 100 100

$25.00 98.437500 100 103.359375 106.666667
5.00 97.1477534 97.4582374 100.668651 101.313152
1.00 96.8891540 96.9510392 100.133420 100.261376

.25 96.8407227 96.8561826 100.033339 100.065281

.125 96.8326527 96.8403820 100.016668 100.032635
.OOl 96.8246668 96.8247955 100.000126 99.996712

28
m'A Jourrdfiebruary 1986
The final result for AUA (99.996712) may well have been caused by the
truncation operation of the computer. If not, it negates the thesis that
AUA has an upward bias.
But what the results do show is confirmation that the more accurately P and
AUA are calculated, the closer they approach VLI. Nevertheless, with the
exception noted, both P and AUA were consistently above VLI. But since in
Table Three it is evident that they can be higher than they should be when
meaningful increments are used, the difference is more likely due to errors
in P and AUA than in the calculation for the Value Line. Furthermore, if
there were a downward bias in the calculation for the Value Line, this
should show up in a cumulative, growing error. This does not occur.

CONCLUSIONS
1) The Value Line Index cannot have a cumulative error arising from the
means of its calculation.
2) The Value Line Index does not suffer from any downward bias other than
some it might share with many other unweighted indexes.
3) For practical purposes, an arithmetically unweighted average (AUA) can
be used, but the Value Line Index is more accurate.

1. Fosback, Norman G., Stock Market I&c, (Fort Lauderdale, Florida: The
Institute for Econometric Research, second printing, 1977).

2. Ibid: All references are found on pages 293-296.

Don Dillistone is a Technical Analyst with Richardson Greenshields of

Winnepeg, Canada. He is a CFA, a member of the MTA and of the Canadian
Society of Technical Analysts.

29
ML24Jourrd/Ekbruary 1986
1 REM H IS
2 REtI L IS
3 I331 ‘fl-i IS
4 PEP1 ‘r’L I :Z
5 REP1 id IS
rJ REM t-1 IS
7 t?EM D IS
8 REM E IS
9 REP1 ‘y’ 15
18 REM H IS
11 RENT IS
12 REM U If-3
13 REtI !s 1:s

MlTA Joumal/E%?bmary 1986

 -cs ???
BY Arthur A. Merrill

The definition of stochastics in Webster's New International Dictionarv:

Stochastic: adj. Conjectural; given to , or skillful in conjecturing.
The definition of conjecture:
Conjecture: v.t. To form opinions concerning, on grounds confessedly
insufficient to certain conclusion; to indulge in surmise.
Under this definition, most of our work is stochastic.
In econometrics, the term "stochastic" is used to signify formulas that
take account of the imprecise nature of economic data. For example, the
formula for a definite straight line regression is Y=A + BX. In
econometrics, this formula is modified to Y=A + BX + e , where e is an
error term (the deviation of Y from the straight line). The modified
formula is stochastic; it recognizes the fact that in economic data the
figures never lie on a perfect straight line.
The "stochastic& that we see produced in current computer programs is
something entirely different. I'm not too happy about the label, since it
might be confused with the econometric "stochastic&'. But it seems to be
firmly established, so I expect I'll have to learn to like it.
Anyway, the technical "stochastics" is a term that has been applied to the
closing price analysis developed by Larry Williams and George Lane. The
general idea is that it is a bullish sign when closing prices crowd the
upper end of a price range; it's a bearish.sign when prices close low.
Larry Williams considers the distance from the low of a price range up to
the closing price as a measure of buying pressure; the distance down from
the top of the range to the close is a measure of selling pressure.
Here are some details:
Larry Williams uses a very short term range, and smooths with moving
averages. The top of his range is the current day's high, or the previous
day's low or the previous day's close, whichever is lower. He calculates
buying pressure (as measured by the distance from the low of the range up
to the close) as a percent of the range. He calculates 7 day, 14 day and
28 day moving averages, then averages the three averages to get his
"ultimate oscillator."

31
M!m Journal/February 1986
George Lane's "stochastic" uses the range based on the last five days. His
formulas:
%K=lOO(C-L)/(H-L)
where C= closing price
H= highest price in last five days
L= lowest price in last five days
%D= 3 day moving average of %K *
slow %D= 3 day moving average of %D
*
- this is essentially the case, although George's calculation is slightly
different from a straight moving average. He totals 3 days of the numer-
ator of %K and then divides by 3 days of the denominator.
Scientific Market Systems uses a range based on the highs and lows in the
last 20 days. They use formulas similar to George Lane's for %K and %D.
Gerald Appel likes to use a shorter term range with 13 units instead of 20.
This is just a brief outline topromote understanding of the term "sto-
chastic&'. For detailed suggestions for interpretation of the figures, you -
can consult the experts:
Larry Williams, P.O. Box 1781, Kalispell, MT 55901
George C.Lane, Investment Educators, P.O.Box 2354, Des Plaines, IL
60016
Scientific Investment Systems Inc., 62 Wellesley Street, Suite 503,
Toronto,- Canada M5S 2x3'
Gerald Appel, Signalert Corp., 150 Great Neck Road, Great Neck, New
York 11021

Arthur Merrill is a member of the MTA and the head of Merrill Analysis,
Inc., Chappagua, New York.

32
MI24 Joumal/E'ebruary 1986
 IYWRKETTIMING: AN EMPIRICAL l5!smmTIoN
Eiy Michael J. Flanagan, Ph.D.

SYNOPSIS: Several quantitative technical analysis models were used to

determine if returns superior to a buy and hold strategy were obtainable
with aggressive growth mutual funds using a transaction timing strategy.
The results of various empirical tests of transaction timing using
technical trading models indicated that the major advantage of transaction
timing lies in avoiding losses during bear market declines and
participating in the early stages of bull market rallies.

This article is based upon the author's doctoral dissertation, submitted to

Golden Gate University, San Francisco,California. The major purpose of
the dissertation study was to critically evaluate the applications of
several quantitative technical analysis models to the problem of stock
transaction timing. The study tested the hypothesis that past price
behavior can be used to obtain returns superior to a buy-and-hold policy.
Concurrently, the study tested the null hypothesis that the "weak form" of
the efficient market hypothesis, also known as the random walk, was true.
The study also sought to evaluate if a personal computer program could be
designed to optimize the parameters of trading strategies based on
technical analysis of historical price data, and if such trading strategies
that were optimized after-the-fact could be applied successfully to future
price data.
Several major findings of this research can be spotlighted.
1. The investment approach of buy-and-hold in bull markets and
holding cash in bear markets was explored using the top performing
aggressive growth funds during the 1971-80 period. A transaction-timing
strategy approach as compared tobuy-and-hold was impressive and ranged
from 135 percent for the nonvolatile Janus Fund to 450 percent for the
highly volatile 44 Wall Street Fund.
2. Trading strategies incorporating trend following and
character of Market Models (trend/countertrend) surfaced as superior while
conducting the empirical evaluation. Successful character-of-market model
signals will usually generate good returns , even though they do not possess
the inherent robustness of trend-following models. If a signal is missed,
the trend-following model always serves as a backup and ensures that the
trader is not on the wrong side of the market during strong price trends.
3. Trend-following systems that are based on a single parameter
moving average should use a smoothing factor value in the 0.01 - 0.04 range
to minimize trading whipsaws (equivalent to a moving average length of 100
to 400 days). Abullish outlook should be assumed if a market index such
as the Standard and Poor's 500 exceeded its long-term (smoothed) trend. A
bearish outlook ought to be assumed if the index was less than the long-
term trend.

33
MI'A Journal/February 1986
 4. The performances of four investment strategies in four
different environments were computed. The following strategies were used:
(a) buy-and-hold policy; (b) buy-and-hold policy except during bear markets
when all equity holdings are liquidated to cash or equivalents; (c) buy-
and-hold policy during bull markets and transaction timing during bear
markets; and (d) unrestricted transaction timing.
The following investment environments were assumed: (a) investment
vehicles with notransactioncosts (e.g., no-load mutual funds) in a tax- -
sheltered environment (e.g., pension plans); (b) investment vehicles with
no transaction costs in a non-tax-sheltered environment; (c) investment
vehicles with transaction costs (e.g., common stocks, options, stock index
futures, commodities, etc.) in a tax-sheltered environment; and (d)
investment vehicles with transaction costs in a non-tax-sheltered
environment.
The returns obtained with each strategy/environment combination showed that
unrestricted transaction timing is the most profitable strategy with no-
load mutual funds in a tax-sheltered environment, while restricted
transaction timing (buy-and-hold during bull markets and transaction timing
during bear markets) is the most profitable strategy.in the other three
environments.
5. A personal computer program can be successfully designed to
automatically optimize the parameters of stock market trading strategies
based on technical analysis and historical price data.
-.
6. Trading strategies that are optimized ex post (after the
fact) on historical price data can be applied to fu=re price data to
produce returns in excess of'those obtainable with a buy-and-hold policy.
7. The empirical results obtained in this study suggest that the
random walk hypothesis does not adequately describe the behavior of auction
market prices. The test data showed significantly superior returns with
transaction timing models compared to a buy-and-hold policy which does not
support the random walk hypothesis.

Technical analysis is based solely on the past behavior of companies or of

the market, using such indicators as price,volume, odd-lot trading, ad-
vance-decline ratios, and the like. Technical analysis rests on the as-
sumption that the forces of supply and demand are the sole determinants of
the price of a stock. Changes in the balance between supply and demand
produce trends which can be best detected by the various technicalindi-
caters.
Trading strategies that employ technical analysis belong to one or more of
the following five classifications: trend following, character-of-market
analysis, price chart analysis, indicator analysis and structural theories,
such as wave principles and time cycles. The trading strategies developed

34
PEA Joumal/i?ebruary 1986
for this study were based on objective technical analysis techniques that
belong to the trend-following and/or character-of-market analysis
classifications. These strategies provide nonambiguous trading signals and
can be processed automatically on a digital computer.
Trend-following models, such as moving averages, perform best in strongly
trended markets but tend to be whipsawed in trading range markets. In
contrast, character-of-market models (momentum, osscillator, velocity-
acceleration, excessive swing , and channel reversal models) perform well in
tranding ranage markets and poorly in strongly trended markets. Whereas
trend-following models confirm price reversals , character-of-market models
attempt to anticipate such reversals. As the name suggests, trend/no trend
models attempt to take advantage of the strengths of trend-following and -
character-of-market models while avoiding most of the weaknesses of each.
The development of a successful trend/no trend trading model is central to
obtaining a robust, automatic indicator that signals the transition from a
trading range to a trend-following market and vice versa.
All trading strategy development work was conducted on the Pennsylvania
Mutual Fund price data for the period January 1973 through December 1977.
This phase was used to test the program logic of each of the trading
strategies and determine practical parameter range and incremental values
for each strategy. The following strategies were included in the
evaluation:
OSMA- Oversold Moving Average
ESMA - Excessive Swing Moving Average
FEMA- Filtered Exponential Moving Average
T/CT - Trend/Countertrend
EMA - Exponential Moving Average
FLTR - Filter Rule
CENA(l)Krossing Multiple Moving Average
m(2)-Confirming mltiple Moving Average
The second phase repeated the first phase parameter range tests on 44 Wall
Street Fund data for the period January 1981 through December 1982. The
performances of the eight trading strategies selected for evaluation are
summarized in Table 1. As indicate,d three of the strategies (OSMA, ESMA,
and T/CT) outperformed the other five. Because OSMA was a subset of ESMA,
T/CT and ESMA were retained for use in all subsequent empirical tests.

35
MI!A Joumal/E'ebruary 1986
 TABIEl

EX POST PERFORMANCE SWNARY--ALL STRATEGIES

FOR THE YEAR 1982:
44WAILSTREFTFUNJJ

Test Period--01/03/81 to 12/23/82

Signal-Transaction Belay Period : la

Trading Best l?E?turn

Strategyb Parameters' 6)
OSMA #l/O.03 75.79
#2/1.20
#3/0.06
ESMA #l/O.03 75.79
#2/1.20
#3/0.06
#l/O.08 50.96
#2/4.50

T/t= #l/O.03 88.86

#2/0.20
#3/0.05
EMA’ #l/O.02 42.82
FLTR #l/O.80 68.82
#2/6.00

m(1) #l/O.15 37.67

#2/0.05

m(2) #l/O.05 46.22

#2/0.05

BUY/HOLD -10.29
aAll trading strategies are optimized to produce the
best investment return "after the fact,"
bRefer to the text for a description of the strategy
acronyms.
=#l, #2, etc. refer to the parameter number. The
adjacent number is the value selected by the optimi-
zation program that produced the best return.

36
 The Excessive Swing, Moving Average Model (FSMA)

The excessive swing, moving average model (ESMA)

uses three trading system ccmqonents:

1. A trend-following model using a single

exponential moving average with a price-velocity-based
deadband on the price/moving average crossover.

2. An excessive swing, moving average model to

detect oversold and overbought conditions and antici-
pate a price reversal.

3. Smoothed price velocity and acceleration to

enable and disable the excessive swing model.

A typical trading pattern of the ESMA Model is shown in

Figure 1.

ESMA includes all of the features and decision rules of the oversold,
moving average model [OSMA] and provides the additional feature of
generating trading signals based on the detection of overbought conditions.
With the exception of appropriate changes in sign, the operation of the
overbought and oversold subsystems is identical.

37
P~II Jcxirnd/Febr~ary 1986
 FIGuRE 1

A TYPICAL EXCESSIVF, SWING/MOVING AVERAGETRADING PATTERN [FSMA]

In some instances during an oversold market condition, a buy signal will

not be given by the excessive swing model because one or more of the signal
requirements are not met. In this case, the trend-following model will
serve as a backup, although with a loss of potential gain. It should be
noted that if a price uptrend persists, a buy signal will always be
rendered by the trend-following model.

38
MI'A Joumal/F&ruary 1986
The Trend/Countertrend Model

The trend/countertrend (T/CT) model uses three trading

system components:

1. A trend-following model using a single exponential

moving average.

2. A smoothed price velocity &el.

3. A minimum/maximum price model that monitors smoothed

price minimums and maximums.

A typical trading pattern is shown in Figure 2.

39
mx Jou.rnal/E'eb~ 1986
 FIGURE 2

ATYPICALTREND/COWEKEEND TRADING PATTERN [T/CT]

In some instances during an oversold market condition, a buy signal will

not be given by the minimum/maximum price model because one or more of the
signal requirements are not met. In this case, the trend-following model
will serve as a backup, although with a loss of potential gain. It should
be noted that if a price uptrend persists, a buy signal will always be
rendered by the trend-following model.

40
MllA JournalDeb- 1986
 TRANSACTIONTIMING USING TEXXNICAL TRADING MCDELS

This section presents the results of various empirical tests of transaction

timing using technical trading models. Several precautions were taken to
make the test results valid. One was a procedure to separate the
development/optimization of trading strategies from the actual empirical
testing of the trading strategies. This precaution, coupled with the
constraints of personal computer usage, led to a focus upon an exhaustive
simulation of the trading of a single highly volatile mutual fund (44 Wall
Street) money market fund pair, followed by a more restrictive test of a
second fund (Janus/Money Market fund pair). These mutual fund data were
carefully selected and processed on an Apple II computer. A further
precautionary step was to establish criteria and statistical tests in
advance for evaluating the comparisons.
A reader wishing to study the research methodology more closely or anyone
who wishes to replicate this study is invited to refer to the original
dissertation entitled "Stock Market Transaction Timing: AnEmpirical Eval-
uation" (Golden Gate University, 1983).

Test Results: Ex Post Determination of Trading

Strategy Parameters, Using the 44 Wall Street Fund

A total of eighteen twelve-month test subperiods and one six-month

subperiod were used to test the two trading strategies (ESMA and T/CT)
selected in the phase l/2 test. The test subperiods, the strategy para-
meters, and the investment performance of each strategy for each test
subpericd are given in Table 2. The best performing strategy in each test
period is marked with an asterisk. This strategy and its associated para-
meters were used in the ex ante tests on contiguous twelve-month test
periods, as described in the following paragraph.

41
m Journal/E&nX=y 1986
 TABLE2

EX POST DEX'ElWINATIONOF TRADING STRAm

PV:44wALlL SrzzEFTFuND

Test Subpericd Trading

Strategy Strategy
ID# Dates NElIlE Parameters Perform ("a)

A1A Ju1'69-Dec'69 ESMA .03 / 1.7 / .Ol -7.80

*T/CT .03 /.245 / .04 2.45
Al Ju1'69-Jun'70 ESMA .03 / 1.7 / l Ol -11.08
*T/CT .07 /.275 / .05 -3.47
A2 Jan-tkc '70 "ESMA .03 / 1.6 / .07 88.74
T/a .04 /.165 / .04 74.35
A3 Jan-Dee '71 *EsMA .03 / 1.5 / .07 47.26
T/@ .03/ .09 / .05 55.63

A4 Ju1'71-Jun'72 FSMA .05 / .9 / .09 48.65

"T/CT .07 /.09 / .03 61.60
A5 Jan-Dee '72 ESMA .05 / 1.5 /.09 5.88
*T/CT .03 /.15 / .02 4.83
A6 Jan-Dee '73 ESMA .07 / 1.7 /.Ol 33.27
"T/CT .07 /.245 /.05 38.83
A7 Ju1'73-Jun'74 "ESMA .05 / .7 / .07 30.00
T/m .07 /.18 / .05 24.32
A8 Jan-Dee '74 *E&IA .04 /1.2 / .06 3.81
T/m .09 /.125/ .03 3.76
A9 Jan-Dee '75 ESMA .03 / .7 / .08 108.51
"T/CT .08 /.135/ .03 114.51
A10 Ju1'75-Jun'76 ESMA .05 / l.l/ .08 37.11
*T/CT .03 /.135 /.03 39.62
All Jan-Dee '76 *EsMA .06 / 1.7 /.Ol 22.56
T/CT .02 /.135 /.04 20.56
Al2 Jan-Dee '77 ES .02 / 1.5 /.08 6.78
*T/ 3 .25 /.105/ .07 7.47
A13 Ju1'77-Jun'78 *EsMA .06 / 1.7 /.Ol 37.73
T/m .25 /.105 /.06 27.39
Al4 Jan-Dec'78 ESMA .03 / .9 /.07 59.55
*T/CT .60 /.105 /.07 78.48
Al5 Jan-Dec'79 ESMA .02 / 1.1 /.Ol 42.96
"T/CT .25 /.105 /.08 41.31
Al6 Ju1'79-Jun'80 .05 / 1.0 /.07 44.28
*T/CT .40 / .12 /.04 57.74
A17 Jan-Dec'80 ESMA .05 / 1.1 /.07 66.96
*T/CT .40 /.105 /.04 67.14
Al8 Jan-Dec'81 ESMA .04 / 1.0 /.06 11.54
*T/Cl? .40 / .21 /.05 24.10
A19 Ju1'81-Jun'82 ESMA .lO / 1.7 /.Ol 2.06

42
~!I24 Jourrd/February 1986
 TABLE 2, mnt'd.

EX POST DEIERMINATION OF TRADING STRATEGY

PV: 44wALL.ziTFamFLJND

Test Subperiod
Trading
Strategy Strategy
ID# Dates NZU-IX? Parameters Perform (%)
A20 Jan-Dec'82 *ESMA .06 / .7 /.09 72.46
T/m .30 / .x05/ .05 60.56

aT/CT is not selected because the number of transactions is

excessive. This is caused by the low value of parameter #2
and provides a warning that the lower-limit value should be
increased.
bA modification was made to the T/CT decision rules to
reduce whipsaws during oversold markets conditions. This
was done by optimizing the moving average smoothing factor
used in the detection of price maximums and minimums.
*Best performing strategy.

Test Results: Ex Ante Simulated Trading Performance, Using

the 44 Wall Street Fund
The results of the ex ante trading simulations using twelve-month test
subperiods are shown in Tables 3. Table 3 shows that one of the major
benefits from transaction timing is obtained by avoiding the price declines
that occur during bear markets (see 1973,1974, and 1981). The following
observations can be made from the results in Table 3.
1. A transaction timing strategy is generally superior to a buy-
and-hold policy during long-term price downtrends (bear market years such
as 1973, 1974 and 1981) and during the early stages of a long-term price
uptrend (bull market years such as 1970 and 1982).
2. During bull market periods, a buy-and-hold policy is
generally superior totransactiontiming (see1975, 1976, 1977, 1979 and
1980). Bull market corrections commonly occur with an initial sharp drop
and are eventually reversed by a sudden uptrend. Technical analysts
generally agree with the random walk theorists .that short-term price
movements are essentially random. By the time the trader reacts to sudden
changes in price, a substantial portion of the loss/gain has often been
made.

43
m Joumal/Ekbruary 1986
 TABLE3
SIMULA~ TRADINGPERFORMANCEUSINGA?WELVE-MONTH
EX POST OPTIMIZATION IN'lXRVAL AND A TWELVFrMONTH
EXANIETESTSUE3PEXIOD: 44WALLS~FUND

Test Annual Performance (%)

Subperiod
Assoc. Buy
Strategy Ex Post Ex Ante Ex Post and
ID # Year Name Subperiod Trading Trading Hold

A2 1970 T/m AlA 69.65 74.35 14.84

A3 1971 ESMA A2 41.38 47.26 57.95
A5 1972 ESMA A3 -.49 4.83 -12.30
A6 1973 T/m A5 37.84 38.83 -38.72
A8 1974 T/m A6 -14.86 3.76 -56.85
A9 1975 FSMA A8 103.10 108.51 106.63
All 1976 T/m A9 9.17 20.56 15.38
Al2 1977 ESMA 'All -6.54 6.78 13.27
A14 1978 T/m A12 73.30 78.48 43.34
Al5 1979 T/a Al4 25.53 41.31 49.93
Al7 1980 T/e Al5 25.59 67.14 32.92
=a 1981 T/m Al7 6.69 24.10 -16.58
A20 1982 T/m =a 46.27 60.56 la.40

aThe large discrepancy between the ex ante and ex post

performances could be reduced by performing ex post optimi-
zation runs more frequently than once a year.

44
Test Results : Ex Ante Simulated Trading Performance,
Usina the Janus Fund
The ex post and ex ante performance results using the Janus Fund are given
in Tables 4 and 5, respectively. As anticipated, a fund such as Janus with
limited volatility is not a suitable candidate for trading. Table 5 shows
that the buy-and-hold policy produced superior returns in two of the four
years. By inspection, the best strategy would have been to follow a buy-
and-hold policy except during the 1973-74 bear market.

EXPOSTDFX!EXMINATIONOF TRADING STFWIEGY

PV: JANUSFUND

Test Subperiod Trading

Strategy Strategy
ID# Dates NiXIT Parameters Perform (%)

Al Jan-Dee '71 Esm .02/ .9 /.04 33.86

T/m .06/.045/.03 40.36

A2 Jan-Dee '72 ESMA .03/ 1.2/.06 23.12

T/CT .03/.185/.03 22.02

A3 Jan-Dee '73 FSMA .057/1.55/.09 .62

T/CT .07/ .08/.02 5.23

A4 Jan-Dee '74 ESMA .l/ 1.5/.09 -1.62

T/m .08/ .22/.03 -2.36

45
MI'24 Joumal/Febmary 1986
 Tzmx5

SIMULATHD TRADING PERFORMANCE USING A TWELVE-I0?I'H

M POST OPTIMIZATION INTERVAL AND A 'IWHLVE-
MONI'HMAN'IETESTSUBPERIOD: JANDSFUND

Test Performance (05)

Subperiod
Assoc. BUY
Strategy Ex Post Ex Ante ExPost and
ID# Year Name Subperiod Trading Trading Hold

A2 1972 T/a Al 18.65 22.02 21.99

A3 1973 T/m A2 -2.48 5.23 -12.63

A4 1974 T/m A3 -4.10 -2.36 -10.77

A5 1975 ESMA A4 -4.70 - 12.18

-
Test Results: Evaluation of a Buy-and-Hold Policy in
Bull Markets and Holding Gash During Bear Markets
The investment approach of buy-and-hold in bull markets and holding cash in
bear markets using the twenty top-performing aggressive growth funds during
the 1971-80 period is summarized in Table 6. The returns using.this ap-
proach as compared to buy-and-hold are impressive and range from 135
percent for the nonvolatile Janus Fund to 450 percent for the highly
volatile 44 Wall Street Fund.

46
PfRi Jourd./Febm 1986
 BUY-AND-HOID PERFORMANCEOFTHETWENTYTOP-PERFORMINGFUNDS
DURING 1971-80 IN A TAX-SHELTRREDRNVIRONMEXI'AND
HOLDING CASH DURING THE 1973-74 BEAR MARKE!T

Percentage Change in NAV per Share with

Aggressive Distribution Added Back for 1971-80 Perioda
Growth
No-Ioad Buy-and-Hold Buy-and-Hold Percentage ~
Funds Policy Policy; Cash Improvementb
Held During Over Buy-and
1973-74 Hold Policy
Twentieth Century
Growth 935 1627 174
44 Wall Street 518 2331 450
Janus 390 526 135
Weingarten Quity 379 808 213
Hartwell Leverage 378 662 175
Acorn 347 689 199
Stein Roe Special 321 680 212
Constellation Growth 312 568 182
ma 292 514. 176
Sequoia 279 498 178
Founders Special 264 462 175
Nicholas 259 1037 400
Afuture 257 792 308
Mathers 257 674 262
St. Paul Special 251 460 183
Naess and Thomas 241 422 175
Rxplorer 235 594 253
Hartwell Growth 234 587 251
Columbia Growth 210 433 206
Lexington Growth 209 602 288
Average 328 748 228'

aThese figures give an approximation of the funds'

relative volatility. Note that 44 Wall Street and
Janus have the highest and lowest figures respectively.
bEven if round-trip transaction costs and taxes on
long-term capital gains are included, the return is
still superior to a buy-and-hold policy. Refer to
Table 9, which shows a 299 percent improvement over a
buy-and-hold policy when taxes and transaction costs
are included and the equity position is liquidated at
the end ,of the period.

47
IWA Journal/February 1986
 Significance Tests on Selected Trading Simulations
Significance tests were performed on selected trading simulations as follows:
Buy-and-hold versus transaction timing for the period 1970-82
(see Table';).
2. Buy-and-hold versus limited transaction timing using the
twenty top-performing funds for the 1971-80 period (see Table 8).
Statistically significant results were obtained in both cases, meaning that
the null hypothesis that a buy-and-hold policy is superior to transaction
timing during the test periods must be rejected. It should be noted that
statistical conclusions cannot be drawn about the performance of
transaction timing versus buy-and-hold during time periods not included in
the tests.

SIGNIFICANCE TEST RESULTSFOR COMPARINGA BUY-AND-HOLD

POLICY AND A TRANSACTIONTIMING STRATEGY:
44 WALL S- FUND DURING 1970-82

Test Annual Return

Subpericd Difference
Buy and Transaction Between
ID# Year Hold Timing Returns
P(bh) p (W W
A2 1970 .1484 .6965 -.5481
A3 1971 .5795 .4138 .1657
A5 1972 -.1230 -.0049 -.1279
A6 1973 -.3872 .3784 -.7656
A8 1974 -.5685 -.1486 -.4199
A9 1975 1.0663 1.0310 .0353
All 1976 .1538 .0917 .0621
Al2 1977 .1327 -.0654 .1981
Al4 1978 .4334 .7330 -.2996

A15 1979 .4993 .2553 .2440

Al7 1980 .3292 .2559 .0733

48
M.I'A Journal/E'&ruary 1986
 'mFm?a 7, ccmt'd.

Test Annual Return

Subperiod Difference
Buy and Transaction Between
ID# Year Hold Timing Returns
p (bh) p (W (d)
A18 1981 -.1658 .0669 -.1327
A20 1982 -.2787

Mean Value
Variance .089
Standard Deviation .298
t-Statistic -1.670

49
m Jou.rrd/Febnx=y 1986
 SIGNIFICANCE TEST RESULTS FOR WARING A BUY-AND-HOLD POLICY
AND A LIMITED TRANSACTION TIMING STRATEGY: THE TOP
TWENTYBEST-PERFORMING FUNDS DURING 1971-80

Change in NAV per Share with

Aggressive Distribution Added Back for 1971-80 Period
Growth
No-Load Buy-and-Hold Buy-and-Hold Difference
Funds Policy Policy; Cash Between
Held During Returns

Twentieth Century
Growth 9.35 16.27 -6.92
44 Wall Street 5.18 23.31 -18.13
Janus 3.90 5.26 -1.36
Weingarten Equity 3.79 8.08 -4.29
Hartwell Leverage 3.78 6.62 -2.84
Acorn 3.47 6.89 -3.42
Stein Roe Special 3.21 6.80 -3.59
Constellation Growth 3.12 5.68 -2.56
Q=ga 2.92 5.14 -2.22
Sequoia 2.79 4.98 -2.19
Founders Special 2.64 4.62 -1.98
Nicholas 2.59 10.37 -7.78
Afuture 2.57 7.92 -5.35
Mathers 2.57 6.74 -4.17
St. Paul Special 2.51 4.60 -2.09
Naess and Thorns 2.41 4.22 -1.81
Explorer 2.35 5.94 -3.59
Hartwell Growth 2.34 5.87 -3.53
Columbia Growth 2.10 4.33 -2.23
Lexington Growth 2.09 6.02 -3.93

Mean -4.12
Variance 12.85

Standard Deviation 3.59

t-Statistic -5.13

50
MA Joumal/Febm 1986
Comparative Performance of Alternative Investment Strategies

Based on the data presented in Table 3, the performance of alternative

strategies in different investment environments can now be compared. The
following strategies were used:
1. Buy-and-hold policy.
2. Buy-and-hold policy except during bear markets when all equity
holdings are liquidated to cash or equivalents.
3. Buy-and-hold policy during bull markets and transaction
timing during bear markets.
4. Unrestricted transaction timing.
The following investment environments were assumed:
1. Investment vehicles with no transaction costs (e.g., no-load
mutual funds) in a tax-sheltered environment (e.g., pension plans).
2. Investment vehicles with rx> transaction costs in a non-tax-
sheltered environment.
3. Investment vehicles with transaction costs (e.g., common
stocks, options , stock index futures, commodities, etc.) in a tax-sheltered
environment.
4. Investment vehicles with transaction costs in a non-tax-
sheltered environment.
Table 9 summarizes the returns of each strategy/environment combination and
indicates that unrestricted transaction timing is the most profitable
strategy with no-load mutual funds in a tax-sheltered-environment, while
restricted transaction timing (buy-and-hold during bull markets and trans-
action timing during bear markets) is the most profitable strategy in the
other three environments.

51
m.zi Journal/February 1986
 COMPARATIVEPERFORMANCEOFINVFSTI%NTSTRAT%IESIN
DIFFEREETINWSTMEWENVIRONMEME: 44WALLSTREETFUND

Performance Improvement Over the 1970-82

Period in Different Investment Environments(

Tax-Sheltered Non-Tax-Sheltered

Investment Transaction Costs Transaction Costs

Strategy
No Yes No Yes

Buy-and-hold 294 291 276 274

Restricted trans-
action timing
(buy-and-hold 1086 1157 927 820
during bull mar-
kets; hold cash (369)b (398) (336) (299)
during bear
markets 173-741

Restricted trans-
action timing
(buy-and-hold 1189 1062 1065 799
during bull mar-
kets; transaction (404) (365) (386) (284)
timing during
bear markets s ~
[73-741

Unrestricted
transaction
timing between a 2190 762 537 273
long position in
equities and (745) (262) (195) (100)
cashC

aOnly eleven months of every year were used in the

simulated trading tests. The results presented here
cannot be compared to the results in Table 6.

bperformance.improvement compared to buy-and-hold.

'If short selling is possible (e.g., with stocks,

futures, etc.), the performance improvement is poten-
tially greater.

52
MllA Journal/E'ebrua.ry 1986
 CONCLUSIONS AND RECOMMENUATIONS

The findings of this research study led to the rejection of the null
hypothesis that transaction timing is no better than a buy-and-hold
strategy. Hence, the conclusion is drawn that a buy-and-hold policy can be
beaten using a transaction timing strategy based on technical analysis.
Furthermore, the empirical test results do not support the random walk
hypothesis.

It is remembered that technical analysis considers the action of the market

only and is not based on any economic theory. The empirical evidence
presented herein and elsewhere shows that quantitative technical analysis
is a viable technique. Because quantitative technical analysis is based on
time series analysis and not on the economic laws that explain price
movements, the trader must periodically subject his trading system to a
testing regime that will permit his system to profitably mimic the unknown
economic laws.

This dissertation was based on the premise that better than average returns
can be obtained by the few investors who pursue a disciplined and rational
approach to stock market investment. The following general recommendations
can be offered to investors interested in transaction timing.

1. Trend following systems that are based on a single parameter

moving average should use a smoothing factor value in the 0.01 - 0.04 range
to minimize trading whipsaws.

2. Investors should' not maintain any long equity positions

during bear markets.

3. .If the investment environment is restricted to the

consideration of transaction costs and the tax sheltering of transactions,
then four combinations emerge as shown in Table 10. Based on the study
results, four investment strategies are rated for profitability in each of
the four environments. As indicated in Table 10, the strategies are ar-
ranged in order of increasing complexity. A buy-and-hold policy is the
simplest strategy because it involves only two timing decisions: when to
invest in the market and when to liquidate market assets. On the other end
of the spectrum, unrestricted transaction timing requires the trader's
constant attention in order to achieve superior returns. For this reason,
the average investor should probably pursue a strategy of investing long
during bull markets and holding cash or equivalents during bear markets.
Investors who are willing to devote above average time to their investment
portfolio should consider transaction timing during the final stages of a
bear market so as to participate in the initialuptrend of the eventual
bull market, a period that typically yields extraordinary returns.
Finally, unrestricted transaction timing is recommended for the serious
investor, but only for tax-sheltered, transaction-free investment vehicles.

4. Trading strategies that are designed to detect and profit

from short-term market swings (say 10 percent) should be periodically

53
m Journal/February 1986
optimized for adaption to the current market climate.
5. The main disadvantage of using only historical price data in
a trading strategy is that such a strategy is constrained to following
rather than explaining price behavior.
The increasing use of personal computers should encourage a wide
variety of research into transaction timing techniques. In particular, the
use of technical indicators with a proven forecasting record (e.g., The Odd
Lot Short-Sales Ratio) coupled with more sophisticated trading strategies
(e.g., expert system-based), has potentialforimprovingtradingperfor-
mance.

54
Ml7i JournalDeb- 1986
 -ED TRADING STRATEGIES IN DIFFERENT
INWSMEXWENVIRO~~S

Investment Investment Rnvironmnts

Strategy
(arranged in Tax-Sheltered Non-Tax-Sheltered
order of
increasing Transaction Costs Transaction Costs
complexity)
No Yes No Yes

Buy-and-hold No No No No
Restricted trans-
action timing
(buy-and-hold Yes Yes Yes Yes
during bull mar-
kets; hold cash * *** ** ***
during bear
markets
Restricted trans-
:.. action timing .
(buy-and-hold Yes Yes Yes Yes
during bull mar- ** *** *** ***
kets; transaction
timing during
bear markets
Unrestricted
transaction
timing between a Yes No No No
long position in ***
equities and
cash
Unrestricted
transaction
timing between Not tested in study
long and short
equity positions

m: *--Good; **--Better; ***--Rest.

55
PfR4 Journal/February 1986
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HI'A Journal/E'ebruary 1986
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58
MA Journal/E'ebruary 1986
Swerdlow, Skip. "The Profitability of Technical Common Stock Trading
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Newsletters, Investment Services,

and Other Sources
Commodity System Reports. Santa Clara, Calif. Published monthly.
Computrac. The Technical Analysis Group, New Orleans, La.
44 Wall Street Fund, Inc. Annual Report. June 30, 1982.
Growth Fund Guide. Yreka, Calif. Published monthly.
Janus E'und Record. Undated.
Market Log' . The Institute for Fconomic Research, Fort Lauderdale, Fla.
PubliiEed monthly.
No-Load Fund * X. DAL Investment Co., San Francisco, Calif. Published
monthly.
No-Load Fund Investor. Hastings-on-the-Hudson, N.Y. Published quarterly.
Systems and Forecasts. Signalert Corporation, Great Neck, N.Y. Published
bi-weekly.
Telephone Switch Newsletter. Richard Fabian, Huntington Beach, Calif.
Published monthly.

Dr. Michael J. Flanagan is head of Flanagan Associates, Consulting Engineers,

Oakland, California.

59
K.L!AJouxmal/F&ruary 1986