MTAJOURNAL

Spring-Summer 1996 . Issue46

.i P1161icnti0,1of

MARKET TECHNICIANS ASSOCIATION, INC.

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 Market Technicians Association Journal
Table of Contents

MTA Journal Editor and Reviewers

MTA Member and Affiliate Information

Style Sheet for the Submission of MTA Journal Articles 5

Market Technicians Association Board of Directors 6

Putting It Altogether 7
Henry0. Pruden,Ph.D.,Editor

The Quantification Predicament 9

TimothyW.Hayes,CMT
The winner of the third Charles H. Dow A4ward,Hayes argues that technical market analysis research should be guided
by objectivity and accurac?. Following rigorous quantitative methods and knowing the pitfalls of various quantitative

1 approaches can strengthen the overall contribution of indicators while avoiding self-deception. Mr. Hares discussesthe
concerns of quantification. and such methods as trade-signal analysis, zone analysis, subsequent-performance analysis
and re\-erse-probabilit analyis.

Seasonal@ in Canadian Equity Prices 15

DonVialoux,CMT
This articles looks at the quantitative evidence in support of or in rejection of the well-knolvn assertion among equit!

2 marketing strategists in Canada: “Buy them when it snows.sell them when it goes.” Presumably Canadian stocks are
stronger between Sovember and March than at other times of the year. MIat does the evidence show? The thorough
analysis and discussion in this article mar give the reader an unequivocal answer.

Patterns of Seasonal Variation in Canadian Fixed-Income Markets 23

R. Alain Rivet

3 , Using detrended data of the Canadian fixed-income market, the hypothesis that there is no seasonal variation in price
behavior wastested. Data suggest the presence of seasonal-variation patterns in Canadian fixed-income markets. The
study of seasonal variation can provide trading strategies that can be tailored to long-term versusmidterm bonds.

35
The High-low Index as a Tool to Enhance Returns
Harold6. Parker,Jr., CMT
Mr. Parker obsen-ed that the 5Pweek high and low data on the AXE could provide valuable insight into the near- to
intermediate-term trend of the market, especial& if the signals were clear and objective. To ovel-come the subjectivitv of

4 most interpretations of the high-low index, Mr. Parker turned to the point and figure chart first employed by Abe
Cohen. Ifith modified decision rules, the Cohen point-and-figure method indicated that the high-low mdes can be
very useful for timing equity entry and exit.

MTA JOU~AL/Spring-Summer 1996 i

 Answering the Bell of Sentiment Indicators 39
Brent L. Leonard
The purpose of this review paper is to list. explain, and ei-aluate se\-el-al well-known stock market Sentiment Indicators
over maw periods of time. These indicators include option put-call ratios. advisors letters, short interest. mutual fund
cash, and other contraq, against-the-cro1j.d statistics.

Using the Z-Trend Oscillator for Long-Term Bond Market Timing 49

Robert T. Zukowski, CM1
This article xas written for the purpose of long-term bond market timing through the use of a well-know1 equity market
indicator called the Coppock Curve. More specifically. it examines the concept of modif)-ing the culle for one simple
reason: to better identih- major tops and bottoms lvith a shorter lead time than the curve in its original format. \Yith
that in mind. Zukowki calls the modified version of the Coppock Curve the Z-Trend Oscillator because of what it can
do. Most oscillators were specificalh- designed for trading period consolidation. but the Z-Trend Oscillators were
specificall\. designed for trading all market conditions from accumulation. to trending, to distribution,

A Study in Volume and Price Alerts 57

David Bryan
That \‘olume precedes price is a well accepted market proposition. In this research studs Da\-id BiTan makes a further
refinement in volume-price studies by offering evidence that a sample ofjust one dal- of ksual volume can predict
subsequent price action. The author concludes that the predictive power of unusual I-olmne is strengthened bv the
addition of evidence of a sharp price movement.

2 MTA JOUR~~~/Spring-Summer 1996

 Market Technicians Association Journal
Spring - Summer 1996 . Issue 46

EDITOR
Henry 0. Pruden, Ph.D.
Golden Gnte I’uiueuit\;
Sun Fmrisco, Califomh

ASSOCIATE EDITOR
George A. Schade,Jr., CMT
Scottsdnle,A~izonn

Manuscript Reviewers

Connie Brown, CMT Don Dillistone, CFA, CHIT Michael J. Mood!; CUT
Ae~od~nnwzicInvestmentslm-. comom t Buy Dorsq, Tliight &+dssorintes
Gctilzesuille,Georgia ll’innej~eg,,I~lnnitoba Pusndenct,Cnliforaicc

Charles P. Kirkpatrick, III, CMT Richard C. Orr, Ph.D.

John A. Carder, ChlT Kirkfhck md Co~njm\; 111~. Chonos Corgorrrtiol2
Tofiline Gr@ics Exete);Ah Hm@h&e Lesiugton, i\kUSSUfll usetts
BOZlk/e,; co/omlo
John McGinle! David L. Upshaw, CFA, GRIT
Ann F. Cod! Tech~~iccd
Treds Lake QuiuircI, Kmsns
hest Finnnciul Co~porution Kilton, Cmuectirut
Tcqn, Flodcc
Robert I. Webb, Ph.D.
AssociateProfessorcod Paul TudorJonesII ResenrchFellow
,\lcl,ltire Schoolof Commerce,liiizwsity of \i’yiin
Clinrlottesuille,I’iq-inin

PUBLISHER
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MTA JO~:ILU;\L/Spring-Summer1996
 Market Technicians Association

Member and Affiliate Information

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a MTA JOURNAL/Spring-Summer 1996

 Style Sheet for the Submission of Articles

MTA Editorial Policy

The Market Technicians Associate Journal is published demic and practitioner) and libraries in the United
bv the Market Technicians Association, Inc., One States, Canada, Europe and several other countries.
\qorld Trade Center, Suite 4447, New York, NY 10048, The K’A Journal is copyrighted by the Market Tech-
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MA Journal is distributed to individuals (both aca-

Style for the MTA Journal

All papers submitted to the MTA Journal are re- the end of the article. Submission on disk is en-
quested to have the following items are prerequisites couraged by arrangement.
to consideration for publication:
4. Greek characters should be avoided in the
1. Short (one paragraph) biographical presenta- text and in all formulae.
tion for inclusion at the end of the accepted article
5. Two submission copies are necessary
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MTA JOURN.L/Spring-Summer 1996 5

 Market Technicians Association
Board of Directors, 1996-l 997
Officers & Administrator

PRESIDENT VICE PRESIDENT/SEMINAR SECRETARY

Philip Roth, ChIT
Dean\litter Relnolds
2 IVorld Trade Center, 63rd Fl.
NewYork, NI’ 10038
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VICE-PRESIDENT/LONG RANGE
Andrea Seumann
HSBCFuturesInc.
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LYYDOR Inr-estmentMgmt.
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ACCREDITATION IFTA LIAISON PLACEMENT

Margaret \'an Andel, CF=\.CMT Philip Erlanger. ChlT JamesBohan
Dal’inci Investments Phil Erlanger Research Merrill Lynch
43 \\‘aite Road P.O. Box 2680 \Yorld FinancialCenter. North Tower
Bosborough,1l.A Oli19 Acton, MA Oli20 NewYork, S‘I’ 10281-1319
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COMPUTER JOURNAL PROGRAMS
John Bollinger, CFA. GRIT Dr. Henn Pruden \Valter Burke, CMT
Bollinger Capital Management P.O. Box’1348 MC11Monel-\\‘atch
P.O. Box 33% Ross,CA 94957 1 ChaseManhattan Plaza.Si’th FL
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6 MTA JOURYAL/Spring-Summer1996
EDITOR’S COMMENTARY
Putting It Altogether
by Henry 0. Pruden, Ph.D., Editor
Philosophy, whether the thoughts of Kay1 Popper or any
one else, was not supposed to be a road map for making
monq in the real warld.
Ei for George Sores, philosophp would serve just that
purpose. In time, he would go jiiom the abstract to theprac-
tical; he would develop theories of knowledge, of how and
rub\‘ peo$e think in cerfnin ways, and from those theories he
wo;,ld spin new theories about the run! the financial mar-
kets functioned.
- Robert Slater, Soros: The Life, Times & TradinaSecrets of the
World’s Greatest Investor
Theolies are nets cast to catch what we call “the world;”
to rationalize, to explain, and to master it. 1l’e endeavor to
make the mesh everfiner and finer
- Karl R. Popper, The Loaic of Scientific Discovery
Over the past twenty Tears, students of technical analv-
sis have frequentl! asked me: “Now that I’ve learned all of
these various indicators, how do I put them altogether?”
Recently the same sort of question was posed to me by an
ardent yet frustrated student of technical analysis, a Mr.
!vl. 11. of New Jersey who called to ask: “M”nere dan I go to
learn how to put it altogether?” This man, it turned out,
had read man? books on technical analysis, studied charts,
acquired software and attended numerous seminars about
technical analysis indicators. Along the wav he had com-
piled a lengthy list of assorted technical ‘indicators he
wished to follow. But he had not learned these indicators
in an integrated manner; rather, he had learned them two,
by two, by two. That is, he picked them up bv studying
one predictor indicator and one dependent indicator at a
time (e.g., stochastics and the S&P 500). Mr. M. M. was
perplexed and frustrated because he lacked the tool/the
perspective for putting them altogether. He believed that
something, somewhere must exist that would show him
how to put all of the indicators together. He believed that
with them altogether he could extract more, and more
valuable, information from his analysis. He is still search-
ing for some method for putting all of his individual indi-
cators together into some meaningful whole.
Mr. 11. 51. remains perplexed and frustrated because
there is an absence of places to go to learn “how to put it
altogether,” and this is because there a lack of methods
and guiding principles that tell the analyst how to ... “put
them altogether.” M%at is missing is a thing that sytem-
atically meaningfully and exhaustivelv puts indicators to-
MTA JOURS;V/Spring-Summer
gether so that superior diagnosis and better prognosis
result. Mr. M. M’s frustration and perplexin points out a
large hole in the fabric of the technical anal!‘sis discipline.
To fill the apparent hole in technical analysis requires
a shift in perspective from part to the whole and a shift in
research/testing attention from the piece-meal creation
and testing of indicators to a more inclusive studv of the
combined contribution of several interacting indicators.
In brief, this means a shift of attention to conceptual
schemes, frameworks, models, systems or theories, all of
which are viewed as being svno&mous with a theoretical
model. In effect, filling the hole in technical analvsis in-
volves the creation and testing of theoretical models of
technical analysis.
Theoretical Model Building: The Component
Parts
“A theoretical model starts with things or vari-
ables, or (1) zr?lits whose interactions constitute the
subject matter of attention. The model then speci-
fies the manner in which these units interact with
other, or (2) the lnw of internctio?z among the units
of the model. Since theoretical models are gener-
ally of limited portions of the world, the limits or
(3) boundnties must be set forth within which the
theory is expected to hold. Most theoretical models
are presumed to represent a complex portion of the
real world, part of whose complexity is revealed by
the fact that there are various (4) slste,n stntes in each
of which the units interact differentlv with each
other. Once these four basic features of theoretical
model are set forth, the theorist is in a position to
derive conclusions that represent logical and true
deductions about the model in operation, or the (5)
~ro~ositiolzs of the model.
So far, we see only the theoretical side of the
theory research cycle. Should there be an)- desire
to determine whether the model does, in fact, rep-
resent the real world, then each term in each propo-
sition whose test is sought needs to be converted into
(6) on em/irical indicntor of the term. The next op-
eration is to substitute the appropriate empirical
indicators in the propositional statement to gener-
ate a testable (7) h?otlzesis. The research operation
consists of measurmg the values on the empirical
indicators of the hypothesis to determine Ivhether
the theoretically predicted values are achieved or ap-
proximated in the research test.”
1996 7
 Exhibit A: Some Correspondence Between Theoretical Model Building and Technical Analysis
Theoretical Model Technical Analysis

lSzit of nnnlyis The four main elements of price, volume, time and sentiment; reversal and continuation
patterns.

Lnua of Intemtion ~bhnle nnd pi@ vcrr~ together; selling climaws and Qclic loal points occur togethrr; uh~~n thy Dow
Jones mnlks alone, look out (dizlo-ge,lcepreredrs prick tend wversnls). Some sort of a statement
comiecting two or more Lmits of analysis, such as “if.... then”; ” vary (associated) together;”
or if “a” is present, then “b” should be present.

Boundnries Technical analysis within its boundaries include those variables that are technical (market
behavior). Fundamental analyses are outside of the boundary of technical analysis.
Monetary data are on the edge of the boundar!- of technical analysis.

System States The four phases or svstem states of accumulation, markup, distribution and markdolvn.

Propositions (1) at turning points, volume precedes price, (2) markets progress through the four
system states of accumulation, markup, distribution and markdown. (3) rising bullish
sentiment and rising prices go together.

H@otheses For the above propositions, insert the following empirical indicators: (1) Granville’s on-
balance volume and the Dow Jones Industrial Average. (2) trends and trading ranges, or
Dow Theory Lines, or the T\‘yckoff method. (3) Investor’s Intelligence “Bull-Bear”
numbers and the S&P 300.

-Robert Dubin. Theory Building observation of the technical world, or by deducing from a
Exhibit ;\ provides some correspondences between classic writing such as from the legendary Jesse Livermore
theoretical model building and technical market analvsis. in Reminiscences of a Stock Operator. in that book, the
chapters on “manipulation” by the stock market operator
Sources of Theoretical Models could easih- have given birth tb modern-day “on-balanced
volume.” &all!; in my view, the new schodl of behavioral
Building theoretical models that are logical, internall!
finance, which shares roots in psycholoE and sociolog!
coherent and consistent, and testable in the real world is
and ivith technical analysis, is a very promising source of
a challenging task. Thankfully the world of technical
conceptual schemes for “putting it altogether.”
market analysis is observable, time dependent, quantita-
tive and unambiguous, all of which help model building References/Bibliography
and testing. As for ideas, one can pursue the route fol-
Barnett, H. G., Innovation: The Basisof Cultural Change.
lowed by George Soros, who turned to first principles in
McGraw Hill, 1963
human behavior and the philosophy of science to logi-
cally develop theories which he then tested in the real D&in, Robert. Theory Building, revised edition, Sew
world. Or, one can follow the hint by the anthropologist York. The Free Press, 19i8
H. G. Barnett, rvho argued for borrowing and substitu- Gleick, James, Chaos: Making a Sew Science. Sew York,
tion. Barnett argued that the “new,” that cultural change, \Xing. 198’7
often comes about through borrowing a thing from one Lefev6, Edwin, Reminiscenses of a Stock Operator,
field and adapting to another. Thus the horse and bugg Burlington, IT, Fraser Publications
was transformed into the automobile b? becoming the
Popper, K. R.. The Logic of Scientific DiscoI-cry. Se\\-
“horseless carriage” as the internal combustion engine was York, Sciences Edition, 1961
substituted for the horse.
Instances of “model borrowing” from science and math- Slater. Robert, Soros: The Life. Times. 8- Trading Secrets
of the \\‘orld’s Greatest Investor. New York. Irwin. 1996
ematics applied to technical analysis occur from time to
time. General models in science have appeared during I\‘aldro, 11. Mitchell, Complesitx The Emerging Science
the past three decades. Technicians saw crrtastrophetheor! at the Edge of Order and Chaos, Sew York, Simon and
in the 70’s, chaos theory in the 80’s and now, perhaps, COM- Schuster, 1992
@it! theory in the 90’s. In addition, an analyst can de- Zeeman, E.C.. Catastrophe Theory; Reading, Mass.
rive theories of technical analysis from direct personal Addison I\esley 1977

MTA JOURXWSpring-Summer 1996

 The Quantification Predicament
Submitted by Timothy W. Hayes, CMT

“This indicator hns nkuqs produd huge profits! In fart, the record was based on just three cases, the results would
you u~oztlrlhme doubled your Mona in just six months!” lack statistical significance and predictive \-alue. In con-
Such a claim could be a sales-pitch. It could also be an trast, there would be few questions regarding the statisti-
analyst’s enthusiasm about some workjust completed. But cal ValidiN of results based on more than 30 observations.
in either case, such claims appear to be meeting increas- The third consideration is the benchmark, or the stan-
ing skepticism, perhaps because enough have proven to dard for comparison. The test of an indicator is not
be based more on fiction than quantifiable fact, perhaps whether it would have produced a profit, but whether the
because enough investors have been burned bv indicators profit would have been any better than a random ap-
that have failed to pa11 out lvhen put to real-time use, or proach, or no approach at all. \Yithout a benchmark, “ran-
perhaps because the combination of ever-strengthening dom walk” suspicions may haunt the results.’
computing power and ever-increasing program complex- The fourth general concern is the indicator’s robust-
itv has made excessive optimization as easier and more ness, or fitness - the consistence of the results of indica-
dangerous than ever. tors with similar formulas. If, for example, the analysis
In any case, the need to quantify accurately and thor- would lead to an indicator that used a 30-lveek moving
oughly is greater than ever. Honest and reliable quantifi- average to produce signals with an excellent hypothetical
cation methods, used in the correct wa!; are needed for track record, how different would the results be using
increased research credibility. The!- are needed to impart moving averages of 28,29,31, or 32 weeks? If the answer
objectivity. Thev are needed for effective analvsis and for was “dramaticallv worse”, then the indicator’s robustness
the somid backing of research findings. The alternative is would be thrown into question, raising the possibilitv that
the purely subjective approach that uses trendlines and the historical result was an exception to the rule rather
chart patterns alone, making no attempt to quantifv his- than a good example of the rule. A1n indicator can be
torical activity. But when the quantification process fails considered “fit” if various alterations of the formula would
to deliver, instead producing misleading messages, the produce similar results.
subjective approach is no worse an alternative - a mis- Sloreoyer, the non-robust indicator may be a symptom
guided quantification effort can be worse than none at of the fifth concern, the optimization process. In recent
all. The predicament, then, is how to trulv add value years, much has been \vritten about the dangers of exces-
through quantification. sii-e curve-fitting and o\-er-optimization, often the result
of miharnessed computing power. ;\s analytical programs
The Concerns have become increasingly complex and able to crunch
The major reason for quantif;\ing results is to assess the through an ever-expanding multitude of iterations, it has
reliabilitl\ and value of a current or potential indicator, become easy to over-optimize. The risk is that, armed with
and the major reason we have indicators is to help us in- numerous variables to test rvith minuscule increments, a
terpret the historical data. The more effective the inter- program may be able to pick out an impressive result that
pretation of historical market activity, the more accurate ma? in fact be attributable to little more than chance. The
the projection about a market’s future course. An indica- accuracy rate and gain per annum columns of Figure 1
tor can be a useful source of input for developing a mar- FlGtJRE
1
ket outlook if quantitative methods back its reliability.
SUMMARY RESULTS FRO41 HYPOTHETICAL INDICATOR TESTS
But for several reasons, quantification must be handled I
with care. The initial concern is the data used to develop These results contain an impresai\e-looking EXCEPTION to the rule
an indicator. If it’s inaccurate, incomplete, or subject to
revision, it can do more harm than good, issuing mislead-
ing messages about the market that’s wider analysis. The
data should be clean and should contain as much histor!
37 72 98 112 65 15.1
as possible. M”nen it comes to data, more is better - the 37 73 91 II3 52 10.1
greater the data history the more numerous the like oc- 36 11 96 1I.l 50 YX

currences, and the greater the number of market cycles These results would all be good ES-\hIPLES of the rule t..
mlder study. 50 10 I56 8.6 55 II s
This lea& to the second quantification concern, and -19 II I5 n Y-l 56 I?0
4s 22 IhO x.2 56 I’ I
that’s sample size. The data may be extensive and clean, Ai 2: I62 80 57 I? I
and the analvsis may yield an indicator that foretold the J6 24 16-l 7.8 56 I20
Bu?-Hold Gain/Annum 6.3
market’s direction with 100% accuracy. But if, for example,

MTA JOURXX/‘Spring-Summer 1996 9

compare results that include an impressive-looking indi-
cator that stands in isolation (top) with indicators that
look less impressive but have similar formulas (bottom).
One could have far more confidence using an indicator
from the latter group, even though none of them could
match the results using the impressive-looking indicator
from the top group.
MThat follows from these five concerns is the final gen-
eral concern of lvhether the indicator will hold up on a
real-time basis. One approach is to build the indicator
and then let it operate for a period of time as a real-time
test. At the end of the test period, its effectiveness would
be assessed. To increase the chances that it will hold up
on a real-time basis, the alternatives include out-of-sample-
testing and blind simulation. An out-of-sample approach
might, for example, require optimization over the first half
of the date range and then a real-time simulation over the
second half. The results from the two halves would then
be compared. X blind-simulation approach might include
optimization over one period followed by several tests of
the indicator over different periods.
Mlatever the approach, real-time results are likely to
be less impressive than the: were during an optimization
period. The reality of an! indicator developed through
optimization is that, as history never repeats itself exactly,
it is unlikely that any optimized indicator will do as well in
the real-time future. The indicator’s creator and user must
decide how much deterioration can be lived with, which
will help determine ivhether to keep the indicator or go
back to the drawing board.
Trade-Signal Analysis
\Vith the general concerns in mind, the various quanti-
fication methods can be put to use. The first, and per-
haps most widely used, is the approach that relies on by
and sell signals, as shown in Figure 2.? M%en the indica-
tor meets the condition that it deems to be bullish for the
market in question, it flashes a buy signal, and that signal
remains in effect until the indicator meets the condition
that it deems to be bearish. X sell signal is then generated
and remains in effect until the next buy signal. Since a
MTA JOURS,~/Spring-Summer
buy signal is always followed by a sell signal, and since a
sell signal is always followed by a buy signal, the approach
lends itself to quantification as though the indicator was a
trading system, with a long position assumed on a buy sig-
nal and closed out on a sell signal, at which point a short
position would be held until the next buv signal.
The method’s greatest benefit is that it clearly reveals
the indicator’s accuracy rate, a statistic that’s appealing
for its simplicity - all else being equal, an indicator that
had generated hypothetical profits on 30 of 30 trades
would be more appealing than an indicator that had pro-
duced hypothetical profits on 15 of 40 trades. ;Uso, the
simulated trading system can be used for comparing a
number of other statistics, such as the hypothetical per
annum return that would have been produced bp using
the indicator. The per annum return can then be com-
pared to the gain per annum of the benchmark index.
But the method’s greatest benefit may also be its big-
gest drawback. No single indicator should ever be used as
a mechanical trading svstem - as stated earlier, indica-
tors should instead be used as tools for interpreting mar-
ket activity. Yet, the hypothetical and actual can be easil)
confused. Although the signal-based method specifies ho\\
a market has done between the periods from one signal
to the next, they are not actual records of real-time trad-
ing performance. If thev were, the results would ha\-e to
account for the transaction costs per trade, with a nega-
FIGURE 3
tive effect on trading results. Figure 3 summarizes the
indicator’s hypothetical trade results before and after the
inclusion of a quarter-percent transaction cost, illustrat-
ing the impact that transaction costs can have on results.
The more numerous the signals, the greater the impact.
Also, as noted in the results, another concern is the
maximum drawdown, or the maximum loss betsveen an!
consecutive signals. But again, as long as it is clear that
the indicator is for perspective and not for dictating pre-
cise trading actions, indicators with trading signals can
provide useful input when determining good periods for
entering and exiting the market in question.
1996

Zone Analysis
In contrast to indicators based on trading signals, indi-
cators based on zone analysis leave little room for doubt
about their purpose - th& don’t even hare by and sell
signals. Rather, zone analysis recognizes black, white and
one or more shades of gray It quantifies the market’s
performance with the indicator in various zones, which
can be given such labels as “bullish”, “bearish” or “neu-
tral,” depending upon the market’s per annum perfor-
mance during all of the periods in each zone. Each pe-
riod in a zone spans from the first time the indicator en-
ters the zone to the next observation outside of the zone.
Unlike the signal-based approach, the indicator can move
from a bullish zone to a neutral zone and back to a bullish
zone. An intervening move into a bearish zone is not re-
quired.
Zone analysis is therefore appealing for its ability to
provide useful perspective without a simulated trading y-s-
tem. The results simply indicate how the market has done
with the indicator in each zone. But this type of analysis
has land mines of its own. In determining the appropri-
ate levels, the most statistically-preferable approach would
be to identi$ the levels that would keep the indicator in
each zone for roughly an equal amount of time. In man)
cases, however, the greatest gains and losses will occur in
extreme zones visited for a small percentage of time, which
can be problematic for several reasons:
1) if the time spent in the zone is less than a year, the
per annum gain can present an inflated picture of perfor-
mance;
2) if the small amount of time meant that the indicator
made only one sortie into the zone, or even a few, the lack
of observations would lend suspicion to the indicator’s
future reliability;
3) the indicator’s usefLllness must be questioned if it’s
-1
n:
MTA JOURS;\L/Spring-Summer
neutral for the vast majority of time.
A good compromise between optimal hypothetical re-
turns and statistical relevance would be an indicator that
spends about 30% of its time in the high and low zones,
like the indicator in Figure 4. For an indicator with more
than four Tears of data, that would ensure at least a year’s
worth of time in the high and low zones and would make
a deficiencv of observations less likely. In effect, the time-
in-zone limit prevents excessive optimization bv exclud-
ing zone-level possibilities that would look the most im-
pressive based on per annum gain alone.
Another consideration is that in some cases, a closer
examination of the zone performance reveals that the
bullish-zone gains and bearish-zone losses occurred with
the indicator moving in particular directions. In those
cases, the bullish or bearish messages suggested by the
per annum results would be misleading for a good por-
tion of the time, as the market might actuall!- have had a
consistent tendency, for example, to fall after the
indicator’s first move into the bullish zone and to rise af-
ter its first move into the bearish zone.
It can therefore be useful to subdivide the zones into
rising-in-zone and falling-in-zone, which can ha-\e the
added benefit of making the information in the neutral
zone more useful. This requires definitions for “rising”
and “falling”. One way to define those terms is through
the indicator’s rate of change. In Figure 5, which applies
the approach to the primarT stock market model used b\
Ned Davis Research, the indicator is “rising” in the zone if
it’s higher than it was five lveeks ago and “falling” if it’s
lower. Again, the time spent in the zones and the number
of cases are foremost concerns when using this approach.
Alternatively, “rising” and “falling” can be defined us-
ing percentage reversals from extremes, in effect using
zones and trading signals to confirm one another. In Fig-
ure 6, for example, the CRB Index indicator is “rising”
and on a sell signal once the indicator has risen from a
trough, whereas it’s “falling” and on a buy signal after the
indicator has declined from a peak. Even though the re-
versal requirements resulted from optimization, the indi-
1996
 ited amount of time, after which they lose their relevance.
The results for a good buy-signal indicator are shown in
Figure 7, which lists market performance over several pe-
riods following signals produced by a 1.91 ratio of the lo-
day advance total to the IO-day decline total.
In its most basic form, the results might list performance
over the next five trading day, 10 trading days, etc., sum-
marizing those results with the average gain for each pe-
riod. However, the results can be misleading if several
other questions are not addressed. First of all, how is the
average determined? If the mean and the median are
close, as they are in Figure 7, then the mean is an accept-
able measure. But if the mean is skelced in one direction
by one or a few extreme observations, then the median is
usuallv preferable. In both cases, the more observations
the better.
Secondly, lchat’s the benchmark? lZhile the zone ap-
cator includes a few poorly-timed signals and lvould be
proach uses relative performance to quantif) results, trade-
risky to use on its own. But the signals could be used
to provide confirmation with the indicator in its bull- “tiUHt7
ish or bearish zone, in this case the same zones as those PERCEST CH-\MGE OF DOW INDISTRIALS
FOLLOWSG 1.91 R4TIO OF lo-DAY ADVASCES T O lo-DAY DECLIUES
used in Figure 4. For example, in late 19i2 and early
1973 the indicator would have been rising and in the
upper zone, a confirmed bearish message. The indi- 22 / 63 1 126 1 252
5.3 0 3 0.1 37
cator would then have peaked and started to lose up- 32 5.x 11.2 4.0 Oh
side momentum, generating a “falling” signal and los- 19 3.5 70 152 2s 4
.I 7 -1.4 10.0 9.Y I88
ing the confirmation. That signal would not be con- I I cl.3 83 IX2 Xl 4
firmed mitil the indicator’s subsequent drop into its -0.4 -3. I 06 lOi 31-I
-2.0 0 Y (I.0 I-1 0 21 5
lower zone. i 5 18 IO.3 173 ?I I
The chart’s box shows the negative hypothetical I I 2h 2.9 56 6.9
-1.8 -0.5 3.9 Ii5 I? Y
returns with the indicator on a sell signal while in the 17 .3 6 II I I-l I 5 0
upper zone, and on a buy signal \\.hile in the lower 3 5 62 I06 101 20 2
37 I30 10.9 37 ? 41 A
zone. In contrast to the rate-of-change approach to 66 83 12.7 I I .: IO Y
subdividing zones, this method fails to address the 36 3Y I-l.6 23 6 34 0
-0.‘) 24 6.7 139 24 6
market action with the indicator in the middle zone. ‘1
_. I-I 0.4 7.6 10 I
But it does illustrate how zone analysis can be used in 63 7.3 I07 23 I -5.4
is 69 6.1 78 16.’
conjunction with trade-signal analysis to gauge the
strength of an indicator’s message.

Subsequent-Performance Analysis
In addition to using signals and zones, results can
be quantified by gauging market performance over
various periods following a specified condition. In c:on-
trast to the trade-signal and zone-based quantification
methods, a system based on subsequent performance cal-
culates market performance after different specified time
periods have elapsed. Once the longest of the time peri-
ods passes, the quantification process becomes inactive,
remaining dormant until the indicator generates a new
signal. In contrast, the other two approaches are alwars
active, calculating market performance with every data
update.
The subsequent-performance approach is thus appli-
cable to indicators that are more useful for providing in-
dications about one side of a market, indicating market
advances or market declines. Ahd it’s especially useful
for indicators with signals that are most effective for a lim-
signal analysis includes a comparison of per annum gains
with the buy-hold statistic. LikeFvise, the subsequent-per-
formance approach can use an all-period gain statistic as
a benchmark. In Figure 7, for instance, the average lo-
da!- gain in the Dow Industrials has been 2% follo\+.ing a
signal, nearly seven times the 0.370 mean gain for all lo-
day periods. This indicates that the market has tended to
perform better than normal follov+ig signals. That could
not be said if the lo-da! gain was 0.4% following signals.
AAthird question is how much risk has there been fol-
lowing a buy-signal system. or reward following a sell-sig-
nal system? Using a buv-signal svstem as an example. one
\cay to address the question would be to list the percent-
age of cases in lshich the market was higher over the sub-
sequent period, and to then compare that with the per-

12 MTA JOURNr\L,/Spring-Summer 1996

centage of cases in which the market was higher over an;
period of the same length. Again using the IO-da! span
in Figure 7 as an example, the market has been higher
after 75% of the signals, yet the market has been up in
only 3% of all 1Odav periods, supporting the significance
of signals. Additional risk information could be provided
by determining the average drawdown per signal - i.e.,
the mean maximum loss from high to low following sig-
nals. The mean for the lo-day period, for example, was a
maximum loss of 0.7% per signal, suggesting that at some
point during the lo-day span, a decline of 0.7%’ could be
considered normal. The opposite approaches could be
used with sell-signal indicators, with the results reflecting
the chances for the market to follow sell signals by rising,
and to what extent.
Along with those questions, the potential for double-
counting must be recognized. If, for example, a signal is must reach its highest level in a >;ear, and the joint high
generated in January and a second signal is generated in must be the first in a year. The significance for the sari-
February, the four-month performance follo\ving the Janu- ous indices can then be compared in conjunction with
ary signal would be the same as the three-month perfor- their benchmarks - i.e., the various all-period gains. Fig-
mance following the February signal. This raises the ques- ure 9 uses 12 of those indices to show how subsequent
FIGURE 8
performance analysis for both buy signals anb sell
signals can be used together in an indicator. For each
time span, the chart’s box lists the market’s perfor-
mance after buy signals, after sell signals, and for all
periods.

Reversal-Probability Analysis
Finally the subsequent performance approach is
useful for assessing the chances of a market reversal.
In Figure 10, the “signal” is the market’s year-to-year
change at the end of the year, with the siglials (years)
categorized by the amount of change - )-ears with
anr- amount of change, those with gains of more than
S%, etc. In this case, the subsequent-perforcance
analvsis is limited to the year after the various one-
‘,dV. I< 11, % /I, ,/,I* il,l,’ id,,i , p<i‘ml r,l,,ll,di 1 (1-I YO year gains. But the analysis takes an additional step
m assessing the chances for a bull market peak tvithin
tion of lvhether the three-month return reflects the im- the one- and nvo-year periods after the years with market
pact of the first signal or the second one. Moreover, such gains, or a bear market bottom Athin the one- and two-
signal clusters give heavier tveight to particular periods of year periods after the years Gth market declines.
market performance, making the summar? statistics more
difficult to interpret. Problems related to double-count-
ing can be reduced or eliminated bv adding a time re-
quirement. For the signals in Figure’ 7, for instance, the
condition must be met for the first time in .30 davs - if
the ratio reaches 1.92, drops to 1.90, and then returns to
1.92 two days later, only the first day will have a signal.
The time requirement eliminates the potential for double-
counting in anv of the periods of less than 30 davs, though
the longer peiiods still contain some overlap in this ex-
ample.
Another application of subsequent-performance analy
sis is shown in Figure 8, which is not prone to any double-
counting. The signals require that three conditions are
met, all for the first time in a given year - the Dow Indus-
trials much reach its highest level in a year, another index

MTA JOURS;\L/Spring-Summer 1996 13

 This analysis requires the use of tops and bottoms iden-
tified with objective criteria for bull and bear markets in
the Dow Industrials. The reversal dates show that starting
with 1900, there have been 30 bull market peaks and 30
bear market bottoms, with no more than a single peak
and a single trough in any year. This means that for anr
given year until 1995, there was a 31% chance for the yea;-
to contain a bull market peak and a 31% chance for the
year to contain a bear market bottom (30 years with rever-
sals / 95 years).
Using this percentage as a benchmark, it can then be
determined whether there’s been a significant increase
in the chances for a peak or trough in the year after a
one-year gain or loss of at least a certain amount. The
chart’s boxes show the peak chances following up years
and the trough chances following down years, dividing
the number of cases by the number of peaks or troughs.
For example, prior to 1995, there had been 31 years with
gains in excess of 15% startingwith 1899. After those Tears,
there was a 52% chance for a bull market peak in the sub-
sequent year (16 following-years with peaks / 31 years with
gains of more than 15%). The chances for a peak within
two years increased to 74%, which can be compared to
the benchmark chance for at least one peak in 61% of the
two-year periods (since several two-year periods contained
more than one top, this is not the exact double of the
chances for a peak in any given year).
A major difference in this analysis is that in contrast to
signals and zones, which depend upon the action of an
indicator, this approach depends entirely on time. Each
signal occurs after a fixed amount of time (one year), with
the signals classified by what they show (a gain of more
than 5%, etc.). Depending upon the classification, the
risk of a peak or trough can then be assessed.
Conclusion
Each one of these methods can help in the effort to
assess a market’s upside and downside potential, with the
method selected having a lot to do with the nature of the
indicator, the time frame, and the frequency of occur-
rences. The different analytical methods could be used
to confirm one another, the confirmation building as the
green lights appeared. An alternative would be a com-
mon-denominator approach in which several of the ap-
proaches would be applied to an indicator using a com-
mon parameter (i.e., a buy signal at 100). Although the
parameter would most likely be less than optimal for an)
of the individual methods, excessive optimization would
be held in check. But whatever approaches are used, it
needs to be stressed that each one of them has its own
means of deception. By better understanding the poten-
tial pitfalls of each approach, indicator development can
be enhanced, indicator attributes and drawbacks can be
better assessed, and the indicator messages can be better
interpreted.
The process of developing a market outlook must be
based entirely on research, not sales. The goal of research
14 MTA JOU~=1L/Spring-Summer1996
is to determine if something works. The goal of sales is to
show that it does work. Yet in market analysis, the lines
can blur if the analyst decides how the mark& is supposed
to perform, then sells himself on this view by focusing on11
on the evidence that supports it. M’hat’s \\‘orse is the pd-
tential to sell oneself on the value of an indicator by fo-
cusing only on those statistics that support one’s view, re-
gardless of their statistical validity. ;Is sholvn by the vari-
ous hazards associated with the methods described in this
paper, such self-deception is not difficult to do.
Our goals should be objectivity accuracy and thorough-
ness. Using a sound research approach, we can determine
the relative value of using any particular indicator in vari-
ous ways. And we can assess the indicator’s value and role
relative to all the other indicators analyzed and quanti-
fied in a similar way. The indicator spectrum can then
provide more useful input toward a research-based mar-
ket view.
1. Reference to Burton Malkiel’s A Random itTalk Down
\\Bll Street, which argues that stock prices move ran-
domly and thus can& be forecasted through technical
means.
2. The charts that accompany this paper were produced
with the Ned Davis Research computer program.
Timothy W. Hayes, CMT
Tim Hayes, CHIT, is the Senior Stock Market Xna-
lyst of Ned Davis Research, Inc., an institutional re-
search firm in Venice, FL. For the past 10 years, Tim
has been editor of NDR’s flagship publication, Stork
~UzrM Stmtegy, developing indicators, models and
studies for the equitv and international services. He
is also a regular author of the firm’s Institutional
Hotline and Chnrt of the Dy ,services. Tim holds the
Chartered Market Technician ((XT) designation,
and he is a member of the Market Technicians A$,so-
ciation. His research articles have appeared in the
LK’A Journal, TechnicalAnalyis of Stocksand Commodi-
tiesand other publications. His market commen-
tary has been featured by The Tlirll StreetJournal,
Barron ‘s, Investor’sDails, CNBC and others.
 Seasonality in CanadianEquity Prices
Submitted by Don Vialoux - CMT Program, level Ill
December 1994
Third Revision August 1995
2
Introduction EXHIBIT 2
“Buy them when it snows, sell them when it goes!” That’s Annual TSE 300 Composite Index Returns Using
the expression used by well known equity market strate- the End of November as a Base Date
gists in Canada. The expression refers to the strategy of Endof November Endof November Percent
buying Canadian stocks when the snow starts to fall in Year TSEC Year TSEC Change
November and taking profits when the snow melts in 1982 1838.31 1983 2540.96 t38.2
March. Canadian stocks tend to be stronger during this 1983 2540.89 1984 2368.54 - 6.8
period each year than at other times of the year. 1984 2368.54 1985 2857.18 t20.6
The evidence of seasonal strength provided by these 1985 2857.18 1986 3046.80 t 6.6
strategists has been mainly anecdotal. They point to sta- 1986 3046.80 1987 2978.34 - 2.3
tistics measuring the low point for the Toronto Stock Ex- 1987 2978.34 1988 3294.68 t-10.6
change 300 Composite Index (TSEC) in November to the 1988 3294.68 1989 3942.77 t19.7
high point in March of the following year. The statistics, 1989 3942.77 1990 3151.01 -20.1
when calculated this way, indeed show that the TSEC ex- 1990 3151.01 1991 3448.51 t 9.4
hibits strong seasonahty. As indicated in Exhibit 1, the 1991 3448.51 1992 3282.83 - 5.0
average return on investment (excluding dividends) dur- 1992 3282.83 1993 4180.21 t25.5
ing the twelve selected periods picked from November 1993 4180.21 1994 4093.41 - 2.1
1982 to November 1994 was an amazing 12.2%. In con- Totals 36,930.07 39J85.17
trast, as indicated in Exhibit 2, the average annual gain by Average + 6.1
the TSEC during the same 12-year period using the end Source: Toronto Stock Exchange Monthly Reuiew
of November as a base date each year was only 6.1%. The This anecdotal evidence may be impressive but is clearly
implication is that the investor can optimize his invest- flawed and statistically incorrect. It implies that the inves-
ment returns by purchasing Canadian stocks at their lows tor knows when the lows will be made in November and
in November and by going short when Canadian stocks the highs will be reached in March. As indicated later in
reach their highs in March. this report, the evidence also leads to a misleading strat-
egy. ‘Yet, the evidence suggests that a statistically correct
EXHIBIT 1 study might provide an interesting insight on the season-
TSEC Returns from the Lows in November to the ality of Canadian stock prices. This report uses a simple
Higbs In March statistical method (i.e. arithmetic or mean averages) to
November March Percent examine the seasonality of Canadian stock prices using
Low TSE 300 High TSE 300 Change the end of November and the end of March each year as a
1982 1790.72 1983 2170.09 t21.2 base. The period of examination was from the end of
1983 2360.27 1984 2436.23 t 3.2 November 1982 to the end of November 1994. In addi-
1984 2350.51 1985 2652.67 t12.9 tion, this report examines the fourteen industry subin-
1985 2995.83 1986 3057.02 t14.2 dexes that make up the TSEC to determine the industry
1986 2677.36 1987 3847.72 t28.4 groups that tend to outperform and underperform the
1987 2833.64 1988 3370.19 t18.9 TSEC during the November to March period. Next, the
1988 3197.97 1989 3652.84 t14.2 major factors causing seasonal strength during this period
1989 3902.91 1990 3774.18 - 3.3 are examined. Finally, the report looks at the employ-
1990 3060.55 1991 3598.05 t17.6 ment of investment strategies using the findings of this
1991 3430.68 1992 3588.77 t 4.6 report.
1992 3213.67 1993 3614.65 t12.5 The following study indicates that Canadian stock prices
1993 4160.15 1994 4609.93 t10.8 show seasonal strength from the end of November to the
Mean return (excluding dividends) +12.2 end of March. The Toronto Stock Exchange 300 Com-
Totals 35,974.26 40,372.34 posite Index wasexamined during the twelve periods from
Source: Toronto Stock Exchange Monthly Bulletin the end of November to the end of March starting in No-
vember 1982 and ending November 1994. The average

MTA JOURNAL/Spring-Summer 1996 15

 gain each year during this period (excluding dividends) Higher returns from the end of November to the end
was 6.4%. Gains were realized in ten of the twelve peri- of March are not a new phenomenon. They have existed
ods. since at least the start of taxation of capital gains in Canada
In contrast, the TSEC displayed in Exhibit 2 rose only in December 1971, as illustrated in the following table:
6.1% per year on average during the 1S-year period from
November 1982 to November 1994. In addition, the TSEC EXHIBIT 5
showed gains during only seven of the twelve years. Annual TSE 300 Composite Returns from the
End of November to the End of March
A Study of Seasonal Price Performance of from 1972 to 1994
the TSEC
Endof November Endof March Percent
Year TSEC Year TSEC Change
EXHIBIT 3 1972 1197.7 1973 1239.1 t 3.4
TSEC Returns from the 1973 1182.6 1974 1214.9 t 2.7
End of November to the End of March 1974 850.4 1975 989.6 t16.4
End of November End of March Percent 1975 980.8 1976 1054.1 t 7.5
Year TSEC Year TSEC Change 1976 920.2 1977 1022.1 tll.1
1982 1838.31 1983 2156.06 t17.3 1977 1017.5 1978 1063.3 t 4.5
1983 2540.89 1984 2382.10 - 6.2 1978 1269.8 1979 1466.4 t15.5
1984 2368.54 1985 2612.81 t10.3 1979 1699.6 1980 1797.6 t 5.8
1985 2857.18 1986 3047.26 t 6.7 1980 2402.2 1981 2333.1 - 2.9
1986 3046.80 1987 3739.47 t22.7 1981 2012.1 1982 1587.8 -22.1
1987 2978.34 1988 3313.79 t11.3 1982 1838.3 1983 2156.1 t17.3
1988 3294.68 1989 3578.22 t 8.6 1983 2540.9 1984 2382.1 - 6.2
1989 3942.77 1990 3639.54 - 7.7 1984 2368.5 1985 2612.8 t10.3
1990 3151.01 1991 3495.67 t10.9 1985 2857.2 1986 3047.3 t 6.7
1991 3448.51 1992 3412.14 t 1.1 1986 3046.8 1987 3739.5 t22.7
1992 3282.83 1993 3602.44 t 9.7 1987 2978.3 1988 3313.8 t11.3
1993 4180.21 1994 4329.62 t 3.6 1988 3294.7 1989 3578.2 t 8.6
Totals 36,930.07 39,309.12 + 6.4 1989 3942.8 1990 3639.5 - 7.7
Source: Toronto Stock Exchange Monthly Review 1990 3151.0 1991 3495.7 t10.9
1991 3448.5 1992 3412.1 t 1.1
Indeed, as the next table illustrates, investors who held 1992 3282.8 1993 3602.4 t 9.7
Canadian stocks during the past 12 periods from the end 1993 4180.2 1994 4329.6 t 3.6
of March to end of November lost money. Totals 50,462.g 53,077.l
Average + 5.2
EXHIBIT 4
Source: Toronto Stock ExchangeMonthly Review
Annual TSE 300 Composite Returns from the
End of March to the End of November Canadian stock prices from the end of November to
Endof March the end of March rose in 18 of 22 years. Average gain
Endof November Percent
Year TSEC Year TSEC Change during each of the 22 periods was 5.2%. Median gain
1983 2156.06 1983 2540.89 t17.9 (identified as the return for the end of November 1985 to
1984 2382.10 1984 2368.54 - 0.6 end of March 1986 period) was 6.7%.
1985 2612.81 1985 2857.18 t 9.4 In contrast, seasonal strength did not appear consis-
1986 3047.26 1986 3046.80 0.0 tently in the end of March to the end of November peri-
1987 3739.47 1987 2978.34 -20.4 ods during the past 22 years. As the next table illustrates,
1988 3313.79 1988 3294.68 - 0.6 Canadian stocks prices recorded an average gain of only
1989 3578.22 1989 3942.77 t10.2 0.5% during the 22 periods. They rose in only 7 of the 22
1990 3639.54 1990 3151.01 -13.4 periods. Median return (identified as the return for the
1991 3495.67 1991 3448.51 - 1.3 end of March to the end of November 1984 periods) was
1992 3412.14 1992 3282.83 - 3.8 -0.6%.
1993 3602.44 1993 4180.21 t16.0
1994 4329.62 1994 4093.41 - 5.5
Totals 39,309.12 39,185.17
Average - 0.3
Source: Toronto Stock Exchange Monthly Reuiew

16 MTA JOURIQL/Spring-Summer 1996

 EXHIBIT 6 EXHIBIT 7
Annual TSE 300 Composite Returns from the Sectoral Performance During the
End of March to the End of November November to March Period of
from 1973 to 1994 SeasonalStrength in the TSE 300 Composite Index
End of March End of November Percent Rank Industry Group Percent Change
Year TSEC Year TSEC Change 1 Paper and Forest Products 16.1
1973 1239.1 1973 1182.6 - 4.6 2 Management Companies/Conglomerates 12.2
1974 1214.9 1974 850.4 -30.0 3 Metals and Minerals 11.1
1975 989.6 1975 980.8 - 0.9 4 Communications and Media 9.8
1976 1054.1 1976 920.2 -12.7 5 Transportation 8.7
1977 1022.1 1977 1017.5 - 0.5 6 Industrial Products 8.6
1978 1063.3 1978 1269.8 t19.4 7 Consumer Products 5.6
1979 1466.4 1979 1699.6 t15.9 8 Merchandising 6.4
1980 1797.6 1980 2402.2 t33.6 TSE Composite Index 6.4
1981 2333.1 1981 2012.1 -13.8 9 Real Estate and Construction 5.7
1982 1587.8 1982 1838.3 t15.8 10 Oil and Gas 5.7
1983 2156.1 1983 2540.9 t17.9 11 Pipelines 3.3
12 Gold and Precious Metals 4.6
1984 2382.1 1984 2368.5 - 0.6
13 Financial Services 3.5
1985 2612.8 1985 2857.2 t 9.4
14 Utilities 1.8
1986 3047.3 1986 3046.8 - 0.0
1987 3739.5 1987 2978.3 -20.4 Source: Toronto Stock Exchange Monthly Review
1988 3313.8 1988 3294.7 - 0.6 The results show that economically sensitive stock
1989 3578.2 1989 3942.8 t10.2 groups such as paper and forest products, base metals,
1990 3639.5 1990 3151.0 -13.4 communications and transportation tend to outperform
1991 3495.7 1991 3448.5 - 1.3 the interest sensitive groups including pipelines, financial
1992 3412.1 1992 3282.8 - 3.8 services and utilities.
1993 3602.4 1993 4180.2 t16.0 Industry groups that recorded the greatest seasonal
1994 4329.6 1994 4093.4 - 5.5 strength from November to March also tended to exhibit
Totals 53,077.l 53,358.6 the greatest seasonal weakness from March to November.
Average t 0.5
Source: Toronto Stock ExchangeMonthly Reuiew EXHIBIT 8
In conclusion, investing in Canadian stocks during the Sectoral Performance During the
four-month period from the end of November to the end March to November Periods
of March provides a slightly higher return with only four Rank industry Group Percent Change
months of stock market risk than employing a buy/hold 1 Paper and Forest Products - 7.1
strategy with 12 months of stock market risk. Indeed, 2 Real Estate and Construction - 7.0
investing from the end of November to the end of March 3 Management Companies/Conglomerates - 4.9
avoids an eight month period of stock market risk when 4 Transportation - 4.8
Canadian stock prices tend to record little or no return. 5 Metals and Minerals - 3.0
Industrial Products - 2.6
Seasonal Strength in Industry Groups that Make ; Oil and Gas - 2.0
8 Merchandising - 1.6
Up the TSECS 9 Communications and Media - 1.1
Some industry groups exhibited more seasonal strength TSE Composite Index - 0.3
than others during the November to March period. A 10 Consumer Products t 1.3
similar analysis of the 14 industry subindexes that make 11 Pipelines t 1.5
up the TSEC was completed from the end of November 12 Financial Services t 2.6
1982 to the end of November 1994. Results of the analy- 13 Utilities t 3.5
sis were as follows: 14 Gold and Precious Metals t 3.6
Source: Toronto Stock Exchange Monthly Reuiew
Results show that holding economically-sensitive stock
groups from the end of March to the end of November is
an inferior strategy. Indeed, holding short positions in
industry groups such as Paper and Forest Products, Con-
glomerates, Transportation and Metals and Minerals can
be a profitable strategy.

MTA JOUKWL/Spring-Summer 1996 17

 Reasons For Seasonality Influences on Canadian equity prices occur indirectly
because of the close relationship between the Canadian
Seasonality occurs for at least three reasons: and American economies. They also occur directly
1) Seasonal strength in U.S. equity markets during the through inter-listed trading activity in stocks that make
end of November to end of March period has an influ- up the TSE 300 Composite Index. A study in October
ence on Canadian equity prices. As the following table 1994 indicated that 51 percent of the weighting of the
suggests, the S&P 500 Index from November, 1982 to TSE 300 Composite Index is based on securities inter-listed
November 1994 showed seasonal strength during the end on U.S. exchanges and 18.7 percent of the value of trad-
of November to end of March periods in U.S. equity mar- ing in TSE 300 Composite Index stocks occurred in U.S.
kets (although not as strong as seasonal strength in Cana- markets.
dian markets). From November 1982 to November 1994, 2) Although Canadian and American tax laws differ,
the S&P 500 index rose an average of 9.4% per year (ex- surges in money flows and investment decisions occur in
cluding dividends). During the twelve test periods, the Canada near year end for similar reasons that they occur
S&P 500 index rose an average of 6.9% (i.e., 73% of the in the United States. Stock prices tend to rebound later
move made the by S&P 500 occurred during one third of when selling for tax purposes has abated.
the year). 3) Contributions to individual retirement plans in
Canada, (known as Registered Retirement Savings Plans)
EXHIBIT 9 usually concentrated in February, tend to have a similar
Standard 8c Poor 500 Composite Index Using the but proportionally greater impact on Canadian equities
End of November and the End of March prices because of more liberal contribution rules and “Ca-
as Base Dates nadian content” regulations.
End of November End of March Percent
Year S&P 500 Year S&P 500 Change A Practical Method to Take Advantage of
1982 138.54 1983 152.96 t10.4 Seasonal Strength in the TSECA
1983 166.40 1984 159.18 - 4.3 According to this report, seasonality among the 14
1984 163.58 1985 180.66 t10.4 TSEC subindexes is strongest with Canadian forest prod-
1985 202.17 986 238.90 t18.2 uct stocks. A portfolio of forest product stocks seasonally
1986 249.22 987 291.70 t17.0 invested beginning in November 1982 and finally liqui-
1987 230.30 988 258.89 t12.4 dated in March 1994 should provide favourable results.
1988 273.70 989 294.87 t 7.7 The implication is that an investor who continues to buy
1989 345.99 990 239.94 - 1.7 Canadian forest product stocks at the end of November
1990 322.22 991 375.22 t16.4 and sells them at the end of March greatly enhances pros-
1991 375.22 992 403.69 t 7.6 pects for an above average return on investment.
1992 431.35 1993 451.67 t 4.7 A study was completed to examine the profitability of
1993 461.79 1994 445.77 - 3.5 the strategy using an initial investment of $100,000. Funds
Totals 3,360.48 3,593.45 were allocated by the TSEC weighting in forest product
Average t 6.9 stocks when the investment initially was made. The
Standard & Poor 500 Composite Index Using the weightings were kept constant throughout the period of
End of November as a Base Date investment (despite the continuous change in the
End of November End of November Percent weightings over time). Eight of the nine forest product
Year S&P 500 Year S&P 500 Change stocks in the TSEC in November 1982 were included in
1982 138.54 1983 166.40 t20.1 the study. AI1 of the eight companies remained Canadian
1983 166.40 1984 163.58 - 1.7 based companies throughout the period of investment,
1984 163.58 1985 202.17 t23.6 although many were involved with mergers, takeovers and
1985 202.17 1986 249.22 t23.3 restructurings. When a company was merged or taken
1986 249.22 1987 230.30 - 7.6 over, prices for the surviving company were taken. The
1987 230.30 1988 273.70 t18.8 ninth company was excluded (Consolidated Bathurst)
1988 273.70 1989 345.99 t26.4 because it did not survive throughout the investment pe-
1989 345.99 1990 322.22 - 6.9 riod as a Canadian forest product company. (It was ac-
1990 322.22 1991 375.22 t16.4 quired by Stone Container). Other Canadian forest prod-
1991 375.22 1992 431.35 t15.0 uct stocks subsequently added to the TSE Forest Product
1992 431.35 1993 461.79 t 7.1 Index also were excluded because their prices were un-
1993 461.79 1994 453.69 - 1.8 available throughout the study period. Price data were
Totals 3,360.48 3,675.63 adjusted for stock splits and reverse stock splits that oc-
Average t9.4 curred during the period of investment. Each stock was
Source: The Wall StreetJournal acquired at the price on the last trade date in November
and liquidated at the price on the last trade date in March.

MTA JOURNAL/Spring-Summer 1996

Each transaction was examined to determine its feasibil-
ity (i.e. the ability to complete the transaction on the given Addendum I
date at its indicated size.) DATA FOR SECTORAL ANALYSIS
The calculations were purposefully completed to pro-
vide a conservative return on investment. Metals and Minerals
l A commission of 1.0% of value was charged on all End of November End of March Percent
purchases and sales (current commission charges now are Year Index Year Index Change
substantially less. However, in the early 1980s in Canada 1982 1585.62 1983 2217.04 t39.8
before commissions became negotiable, a 1 .O% rate was a 1983 2511.63 1984 2326.33 - 7.4
fair estimate of cost). 1984 1872.96 1985 2020.21 t 7.9
l Dividends were not included. 1985 1929.90 1986 2337.83 t21.1
l Interest from cash balances held from the end of 1986 2085.48 1987 2566.49 t23.1
March to the end of November each year wasnot included. 1987 2371.96 1988 2650.09 t11.8
As one would expect, knowing how well the forest prod- 1988 2925.38 1989 3327.71 t13.8
ucts in general have done during the end of November to 1989 3353.24 1990 3125.70 - 6.8
end of March periods, results from the portfolio were 1990 2586.85 1991 3184.27 t23.1
impressive. The $100,000 portfolio appreciated in value 1991 2846.05 1992 2890.57 t 1.6
to $406,773 during the 12 periods of investment. 1992 2528.95 1993 2938.38 tl5.9
1993 3275.99 1994 3618.55 t10.5
EXHIBIT 10 Totals 29,873.91 33,196.17
Value of a $100,000 Portfolio of Canadian Forest Average 1994 3921.40 tll.l
Product Stocks Held During the November to
Gold and Precious Metals
March Periods from November 1982 - March 1994
Stock Original Original End of November End of March Percent
Final
TSEC Investment Investment Weighting Year Index Year Index Change
B.C. Forest Products .11 1982 3212.94 1983 3989.27 t24.2
$9,200 $38,023
Doman Industries .02 1,700 7,907 1983 4148.45 1984 4659.51 t12.3
Domtar .33 27,700 44,477 1984 3374.50 1985 3750.18 t10.8
Fraser Inc. .04 3,400 16,680 1985 4419.10 1986 4056.85 - 8.2
Great Lakes Forest .22 18,500 63,478 1986 5338.40 1987 8187.50 t53.4
MacMillan Bloedel .41 34,500 202,386 1987 7831.84 1988 6623.69 -15.4
Scott Paper .04 3,400 10,126 1988 565039 1989 4707.89 -16.7
Whonnock A .02 1,700 23,696 1989 7426.46 1990 6862.62 - 7.6
Totals 1.19 $100,100 $406,773 1990 5293.14 1991 5180.22 - 3.1
1991 5068.29 1992 4510.77 -11.0
Conclusion 1992 4967.23 1993 6481.47 t30.5
Seasonality analysis shows that Canadian stock prices 1993 10,005.86 1994 10,778.81 t 7.7
have been significantly strong during the four month pe- Totals 66,736.80 69,788.78
riod from the end of November to the end of March dur- Average 1994 8757.00 t 4.6
ing the 12-year period ending November 1994. Three
Merchandising
main factors probably influencing Canadian stock prices
during this period were year end transactions for tax pur- End of November End of March Percent
poses, RRSP contributions and seasonal influences by U.S. Year Index Year Index Change
equity markets. These three factors are expected to con- 1982 1621.42 1983 1954.28 t20.5
tinue to influence the seasonality of Canadian equity prices 1983 2274.37 1984 2150.70 - 5.4
in the future. 1984 2033.41 1985 2188.40 t 7.6
Investors can continue to look for opportunities to take 1985 2961.40 1986 3659.35 t23.6
advantage of seasonal strength in Canadian stock prices. 1986 3510.67 1987 3898.40 t11.0
Each year as November approaches, they can examine 1987 2882.00 1988 3486.42 t21.0
Canadian stock groups such as forest products and base 1988 3603.72 1989 3957.58 t 9.8
metal stocks that tend to outperform the TSEC during 1989 4480.36 1990 4059.97 - 9.4
the next four months. An examination of technical pat- 1990 3665.72 1991 4421.41 t20.6
terns and fundamental outlooks for individual stocks 1991 4060.55 1992 3997.41 - 1.6
within these groups could help to identify potentially prof- 1992 3611.91 1993 391O.li t 8.3
itable investment opportunities. Investors subsequently 1993 4407.42 1994 3921 .j7 -11.0
should liquidate positions by the end of March and, when Totals 39J12.95 41,605.66
appropriate, consider short positions in these groups. Average 1994 3442.83 t 6.4

MTA JOURNAL/Spring-Summer 1996 19

 Financial Services Transportation and Environmental Services
End of November End of March Percent End of November End of March Percent
Year Index Year Index Change Year Index Year Index Change
1982 1420.80 1983 1766.64 t24.3 1982 2335.51 1983 2944.56 t26.1
1983 1781.82 1984 1590.46 -10.7 1983 3458.84 1984 3020.11 -12.7
1984 1680.81 1985 1761.40 t 4.8 1984 3316.17 1985 4018.94 t21.2
1985 2227.70 1986 2246.34 t 0.8 1985 3766.60 1986 4087.01 t 8.5
1986 2319.59 1987 2580.18 t11.2 1986 5601 .Ol 1987 8233.83 t47.0
1987 1904.70 1988 2101.33 t10.3 1987 6745.92 1988 9157.99 t35.8
1988 2373.90 1989 2550.42 t 7.4 1988 7228.43 1989 7450.53 t 3.1
1989 2961.07 1990 2588.37 -12.6 1989 9863.39 1990 9596.07 - 2.7
1990 2225.20 1991 2701.40 t21.4 1990 7903.65 1991 6297.27 -20.3
1991 2807.70 1992 2658.80 - 5.3 1991 4188.60 1992 4906.28 t17.1
1992 2555.46 1993 2654.04 t 3.9 1992 4135.54 1993 4275.51 t 3.4
1993 3166.80 1994 3183.16 t .5 1993 3945.74 1994 3946.73 0.0
Totals 27,425.55 28,382.54 Totals 62,489.40 67,934.83
Average 1994 3127.42 t 3.5 Average 1994 4518.56 t 8.7

Utilities Pipelines
End of November End of March Percent End of November End of March Percent
Year Index Year Index Chan,ge Year Index Year Index Change
1982 1668.09 1983 1851.26 t11.0 1982 2065.22 1983 2111.48 t 2.2
1983 2270.41 1984 2081.38 - 8.3 1983 2150.14 1984 2195.52 t 2.1
1984 2408.38 1985 2664.54 t10.6 1984 2446.81 1985 2696.41 t10.2
1985 2927.80 1986 2753.43 - 6.0 1985 2813.00 1986 2377.16 -15.5
1986 2636.59 1987 2968.43 t12.6 1986 2278.80 1987 2898.64 t27.2
1987 2536.20 1988 2700.15 t 6.5 1987 2548.50 1988 2951.75 t15.8
1988 2713.46 1989 2658.88 - 2.0 1988 3179.23 1989 3525.13 t10.9
1989 3096.80 1990 2897.07 - 6.4 1989 3797.63 1990 3877.36 t 2.1
1990 2814.88 1991 2944.65 t 4.6 1990 3950.39 1991 4017.65 t 1.7
1991 3286.74 1992 3200.52 - 2.6 1991 3654.69 1992 3336.00 - 8.1
1992 3107.33 1993 3169.78 t 2.0 1992 3428.81 1993 3652.54 t 6.5
1993 3466.05 1994 3621 .Ol t 4.5 1993 4133.56 1994 4014.39 - 2.9
Totals 32,932.73 33,511.10 Totals 36,446.78 37,654.03
Average 1994 3423.98 t 1.8 Average 1994 3825.71 t 3.3

Communications and Media Real Estate and Construction

End of November End of March Percent End of November End of March Percent
Year Index Year Index Change Year Index Year Index Change
1982 2026.77 1983 2478.36 t22.3 1982 3780.26 1983 3879.00 t 2.6
1983 3075.57 1984 3116.75 t 1.3 1983 4785.91 1984 5188.62 t 8.4
1984 3630.16 1985 4194.81 t15.6 1984 6469.39 1985 7480.81 t15.6
1985 4851.10 1986 6077.52 t25.3 1985 8071.90 1986 9157.46 t13.4
1986 6145.11 1987 6941.61 t 8.9 1986 11001.82 1987 13440.70 t22.2
1987 5443.11 1988 6613.84 t21.5 1987 10924.95 1988 13806.29 t26.4
1988 7558.62 1989 8145.88 t 7.8 1988 13845.84 1989 15484.54 t11.8
1989 8154.84 1990 6795.25 -16.7 1989 16557.77 1990 13612.08 -17.8
1990 5976.41 1991 6932.07 tl7.0 1990 7826.81 1991 9262.09 t18.3
1991 6542.74 1992 7336.51 t12.1 1991 7745.87 1992 6217.91 -19.7
1992 7145.44 1993 7580.46 t 6.1 1992 3263.15 1993 3225.38 - 1.2
1993 8251.69 1994 9351.38 t13.3 1993 3368.99 1994 3163.72 - 6.1
Totals 6QO1.56 75,564.44 Totals 97,642.66 103,239.60
Average 1994 7984.86 t 9.8 Average 1994 2152.44 t 5.7

20 MTA JOURNAL/Spring-Summer 1996

Consumer Products Paper and Forest Products
End of November End of March Percent End of November End of March Percent
Year Index Year Index Change Year Index Year Index Change
1982 2039.48 1983 2477.10 t21.4 1982 1385.46 1983 1860.47 t34.3
1983 3147.70 1984 2871.15 - 8.8 1983 2145.51 1984 2243.04 t 4.5
1984 3086.91 1985 3465.61 t12.3 1984 1984.48 1985 2104.87 t 6.1
1985 3915.50 1986 4674.49 t19.4 1985 2071.34 1986 3115.89 t50.4
1986 4786.67 1987 5434.12 t13.5 1986 3589.75 1987 5189.44 t44.6
1987 3840.72 1988 4056.37 t 5.6 1987 3845.44 1988 4111.45 t 6.9
1988 4128.50 1989 4672.68 t13.2 1988 3681.05 1989 4184.63 t13.7
1989 5369.31 1990 4804.84 -10.5 1989 3635.80 1990 3783.69 t 4.1
1990 4445.05 1991 5084.85 t14.4 1990 2998.76 1991 3570.96 t19.1
1991 5880.14 1992 6335.13 t 7.7 1991 3243.47 1992 3360.44 t 3.6
1992 6044.19 1993 6335.02 t 4.8 1992 3003.83 1993 3695.51 t23.0
1993 6779.44 1994 6755.50 - .4 1993 4333.21 1994 4469.59 t 3.1
Totals 53,463.61 56,966.86 Totals 35,918.10 41,689.98
Average 1994 6257.30 + 6.6 Average 1994 4195.78 +16.1

Industrial Products Management Companies/Conglomerates

End of November End of March Percent End of November End of March Percent
Year Index Year Index Change Year Index Year Index Change
1982 1343.95 1983 1588.22 t18.2 1982 1794.05 1983 2201.00 t22.7
1983 1969.11 1984 1622.66 -15.6 1983 2642.29 1984 2735.15 t 3.3
1984 1697.23 1985 1816.83 t 7.0 1984 2825.67 1985 3301.83 t16.9
1985 1931.10 1986 2195.50 t13.7 1985 3565.90 1986 4345.36 t21.9
1986 1946.24 1987 2316.28 t19.0 1986 4140.64 1987 5748.47 t38.8
1987 1680.41 1988 2036.82 t21.2 1987 4278.50 1988 5230.58 t22.2
1988 1890.43 1989 2026.54 t 7.2 1988 4565.22 1989 5236.88 t14.7
1989 1946.71 1990 1874.47 - 3.7 1989 5490.89 1990 5219.81 - 4.9
1990 1625.96 1991 1874.33 t15.3 1990 4047.49 1991 4353.77 t 7.6
1991 1920.93 1992 2105.17 t 9.6 1991 4077.00 1992 3859.17 - 5.3
1992 1908.95 1993 20'35.30 t 9.8 1992 3405.80 1993 4193.44 t23.1
1993 2459.55 1994 2656.82 t 8.0 1993 5034.41 1994 5027.85 - .l
Totals 22,320.57 24,248.94 Totals 45,872.86 51,453.31
Average 1994 2635.06 t 8.6 Average 1994 4856.93 t12.2

Oil and Gas

End of November End of March Percent
Year Index Year Index Change
1982 2800.57 1983 2770.77 - 1.1
1983 3486.37 1984 3450.80 - 1.0
1984 3094.47 1985 3479.77 t12.5
1985 3443.20 1986 2795.75 -19.8
1986 2799.61 1987 3929.31 t40.4
1987 3127.18 1988 3815.63 t22.0
1988 3419.75 1989 4020.03 t17.6 Don Vialoux, CMT
1989 4236.94 1990 4245.50 t 0.2 Don Vialoux is currently employed at Richardson,
1990 4016.35 1991 3879.97 - 3.4 Greenshields of Canada, Ltd. as their U.S. equity
1991 3419.63 1992 3006.75 -12.1 analyst and derivative expert. He has 29 years of
1992 3356.01 1993 4030.57 tzo. 1 experience in the investment business. Don is the
1993 4339.13 1994 4466.38 t 2.9 past president of the Canadian Society of Technical
Totals 41,539.21 43,891.23 Analysts (CSTA) and is currently acting as Secretary
Average 1994 4263.03 t 5.7 to the CSTA. He is the past chairman of the Cana-
dian Derivative Action Committee. Don holds Bach-
elor of Science and Bachelor of Commerce degrees
from the University of Manitoba.

MTA JOURNAL/Spring-Summer 1996

22 MTA JOURNAL/Spring-Summer 1996
 Patterns of Seasonal Variation in Canadian
Fixed-Income Markets
Submitted by R. Alain Rivet, CMT Program - level Ill
3rd Revision, June 1996
A. Introduction
The literature of technical analysis and investing has
over the years contained many references to “seasonal ef-
fects” and the resultant consequences on investors’ rates
of return. This paper will examine apparent seasonal ef-
fects in the Canadian tixed income markets for evidence
that such effects are statistically significant.
B. Background
1. CYCLEANALYSIS
Cycle analysis has been used in many different contexts
and applied to many different time frames, ranging from
several decades, as in the works of Nikolai Kondratieff and
his adherents, to more contemporary comments applied
to day trading or weekly trading in the commodity futures
and financial futures markets.’ In this paper the objects
of study will be the month end closes of two Canadian
fixed income indices, the Scotia McLeod Long Term Bond
Price Index and the Scotia McLeod Mid Term Bond Price
Index, for the period 1948 through 1994, and 1980
through 1994, respectively. Initially, patterns of month to
month variation within each year will be examined; sub
sequent sections will look at possible relationships between
seasonal variations and multi-year trends of bond yields
and bond prices.
2. CANADIAN FIXED INCOME MARKETS
The beginnings of the fixed income markets in Canada
can be traced back to the early 1870’s; the first issues of
Government of Canada marketable bonds came out at that
time to refinance existing provincial obligations.* Debt
outstanding grew rapidly during World War I, and during
World War II. The next period of rapid growth in debt
outstanding occurred during the 1975-1990 period.3 As
at December 1994, the value of unmatured marketable
bonds issued by the government of Canada had reached
Cdn. $234 billion. These bonds are held by a wide variety
of investors, both foreign and domestic, individuals as well
as institutional investors such as banks, pension funds and
mutual funds. As an example, the value of assets held by
Canadian bond-oriented mutual funds was Cdn. $13.9
billion as of August, 1994.4 The fixed income markets in
Canada therefore enjoy significant size, a wide variety of
participants, and for most issues of government of Canada
and provincial government bonds, very good liquidity.
3. MAJOR TRENDS IN CANADIAN BOND PRICES
The value of the Long Term Bond Price Index has
MTA JOURNAL/Spring-Summer
3
ranged from a low of 59.34 (September 1981) to a high of
216.21 (January 1948) (Table 1 (d)). The extent of this
variation is not out of line with the variations observed in
the yields of U.S. treasury bonds in the years since 1960;
the latter went from 4% in 1960 to the inflation-induced
levels of 14% in the early eighties, dropped back to 5.9%
in the fall of 1993, and returned to the 8% level in No-
vember 1994.s
An examination of the yearly averages of the Long Term
Bond Price Index provides a very good overview of the
major trends in Canadian bond prices from 1948 to 1994.
Prices declined fairly steadily from 1948 through 1953,
rebounded briefly, and declined again until 1958. Prices
remained relatively stable from 1959 through 1965. The
price decline from 1966 through 1981 was briefly inter-
rupted by short intervals of relative stability during the
1970-1972 and the 1974-1978 periods. (Graph 2)
A clear multi-year bear market trend can be identified
as having existed from 1966 through 1981; similarly a clear
bull market trend can be identified from the 1981-1994
period, with 1981 being the changeover year. (Table 1 (d),
“Average” column and Graph 2).
C. Methodology
1. DATA SOURCES
For the purposes of this study, two monthly data series
were examined: (1) the Scotia McLeod Long Term Bond
Price Index for the period 1948-1994; and (2) the Scotia
McLeod Mid Term Bond Price Index for the period 1980-
1994. These two indices are the best-known bond indi-
ces in Canada. Along with government of Canada bonds,
these indices comprise four different groups of bonds: 10
utilities, 10 municipals, 10 provincials and 10 industrials.
The first data series, was started in 1947 and has been
updated monthly since then. These two series were picked
for this study because they represent a source of continu-
ous, internally consistent and easily available data. As of
November 1995, the sector weighting of the Long Term
Bond Index was as follows: Government of Canada, 59%;
Provincials, 25%, Corporates 13%, municipals, 3%. The
Mid-Term Bond Price Index had a similar weighting. Both
the long term and mid-term bond price indices were re-
calculated in 1985, with a new base of 1985 = 1OO.6
2. ANALYSIS OF DATA
A more formal statistical method will be used to test
for seasonality, relating each monthly datum not only to
the average value of the index for that year, but also to the
1996 23
 index value for the month immediately preceding it. Tests formed as in the other tables. The reader should also
of statistical significance will be tabulated not only for the note that the Long Term Bond Price Index series has been
raw ihdex values, but also for each of the derived data broken out into one subseries, for the 1980-1994 period,
series. in order to compare the results of Long Term index and
The null hypothesis can be stated as follows: none of the Mid-Term index for the same time frame.
the data series examined contains seasonal variations that In order to determine the statistical significance of each
display statistical significance. In proceeding with the sta- month’s variation, the following formulae were used:
tistical treatment of the monthly index values, the author
1) 'T'STATISTIC
is starting out with one basic premise, namely, any sea- T= absolute value (column average - matrix average)
sonal difference is worth examining only if the average
(SzL/ NC) t (S’” / N,)
price in one period differs significantly from its price in where: S2‘ = standard deviation for column
another period. This can be accomplished by calculating S’” = standard deviation for matrix
for the period under study the index average and stan- NC = data count for column
dard deviation by month, and from it deriving the “p- Nm = data count for matrix
value”, or confidence interval for each month.7 The cri- This calculation of the “T” statistic for the two means is
terion in the economic literature of “p” value of .lO or used for the test of the null hypothesis.
less will be used. This is the criterion mentioned in Au-
gust 1992 issue of Technical Analvsis of Stocks and Com- 2) 'YSTATISTIC
modities, in an article by Dr. Lewis C. Mokrasch. The p = 0.5/((ltc,(T, t co) t cp (T, t co) ‘t c1 (T,t CO)~ t
method used here is an adaptation of the algorithms de- c4 (T,tco)4 t cg (T,tco)s)2
veloped by Dr. Mokrasch. a For this study, the month-end where Tn = T statistic for any given month as computed
closes for the Scotia McLeod Long-Term Bond Price In- above and c , c,, cg, cg, c, and c5 are the standard curve
dex and the Scotia McLeod Mid-Term Bond Price Index approximati& coefficients.”
were used. This study examines the average monthly val- This formula is used to calculate the area under the
ues for both indices, and also includes tests of statistical distribution curve.
significance for those values, as well as for two other sets
of monthly averages derived from the raw index numbers.
These are, respectively, the average index value for each
month expressed as a percentage of the year’s average
value, and, the month-to-month change in each index
expressed as a percentage of the previous month’s datum.
The sequence of the calculations can be seen by consult-
ing Tables 1 (d) through 3(f), which are included in the
body of this paper. In addition to the raw index values for
each data series, two sets of detrended data were used.
First, the raw index values for a calendar year were ex-
pressed as a percentage of the 12 month average. For
each calendar year, the average 12 month index value was
calculated; the average index value for each month was
divided by the 12 month average for the same year and
expressed as a percentage. In the subsequent set, each
datum was compared to the index value of the month Il. Presentation of Results
immediately preceding, with the difference expressed as
1. 1948-1994PER100
a percentage. The same series of calculations was per-

Table l(a): Summary of Results from Table l(d)

Long-Term Bond Index
1948-1994
Raw Index Values
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Oev. N
Average 138.02 137.71 137.10 136.59 136.49 136.11 135.46 135.31 134.69 135.47 135.45 135.51 136.16
Std. Dev. 42.19 42.56 42.86 42.88 42.67 42.66 42.89 42.34 42.30 41.63 40.94 40.5; 42.23
N= 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 564.00
T= 0.29 0.24 0.14 0.07 0.05 0.01 0.11 0.13 0.23 0.11 0.11 0.11
P= 0.31 0.33 0.35 0.36 0.36 0.37 0.35 0.35 0.33 0.35 0.35 0.35

24 MTA JOURNAL/Spring-Summer 1996

 Table l(b): Summary of Results from Table l(e)
Long-Term Bond Index, 1948-1994
Monthly Average Values
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Dev. N
Average 101.54 101.16 100.58 100.13 100.13 99.83 99.20 99.24 98.78 99.63 99.82 99.98 100.00
Std. Dee 4.97 4.12 3.53 2.53 2.34 2.99 2.78 2.64 3.27 3.54 3.76 4.86 3.62
N= 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 564.00
lY= 2.08 1.87 1.07 0.34 0.36 0.38 1.86 1.84 2.44 0.69 0.32 0.03
P= 0.05 0.06 0.16 0.31 0.30 0.30 0.06 0.07 0.03 0.23 0.31 0.37
Table l(c): Summary of Results from Table l(f)
Long-Term Bond Index, 1948-1994
Month-To-Month Average Price Change
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Dev. N
Average -0.02 -0.32 -0.53 -0.38 -0.02 -0.31 -0.59 -0.07 -0.46 0.90 0.21 0.13 -0.11
Std. Dev. 2.28 2.11 2.03 2.64 2.02 1.60 2.74 2.05 2.22 2.77 2.29 1.64 2.27
jy= 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 47.00 564.00
T= 0.26 0.66 1.37 0.68 0.41 0.80 1.17 0.56 1.06 2.41 0.91 0.91
P’ 0.32 0.24 0.12 0.24 0.29 0.21 0.15 0.26 0.17 0.03 0.19 0.19

seasonal point of view, bonds tend to be more of a sale in

Raw Index Values
January, and more of a buy in September.
For the 1948-1994 period, the month displaying the
largest standard deviation wasJuly, the smallest, Decem- Month-to-Month Average Price Changes
ber. The high for the year occurred in January, the low
An analysis of the average monthly percentage price
for the year came in September. As none of the “p” statis-
changes also suggest some possible trading strategies. For
tics for the raw index average monthly values is near .lO,
the data series as a whole, the average month to month
it can be concluded that there is no statistically significant
price change is quite small, -.l 1. This is as could be ex-
variation. (Table 1 (a))
pected, i.e. short term price fluctuations tend to cancel
Monthly Average Values one another out. The largest average positive price change
occurred in October (t.90); the largest negative price
When the index values are re-expressed as a percent- change wasin July (-.59). The “p” value for October com-
age of the year’s average, a slightly different pattern putes as .03; this suggests that in terms of short-term trad-
emerges. The largest standard deviation appears for Janu- ing, October is a good month for taking profits. (Table
ary. There are five months that display “p” values smaller l(c))
that .lO: September (.03); J anuary (.05); February (.06);
July (.06) ; August (.07). These results suggest that from a 2. 1980-1994PER100

Table Z(a): Summary of Results from Table 2(d)

Long-Term Bond Index, 1980-1994
Raw Index Values
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Dev. N
Average 95.67 94.72 93.65 93.16 93.88 93.82 93.17 94.05 93.28 95.53 95.91 96.90 94.48
Std. Del: 13.79 13.64 12.99 12.64 12.64 13.47 15.07 14.92 14.23 13.32 11.74 12.49 13.50
N= 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 180.00
T= 0.32 0.07 0.24 0.39 0.18 0.18 0.32 0.11 0.32 0.29 0.45 0.72
P= 0.31 0.36 0.33 0.29 0.34 0.34 0.31 0.35 0.31 0.31 0.28 0.23

MTA JOURNAL/Spring-Summer 1996 25

 Table 2(b): Summary of Results from Table 2(e)
Long-Term Bond Index, 1980-1994
Monthly Average Values
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Oev. N
,;\verage 101.42 100.30 99.19 98.63 99.39 99.24 98.24 99.25 98.54 101.16 101.82 102.83 100.00
Std. Dev. 7.39 5.60 4.81 3.21 3.27 4.77 4.19 3.72 4.78 4.92 4.74 6.02 5.12
N= 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 180.00
T= 0.73 0.20 0.63 1.51 0.66 0.59 1.53 0.73 1.13 0.88 1.42 1.77
P= 0.23 0.33 0.25 0.10 0.24 0.25 0.10 0.23 0.15 0.20 0.11 0.07
Table 2(c): Summary of Results from Table 2(f)
Long-Term Bond Index, 1980-1994
Month-To-Month Average Price Change
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Dev. N
i\verage -0.61 -0.93 -1.02 -0.42 0.81 -0.18 -0.87 1.08 -0.71 2.73 0.72 0.95 0.13
Std. Dev. 3.22 3.46 3.04 4.08 3.05 2.37 4.64 2.72 3.41 3.64 3.41 2.12 3.50
N= 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 180.00
T= 0.85 1.14 1.40 0.51 0.82 0.47 0.81 1.27 0.91 2.67 0.64 1.36
P= 0.20 0.15 0.11 0.27 0.21 0.28 0.21 0.13 0.19 0.02 0.24 0.12

RAW INDEX VALUES
For this data series, the December value displayed the
average high for the year, as could be expected in a secu-
lar bull market. The lows for the year occurred in April
and July. None of the “p” values for the raw index values
are significant. (Table 2 (a))
MONTHLY AVERAGE VALUES
For the detrended data, the largest standard deviation
OccurredinJanuary. ThemonthsofApril (.lO);July (.lO);
and December displayed statistically significant values.
This suggests that the optimal trading strategy would be
to buy at the April lows and take profits at year-end in
December. It is worth nothing that the statistically signifi-
cant low point for the year of the monthly average values
is April, rather than January or February. (Table 2(b))
MONTH-TO-MONTH AVERAGE PRICE CHANGES
For this data series, the average month-to-month price
change is quite small, with an upward bias (t .19%). The
largest positive average price change took place in Octo-
ber (+2.73%); the largest negative price change occurred
in March (-1.02%). The only month with a significant
“p” value was October (.02). This would suggest that Oc-
tober month end is an optimum time for profit-taking
for short-term trading, as the average monthly value in-
creased from 98.54 in September to 101.16 in October.
(Table 2(c))
2. SCOTIA MCLEOD MID-TERM BOND INDEX

Table 3(a): Summary of Results from Table 3(d)

Mid-Term Bond Index
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Dev. N
Average 96.29 95.34 94.54 94.12 94.59 94.56 94.25 94.65 94.10 96.01 96.29 96.93 95.14
Std. Dev 8.17 8.96 9.15 9.04 9.34 10.36 11.42 11.04 10.53 10.01 8.54 9.26 9.86
N= 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 180.00
T= 0.90 0.20 0.59 1.65 0.84 0.69 1.26 0.84 1.25 0.98 1.40 1.70
P= 0.27 0.36 0.33 0.29 0.33 0.33 0.31 0.34 0.30 0.31 0.27 0.23
Table 3(b): Summary of Results from Table 3(e)
Mid-Term Bond Index
Monthly Average Values
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Dev. N
Average 101.31 100.24 99.42 98.93 99.43 99.33 98.86 99.33 98.81 100.92 101.39 102.03 100.00
Std. Dee 5.55 4.44 3.68 2.26 2.40 3.57 3.32 2.88 3.52 3.45 3.68 4.49 3.75
N= 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 180.00
T= 0.90 0.20 0.59 1.65 0.84 0.69 1.26 0.84 1.25 0.98 1.40 1.70
P= 0.19 0.33 0.25 0.08 0.20 0.23 0.13 0.20 0.13 0.18 0.11 0.08

26 MTA JOURNAL/Spring-Summer 1996

 Table 3(c): Summary of Results from Table 3(f)
Mid-Term Bond Index
Month-To-Month Average Price Change
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average Std. Oev. N
Average -0.19 -0.98 -0.76 -0.40 0.52 -0.12 -0.41 0.51 -0.52 2.17 0.50 0.61 0.08
Std. Dev. 2.14 2.71 2.35 2.93 2.29 1.81 3.14 2.19 2.41 2.43 2.93 1.57 2.58
N= 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 180.00
T= 0.46 1.45 1.32 0.61 0.72 0.39 0.59 0.72 0.92 3.19 0.54 1.20
P= 0.28 0.11 0.12 0.25 0.23 0.30 0.25 0.23 0.19 0.01 0.26 0.14

RAW INDEX VALUES
There is only one set of data available for the Mid-Term
Bond Index, for the years 1980-1994, with the general
trend being a fairly steady advance in prices from 1981
through 1993, with only a brief interruption for the years
1987,1988 and 1989.
For the raw data, the average high for the year occurred
in December, while the average low was registered in Sep-
tember. The month with the largest standard deviation
wasJuly. None of the “p” values for the raw data aresig-
n&ant. (Table 3(a))
MONTHLY AVERAGE VALUES
For the monthly values expressed as a percentage of
the year’s average, the month with the smallest standard
deviation was April. The months of April and December
both displayed “p” values of .08. This would suggest a trad-
ing strategy of taking advantage of the April dip in prices
to buy, and taking profits at year-end. (Table 3(b))
MONTH-TO-MONTH AVERAGE PRICE CHANGES
Concerning the average month-to-month price
change, the value for this particular series was .OS%, i.e. a
small change, but with an upward bias. The largest aver-
age positive change occurred during October, (2.17%)
while the largest average negative change took place dur-
ing February (-.98%). The month showing the largest
standard deviation wasJuly with a value of 3.14. The month
with a statistically significant “p” value was October (.Ol ).
This would suggest the following strategy for Mid-Term
bonds: make use of April price weakness to buy, as noted
in the previous section and take advantage of the price
strength during October to sell.
Conclusion
The analysis of seasonal variations in the Canadian
fixed-income markets, making use of detrended data, al-
lows us to reject the null hypothesis that seasonal varia-
tions in the Canadian fixed-income markets are devoid
of statistical significance. The study of the patterns of sea-
sonal variations can provide trading strategies that can be
tailored to long-term versus mid-term bonds. These strat-
egies can also be customised to be better applied to
month-to-month price changes versus changes in bond
prices over a twelve-month trading cycle. The study of
seasonal variations is best used as a confirming indicator
for those with a time frame longer than a year. Seasonal
patterns do provide valuable signals for shorter-term trad-
ing.
It is also instructive to make certain comparisons be-
tween the Long Term Index and Mid-Term Index. Re-
garding the raw index values, the standard deviation for
the long-term index is much larger (41.23 and 13.50 vs.
9.86). This is to be expected, since longer-term bonds
are more volatile than near-term bonds. This may also
be partially explained by the difference in the number of
observations (564 for the Long Term Index compared to
180 for the Mid-Term index). When the detrended data
for the same time periods are examined (Tables 2 (b) and
3(b)), the difference in standard deviations is much
smaller (5.12 versus 3.75), but it is the Long-Term index
that carries the higher value. Within the calendar vear,
therefore, it is the Long-Term index that has the higher
variability. In terms of month-to-month price changes,
the Long Term Index shows a standard deviation of 2.27
for the 1948-1994 period, and 3.50 for the 1980-1994
period, compared to 2.58 for the Mid-Term Index. Within
the calendar year, the month-to-month price changes of
the Long Term Index display the greater variability. For
the 1980-1994 period, the April lows and December highs
are statistically significant for both the Long-Term and
the Mid-Term index. This clearly indicates April month-
end as a favourable buy point and December as a good
time for profit-taking.
The best indicator is provided by the analysis of the
monthly average values of the Long Term Bond Index. It
is the best indicator for the following reasons:
1) It incorporates the largest sample: forty seven years
of data, or a total of five hundred and sixty-four pieces of
data.
2) It covers periods of both declining and rising bond
prices, thereby providing the conclusions with the great-
est applicability.
If we examine the monthly average values of the Long
Term Bond Index just for the years 1980-1994, the only
month that shows any significance is December (p=O.O7),
with the value for April at the limit (p=.lO). However,
when the longer time frame 1948-1994 is examined, we
find September (p=O.O3) to be a statistically significant
time to look at buying, whereas January (p=O.O5) and Feb
ruary (p=O.O6) can be considered statistically significant
times to conduct selling.

MTA JOURNAL/Spring-Summer 1996 27

 In terms of month-to-month price changes, all three
data series display both statistical significance for the
month of October and a positive average price change
for that same month, suggesting that it is also a good time
of the year to be a seller of Canadian bonds. The study of
seasonal patterns in the Canadian fixed-income markets
appears to be of value to those seeking investment oppor-
tunities in this arena.

End Notes
1. John J. Murphy, Technical Analvsis of Futures Markets,
N.YI.F., 1988, pp 414455
2. J. E. Hatch, Robert F. White, Canadian Stocks, Bonds,
Bills and Inflation, 1950-1987, The Research Foundation
of the Institute of Chartered Financial Analysts, 1988, p.
27
3. Ibid., see also Bank of Canada Review, various issues 1988
1994
4. Albert S. Thompson, The Canadian Mutual Fund
Industry, Moss, Lawson & Co. (Research Report), July
1994
5. Charles Kirkpatrick II, Charles Dow Looks at the Long
w, Barron’s, June 1994
6. Note: The Scotia McLeod Mid-Term Bond Price Index
and the Scotia McLeod Long Term Bond Price Index are
copyright Scotia McLeod Inc. The monthly index values
are courtesy Scotia McLeod Inc. The monthly index
values are courtesy Scotia McLeod Inc. The figures for
the raw index values are from Scotia IMcLeod’s Hand-
book of Canadian Debt Market Indices, Toronto, 1994
7. Dr. Lewis C. Mokrasch, Detecting: Seasonalitv, Technical
Analysis of Stocks & Commodities, August 1992
8. Ibid.; see also from the same author, Looking at lo-Year
Stock Price Patterns, Technical Analvsis of Stocks &
Commodities, April 1991
9. Ibid.; see also A.N. Beals, Statistics for Economics and an
M. Abramowitz and E. Stagun, Handbook of Mathemati-
cal Functions
The author gratefully acknowledges the assistance of Dr.
L.C. Mokrasch and Mr. Harvey Chan for this study.

R. Alain Rivet, B.A. (Econ.), M.B.A.

Alain Rivet is an Investment Advisor with Moss,
Lawson & Co., Ltd., a Toronto based boutique fo-
cusing on the wealth-management needs of high-net-
worth individuals. Alain has been engaged in this
profession for over ten years, and has concentrated
his personal research efforts on the cyclical aspects
of the Canadian financial markets. He has also
hosted a daily commentary on the investment mar-
kets for a Toronto French-language radio station, and
has made several appearances as a guest commenta-
tor on local public television.
Overfor additional tables and charts

MTA JOURNAL/Spring-Summer 1996

 J”“. J La Aupull 5aplaber Wk, Nwsmkr mumkr A”W.9. 9ld m= 0 7071
2i4 26 21454 21426 213% 2>2 69 21262 212 09 2,206 213 42 El= 01411
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190.02 2wm 19784 19072 19072 191 86 189 13 16492 176 3, 17EY 172.76 172.40 167.01 955
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182.62 164% 163.14 16209 (63% 16635 15600 16690 16653 16763 166 74 ,%.,6 185.59 2 20
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157.66 15522 ,544, 15393 ,536, 153 29 15976 145% 1.609 1424 (45.51 145.95 (9074 4 32
1967 149 62 IS.26 tw.3 14921 1.5 46 143 ,I 14303 14, 2, 138.0.3 13650 13572 135.59 ,421 560
,961) 135115 13393 1,143 132.58 129.97 13057 13204 13326 0240 1x93 1330.5 12616 I,,?8 1%
1069 127 7, 12690 12553 125.42 123.74 12167 120 62 (2040 11925 1,694 1,631 I1423 121.75 405
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\9!1 129.24 126.88 726W ,248.. 12263 \*I 86 120 II 123.83 (2505 ,202s 129.56 12625 125.61 2 81
1972 12602 127.55 1260s 12526 124w 12421 12439 123.72 123 35 (24 n 127.17 12764 12557 1%
1973 12723 127 11 12694 12606 12366 '238) ,220a 3 19.43 122 25 12, 73 12125 119.65 123.42 2 72
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1975 lC8.81 ,091, 107 52 10236 103% ,cd26 IO, 42 101.17 9794 100 27 8863 im4.3 102 01 3 32
,976 10283 10333 10152 10303 10353 102ea 10319 10566 10664 (07.35 10906 I,, 98 ,051, 2%
1977 Ill.62 11069 j 09.22 109.64 110.76 11136 I,1 26 112.03 1t2rn I,,66 11163 111 16 11113 OW
1976 108% 1m.42 1wY) 108% 106% 10649 tm34 im3.4 IWO, IO529 10595 10502 to794 IM
1979 103.64 102.85 103 45 (0525 105 45 I0.W rm,, 10393 98.6 92 85 9459 91 83 lMS7 4 16
8623 62.65 7080 86 57 9005 91 45 83.86 6.3 25 cl1 6, 7993 El 01 62.77 84.10 361
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96.50 99 07 99 45 9¶12 96 aa 9592 9734 %$2 to2 ?I 10550 105.6 ,015s ,w.n 367
,992 106 I6 x604 IO265 10, % ,054s '374, 1,354 11421 ID994 111 79 107 40 109.45 106 02 3 73
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P’

TCb* l(Ol rg. "alum

Yew .hwy Fcbrwy March bd WY IYnl Juhl kq"Q Seplwnbf tik Novambat
cecembr *wr.g. St.3mv
,949 101 31 99% 9912 %63 10039 Trn62 70039 10327 9975 9962 99 7s 9937
1949 9972 9972 69 72 99 47 89.65 9980 8960 8960 6¶ 97 IW.9 IO, I, 10, I,
1OW 9992 lWl6 IW (6 Irn I.8 Ia, 31 lrnm 9692 10005 im.31 lW.3, 8967 %91
1951 10564 lM.97 102 w lM69 93.78 %I6 %?a 9316 %93 % 6, 9517 94 (6
,952 39.69 twos ,m29 1cn% 101.01 imb4 1m.m 10017 3969 89.2, 9921 9334
,953 imur 10026 lW26 too5 99.93 99% 99.6 9934 99.6 99 93 1m.40 1m.ea
1954 94.6 95% 96 75 lM22 1W.64 lM% 101 2, (0147 101 n tot n (0159 101 n
1955 ,m TO lm4.5 100% lW% 101 t, 1011, 101 1, 10023 9666 99 73 $776 96%
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l-05-9 lm69 10103 10, 6.5 101 6, 10, 65 IO, 03 loo22 09 76 98 42 98 42 98 09 9700
1959 ,m25 10490 104 55 10432 102 16 111094 1w.o 9752 $4 69 % 26 95 46 94 49
1960 94 42 95 01 97 31 9624 98% 101 22 101 ?7 103 67 104 47 101.3 lW76 IW76
196t 98 20 9927 96 52 97 M %W 100.6 10076 10079 100 5, 101 23 101 so 101 56
1962 101 15 10, $3 102% 10329 jm60 97 24 9603 9734 97 66 tWm ,w55 lWM
1963 1w.w 1m39 tM 16 13394 101 60 10, 36 99 ?2 $7 .a4 9917 99.9 9927 993.8
1%. 9982 6960 9980 9962 13004 0% 93 9980 9993 99 $3 rw,, ,m47 loo60
1965 102.73 10264 102 06 102% 13162 10051 99 22 9901 98% 07% 97u 965,
196E ,647, 102.97 to244 102 12 10, 91 IO, 69 two3 96 62 96 92 97 02 9653 9662
1957 10461 104s. 1mo4 104 19 ,31 5a 99% 09 67 9660 96.42 9531 9477 9466
1968 103.09 10163 99 74 ,m67 96 63 9908 10020 ,011, lW.47 9936 98 7, 97 27
,969 104% lo423 103 11 10302 IO, 64 9994 09 24 96 w 97.85 9770 %54 93 84
1970 9617 96 34 90% 9917 98 99 08% 10009 10017 ID343 IWO6 101 ?2 10.84
1971 102 09 10102 1W39 9939 97 63 07 03 96 1.8 96M 99% 132 10 10314 102 10
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,975 103 79 10503 104.6 99 49 10102 101 31 90% 963, 051, 97.4 9661 97%
,976 97.91 98 28 96% %W 9647 97 86 96 34 10069 IO1 62 1021, 10376 10649
1977 ID344 09 79 % 26 PB 93 9967 1m23 1w 12 lW.79 IW 79 1W48 lW.5 IWO3
1978 IW 70 lW.5 lW60 ,005, too58 lrn5, 101 ?a 1Ol.M 1m99 97 55 9816 9730
1979 ,03m (0207 10266 104 65 10485 104 25 1025.3 IWM 97 92 9212 93% 91 37
,960 (02 60 9627 -34% 102 93 10707 108 74 99 7, Se.88 9704 9504 96 32 0.94,
198, ((4% ,I092 110% IW 35 ,m97 loC6, 88 76 9025 8465 93 69 lo426 9041
,982 91 70 93 01 93 13 95 15 9.24 ea.6 9120 9880 105.23 (1425 1,434 (20%
1 QW 96 54 1ws5 1m.6 10527 10163 10195 973.9 9644 100.50 IW 4, 13016 %50
,984 1M.l. 101 62 96% 9535 92 95 92 46 9693 100 27 1m5.z 10.42 10593 107 5,
1685 97 03 8095 9.30 $5 75 10227 '02% 103 18 101 09 ,m22 102 67 lM63 107 42
,986 9308 97 26 101 77 10, 26 986, 'cc92 101 I7 103 04 10024 99 49 10, 52 101 60
,987 10776 1362s IO? 16 101 16 101 40 10137 $7 39 9507 $1 5-5 98 67 9554 LX62
1988 103 53 10352 IW53 % 47 995.4 '0370 %MH 9676 99 10 tot 43 %I9 9867
,989 96 02 9564 9626 88 23 lW46 '3256 10340 IO, 74 9968 lo* 19 ,W% 10, 3,
,990 10631 10152 9815 9495 1m 19 'WT. 10, 4E 93% %.a 97 44 1w57 102 32
9596 96 54 9801 98 59 98 35 95 40 96 62 9639 10222 10493 10491 10697
1992 96 26 96 21 9521 04 39 97 62 QQ 43 ,051, lo573 IO, 76 103 49 99 43 10132
,993 93 62 9709 9637 96 36 97 37 98 73 101 00 10432 to1 65 10394 10380 10597
1994 ,,6?9 110% 10301 10142 9794 93 75 9.77 97% 9716 9515 $533 95 I,
rvcmqe 10, Y 10, 16 tm5.5 1Ml1 1w 13 99 83 9920 9924 98 76 9963 9962 99% ,mm
sm mv 4 97 4 12 3 53 2 53 2 23 299 2 76 2 64 327 351 3 76 466 362
k 47m 47m 4100 47 w 47M 4700 47 w 4700 4700 47 m 4700 47m 56400

T= 2m 18, I 07 234 039 3% 1 66 164 2 44 060 0 32 003

P’ 005 008 0.16 331 OY) 332 006 007 0 03 023 0 31 0 37
 1943 .i 55 i’41 478 0 51 '0 77 013 ‘9 13 013 n.33
1949 025 OW 000 -025 038 ~J25 OM 064 OW
1950 n64 026 0.00 CM 013 426 0 13 -0M n 76
1951 -0 31 013 -3 00 -1 65 -1 10 461 412 -3 69 ., 06
,952 095 OM 02. 028 0.26 436 012 000 0.12
1953 ow .o 12 OW 023 412 -0 36 .o 12 0 47 048
19% 024 0% 355 149 062 0 13 025 413 0.13
1955 -0 f3 038 031 0 13 012 OW 087 -1 97 110
1956 061 0 49 .I 10 -3 59 OW 0.90 .I 23 -2 01 .o 23
,957 422 c 78 345 -067 055 .(I 33 -2 43 394 1 37
19% 051 0 34 co1 023 023 -Cal 045 -0 24 -1 1,
,959 011 0 13 0 33 022 -2 07 .t 19 -2 86 02t .I 04
1960 -0 72 0 62 2 42 (08 C53 238 1 a7 -2 59 0 00
196, -0 10 I 08 075 4.84 0 97 1 64 OW 066 -0 33
1962 -0 33 0 77 rca 0 33 .I 4, .3 53 1 39 055 033
1963 c 22 021 622 077 066 1122 .I 64 422 011
,984 -0 54 321 000 021 022 -Cl, 0 33 000 033
1965 066 01, c 76 OW -0 43 .: 09 -0 22 053 .O 95
1966 c 43 I 67 -0 52 -0 31 -0 2, Jz 21 .3 20 450 0 30
1967 2 65 0 31 0 10 -0 bl .2 M -1 58 ., 27 n 57 .o 10
1969 0 19 ./ 4, ., I7 0 94 .2 03 045 c 94 -065 .1 d6
1969 417 I 08 co9 -1 ,4 -1 67 -0 35 2.2, -1 77
,970 CM Cl7 0 67 Cl7 .o 1, OW 038 1 62 3 08
197: 654 -1 82 n 63 .(I 93 -1 77 0 6, 253 1 c2 -1 01
,972 n I.5 037 -1 ,I 063 n 37 -3 47 -0 54 196 c 37
1973 0 32 -0 08 -0 15 -0 68 -9 92 005 -2 17 -c 39 -1 32
,974 093 0.35 .2 23 .5 26 -2 19 -284 .2 40 067 -1 67
,975 3 a 215 .l 48 -4 78 1% 0 29 .025 .o 64 0 80
,976 2 39 0 49 -1 75 1 49 049 .o a, 239 162 263
,977 -0 30 065 -, 51 0 66 0 75 0% 067 -0 01 042
1971 -2 22 -025 015 -0 03 00, 406 000 0 53
,979 1 3, .096 0 78 1 74 019 .058 .2 11 200 -2 76
19.94 -6 09 -4 22 .3 45 84.3 402 1 59 -0 73 1 35 217
19-3, -2 72 3 43 0 06 .9 ?I 081 010 1 69 11 06 .4 66
19d2 -4 02 I 44 Cl3 216 095 6 I4 8 33 000 538
1903 4 72 116 009 4 78 3.26 011 -097 -C 25 -1 66
,984 -3 16 -5 05 .I 3a .2 52 .o 53 3 45 1 41 I52
1985 2 53 -6 27 369 1% 6*1 023 090 2 89 : 70
1985 -3 58 452 461 -048 2 35 I 04 2 05 008
1987 2.26 -1 37 082 -5 00 c24 -0 03 -2 37 -3 17 I,2
198-5 53 001 .: 89 2 04 loa : 19 -1 62 -2 23 .o 33
IV.99 118 247 069 202 233 2 IO -1 6, -1 59 c 74
19-w -2 so 451 -332 -3 26 552 055 .I 60 322 1 73
1991 1% 266 0 3.9 0 33 .o 24 .2 93 : 62 .002 I 96
1992 .1 29 -007 -3 05 n I? 342 lea 0 59 .3 93 I 91
1993 -0% 3 71 374 -0 01 I 05 1 40 3 28 -032 2 29
19% 2 97 -. 99 -7 ,b -1 55 -3 43 -4 28 337 02, 037
Arer.Qa -0.02 032 0 53 43.9 CM -03, c 37 02, c 13 c 11
ski ocv 2.28 2 11 2 03 264 2 02 I 60 2 05 2 29 1 54 2 27
N- P700 a7co 4703 47w 47m 4700 AlOO .I 00 d7M

Tm 026 066 137 068 c 41 0.80 0 56 09‘ c 91

032 024 312 024 c 29 021 0 26 3 19 c 19
P
VUr J--v F.bNUV hW* WI w J”lu July “Z15 -bf oclohf NwwnLw Decamta A- SM cm.
l%o 96m 82.65 79M 86.57 9005 91 45 63% II 9, 7993 6101 82.77 8110 361 co= 07071
1981 LL(152 77.76 77 61 7021 70 76 70 71 K2l 63 17 59 34 65.82 73.10 69.69 70.10 632 et= 0.1411
1%2 666s 67.65 67 94 68.41 6a75 64% 6653 7207 76 76 WY 6341 67% 12 es 756 c2= 006w
tee3 63.75 67.23 67.15 et.32 86.34 8844 8446 63.88 67.16 17.11 w.69 6545 68.75 2% c3= 0.0274
1984 6a 15 a.43 79 22 76.13 76.16 75 76 79 42 62.16 62 40 65% 86.77 88.09 61 W 4C2 OmM
1905 90x2 M.66 67 76 69.13 95x 9542 93 26 94.10 932s 9557 %33 am 9308 4 23 2 0.0033
t%6 8842 10376 ID5.3 10492 102 15 104% lo-4 61 lo674 lOlb( 103% 10517 lC525 10359 2 65
I%7 107 a 109.10 107 03 101.04 10128 1012.5 97 27 M.% 9147 9055 9543 %50 9988 492
(%a 101 61 10160 %69 96.64 9769 9903 9673 95.16 97.46 99.75 9755 97.23 %W ‘93
I%9 98% 95.95 9661 9856 tma3 102% la76 102.11 ID302 102.56 9m93 10153 trn26 24C
1990 9873 S426 91.15 94 10 93M 93% 94 2. 92 73 0960 SC.49 83409502 92 67 2%
1991 9650 9907 9945 9% 12 9668 9s 92 9734 9a 92 102 7, tos50 10548107% jrn54 367
IS92 lm.16 lW.09 102.8s 101 96 10549 107 41 ,054 11421 tow4 Ill79 10740 10945 rmm 3 73
1993 toan 11276 11192 111 et 1lJW 1,466 1,730 (21.15 11805 120.71 12032 12307 1:614 4%
,994 12673 120.40 ,,I 76 11009 ,%a to, 73 IO263 10624 10545 lm.25 10347 103M ,m*t 741

AV=m 9567 94 72 9365 31.16 9366 9362 S3,7 was 9326 9s 53 95 91 9693 94 4n
SM. Dw. 07s 1364 12% 1264 1264 1347 ,507 1.42 1423 13.32 ,174 1249 13%
N- srn tsrn 1500 lsm t5m tsm tsm tsm lsrn tsm 1500 tsrn (corn

T- 0 33 007 024 039 016 016 0 32 01, 032 029 045 on

P- 031 0% 0.33 029 0% 034 0.31 0.35 0 31 0 31 026 023

veal J1 wary Frtww M8ti May JUM July ~~ -r ocmb, M mmmr Dec~mtu A- St4 mv
1980 10260 38.27 e46B 10707 10674 9971 1.99 9704 -04 9832 %.41
I%1 114w 11092 11099 10015 too97 10067 BB 76 9325 646s 9369 16426 9941
1961 91 70 93 01 93 13 9515 94.24 0849 91 m 96.Bo IM.23 11425 1,434 tmso
,963 98.54 tm5s 10046 10527 101 63 101 es 973d 9644 lrnxl tm.41 tm 16 90.50
1993 105 14 101 62 %6d 9s% 9295 9246 98% 10027 im.9 ,(Y42 1ossa ,075,
l%s 9703 9095 9430 9s 75 902.27 102so too 16 10109 imn IO2.67 tm.63 10742
I%# 93% 97 26 $01 7, IO, 26 %6, 4ms2 10117 103.M -m24 %.49 10152 tar 60
,%7 107.76 10629 (0116 ?0,,6 to1 4a tot 37 97% 9507 91 sa 9067 95.54 0662
we-9 10353 103 52 too.53 %.47 99% 10070 98.36 9676 99 IO 10143 89 10 %67
I%9 9002 95-m 99.26 9820 lm46 10256 10340 ,0,.74 sew 10219 100% 101.3,
1990 10631 101 52 IM.15 94% tm.ts 10074 101.43 %4a 97.44 tm57 m2.K
,991 9596 96 54 48.91 9059 9835 0540 96 82 ii.: 10122 10493 lc491 10687
,991 %26 4821 952, 9438 9762 9943 1051t 10573 101 ,I (0349 9943 10132
,893 93 K 8709 %37 %36 97.37 S673 tot m 10432 101.6s 103.94 103M 105 97
1994 116.79 110.96 lrn of tOI 42 97e4 93 75 94 77 87% 97.16 95.1, 95% 9s 71

AVMQ8: 10142 too30 99t9 %63 99 39 9424 98 24 9925 %.Y 101.16 101.62 10263 lmrn
SI. cbv 738 SBO 46, 321 327 47, 4 19 372 4 76 4 92 4 74 602 511
N l5.m 1sm 15w mm lsrn em tsrn mm 1500 is.00 ism nrn ~.wrn

T- 0.73 020 063 IS, 069 054 153 073 1.13 0.M ,.42 177
P 023 033 025 010 024 025 0 ,o 023 015 0.20 OfI 007

“.I, hnwy FetutW mu MW J"c4 J uhl AWJUSI sDpmnlby cmobw Nmwmbf l3acmmbr A”-. St4 mv
l%O ,609 -422 6.46 402 t 55 4% on .,.97 -2 lm I35 217
1%1 .2 72 3.43 a.77 061 010 -12.01 :: 6.21 10.92 11.09 -466
1962 .4 02 144 216 4.95 4.,4 3.10 651 6.57 009 cd
1963 4n 416 -00s 4 76 526 011 -440 097 421 -0m 4.25 -1 .E6
1%4 OK -3.16 5.05 .! 38 -2 52 953 463 3 45 029 3.K 1.41 1 51
196s 253 -627 38) (54 661 023 -2.26 090 066 2.44 2% tm
,%a -3 56 452 461 -048 -2 64 235 025 1.m -2 72 -675 203 0.m
,%7 226 -1.37 OK 560 024 -am -393 -2 37 -3 66 7.74 -3.17 1.12
1968 560 no1 -2.Sa -2 04 loa 116 -2.32 -1 62 242 2% -2 21 4.0
190 I,6 -2 47 089 202 230 210 06, -1 61 -2 05 254 .t 59 0.74
1ssJ -2 93 4 51 -3 32 -3.26 552 0% 073 .t 60 -3 3a OS0 322 1 73
IS91 Is6 268 036 0.33 024 -2 es
1992 -I 29 4a7 -1 cd -067 342 tc6 ;.; 059
162 -374
369 t6d
266 -3402 93 19t
1%
1903 456 3 71 0 74 no1 105 110 2.x) 326 -2 56 225 432 223
,994 297 *99 -7 16 -1 55 2343 -4 26 loa 337 480 .2 m 021 037

0 61 493 .I 02 0.42 061 016 -0.67 0 71 2 73 OR 0% 013

32l 3.46 3.04 4.06 305 2 37 4 64 341 394 14% 2 12 392
N- 1900 15.m 1500 mm t5.m I 5.m t5.m i 5.m t5m sm em 15.00 mm
T. 08S ,.,4 1 40 0.51 OK 0.47 06, 127 091 267 064 136
P 0.20 0.15 0.11 0.27 0.21 026 021 0.13 0 19 002 0.24 0 12

MTA JOCRNAL/Sptinq-Summer 1996 31

 YOW J=w F&ru.ry March >“I” Augurt 6i.pfWlb3, ockh Nwmbr December * Mngs sm Dew co- 07071
19M 89.97 6605 8457 d3.M 94 15 6357 8801 8B.42 65.66 8596 87.00 %J. 2.88 sl- 01.1,
1981 e63a e420 83% 77 69 77 ?a 71 04 71 31 68.39 7369 6044 7716 7742 539 cz- 006%
1962 74 72 75 u 7562 7626 7262 74 44 7939 62e9 87.62 a7.51 9062 7952 5% Ia- 00274
mm 8907 91 49 80.90 91.63 91 22 811.7, 67% 9031 90.79 9041 90.38 90.51 1% c.-
i%4 90.25 87 97 @Am 83% 1150 80.54 63.39 .%211 65.70 6782 89.89 9122 ffim 321 cs- :.z
19s 33.w 6.521 9062 9160 95% %oa 94 63 9519 9473 9073 9892 IWW 9463 322
Is26 97.04 9913 10x4 10238 lco.21 102 19 101 9a 102.98 10126 101 I, (02% 10262 101 39 173
1987 105.26 10444 10530 lW40 ,m.,5 cm 10 97 29 9553 93ca 9652 95.81 %.% 98.37 385
193.5 10065 ID377 9915 9169 97.90 9649 9703 9529 96% 98.22 96.4 95.7, 9764 1 87
1989 46.41 93.93 9429 96 37 %I8 10007 loo77 98% 97.32 9862 9732 9809 9752 1 97
I%0 96.53 9245 9027 66,7 91 50 92m 93M 931, 91 2, 9, 91 9411 9503 9251 2,2
I%, 86 32 9674 9880 9692 9867 9647 9751 96 75 101.x ,042, 10454 10644 I* 1, 32,
1992 104 61 10458 10181 10172 104% 10626 11080 1,112 10895 109.10 104% 10625 ,WM 2%
1993 1mm 10300 ,085, 10829 10915 11046 1,220 114 11 111.93 11422 11.18 1,615 ,,,zo 2%
,934.w ,lIoa 11365 10675 10361 10266 35 70 10059 10302 10277 101 58 (0085 ,m52 10465 547
Awmg. 9623 9534 9454 9412 9459 94% 9425 94% 9410 %Ol 9629 9693 9514
SM Dw 617 8% 915 004 9% 1035 ,142 ,,.od 1353 10.01 0 54 926 986
N= 1502 1500 1500 ,5m 15w 15W :5m 1500 1500 ,500 1500 I8000
T- 051 008 024 042 022 3 21 029 017 037 032 0 49 0?2
P- 027 0.36 033 0.29 033 0 33 031 0% 030 031 027 023

Tab* 3(.,. uonmly AW.ga wtms

Year .JanuaIy Februarf March MliI Mal J”“* Jury I sepbmtm oclotw NovrmbcrD* FIrnbm *wr.g. sm ow
IS80 10185 974, 95 74 10, 45 10532 106% 101 40 9763 96% 97.3, 9.549
1481 1115d loo.76 loa loo .I ,m35 9993 91.82 921, 8834 9507 1039, 9367
,982 93% 9487 95% 9634 9590 9157 93.6, 9984 tm.99 1,019 11043 113%
19@3 98 41 1OI.W la352 10266 10, 30 10070 98 01 97.21 rn.78 loo 31 9889 99.83
19e4 10490 102.25 9857 9723 94 73 93% 96% 9912 99 81 10219 1044.5 10603
,985 9628 93.22 95.76 9660 10129 101 53 IWCG 10059 103.11 10222 104 53 ,056,
19% 957, 9777 101.43 lrn.91) 9184 10379 lW58 101.57 9998, 99.79 101.25 (0, 41
,967 10592 ,W,O 1059e 101 03 10078 la373 9790 96.13 93 67 w.14 96.42 9720
19W ,028, lo297 10132 99.83 la312 10064 9915 9737 98 97 loo.37 w.59 9780
19% 9666 9632 46% 96.82 ,MM 10262 10333 10119 99m (0133 99.30 lW5.9
1993 104 34 9993 9750 95.31 9.59, 9956 10122 lcoffi 965s 89% 101.7, 10272
I%1 9622 9863 96% 98.71 %56 9637 9141 9864 10184 104 18 104.43 10633
1992 %M 9859 9600 9592 9640 1m20 10457 lo476 10085 10267 9.5.99 ID019
,333 9537 9808 9759 9739 9616 9924 1ms3 10265 lM66 102.72 1026.9 10446
1994M 1,294 to860 1020, 10092 W.10 95.27 9612 9644 9112, 9707 963, 9606
*WZ.p: ,0132 10024 9942 98 93 SC.43 99 33 98 85 99 33 9a I1 10092 101.39 102.03 lW.W
sm Dw 5 55 444 3&Y 226 2.40 357 3 32 269 3.52 345 368 449 3.75
N- ,sm ,500 ,500 ,500 ,500 ,5w 15ca ,500 15.00 ,500 15.00 15.00 100.00

T- 090 0.X 059 165 084 0% 1 .zs 0.94 1.25 0% 140 1 70

P= 0.19 03 OX OW 020 023 013 020 0.13 011 011 OW

Ia* Janwy F&.nmry Much JUlv Auglnt seplabw ocloba Novmlbl Des.mba Average SM. Dw.
19% -3.01 4.38 -1 72 4 86 -1 74 .I 111 4% 0.33 I 21
I!%1 4.7, -2 52 665 -7 oa 4 42 a.12 032 4.09 792 928 -408
1982 -3.16 0% 050 IO4 -4 5, 2 22 665 4.18 5% 022 320
ISKI -1 7, 2 72 456 2.35 05, -2 75 -081 2u 053 -042 am
1984 -0.12 -2.53 -360 -1 38 011 315 227 259 2.24 146
1965 1% -5 15 2 73 ,m 0 24 -1 51 059 :: 2 ,I 2.28 to9
19% -2 98 2 15 3 74 -0 45 1 98 42, 0911 -167 -0.09 I .46 017
16-37 237 0.76 062 -465 405 -2 II -1 8, -2 50 564 -2.75 081
19M 420 0,2 -1.6, -1 47 052 -1 4.5 -1 79 164 1 4, -1.77 480
1989 on -2.5, 0.38 22, 1% 0 70 -2 07 ~1.38 1 54 -,.52 079
1990 -1.59 .423 -2 38 -233 370 0 77 1% 057 -2.04 077 2 39 0%
1991 1% 2.51 OW 0.02 015 -223 lca 121 324 226 0.26 162
1992 -1.72 .005 -2 83 409 260 162 437 OM -3 75 20, -3 76 121
1893 019 204 0.50 020 079 t 20 158 173 -1 94 2.05 4.34 I 13
199400 1% -375 607 .I 07 -2 79 -2 ed3 069 2.42 024 -,.I6 472 -0 33
A-: 019 0% -0 ,8 -0 40 052 -0 12 4.1 0.51 452 217 0.50 OS1 055
SM cw 2.14 2.7t 2.35 293 229 1 81 3,4 2.19 24, 2 43 2% 157 2.5-5
N- 15m 15.00 ,500 1500 ,5m rsm 15m 1500 1500 1503 ,500 1500 1w.m

T- 0 46 145 , 32 081 072 0 39 059 072 092 3.,9 054 1M

P 021 011 0.12 025 023 a30 0.25 023 019 001 026 014

32
Graph 1

33
34 MTA JOU~‘;U,/Spring-Summer 1996
 The High-low Index as a Tool to Enhance Returns
Introduction
Submitted by Harold B. Parker, Jr., CMT
The analysis of uew 52-week high and low data 011 the
NkSE can provide valuable insight into the near- to inter-
mediate-term treud of the market. These data have beer1
used in a wide variety of ways over the years, but most com-
mouly they are used as a ratio (highs divided by lows) or
as a difference (highs minus lows) .’ The interpretation
of the data has generally fallen iuto two general catego-
ries as well. Oue method relies 011 the data to confirm or
diverge from the popular indexes such as the Dow Joues
ludustrials or the S&P 500. The logic behind this method
is that a healthy market which is making new highs should
be accompanied by a large aud/or rising number of indi-
vidual stocks making new highs as well. Sew highs ill the
indexes without IKW highs iu the high-low indicator are
considered suspect. The reverse would be true of bot-
toms. The second general use of the high-low indicator
has beeu as au overbought-oversold indicator. The logic
behiud this method is that extremes in the indicator point
to unsustainable extremes iu the market. Most forecasts
usiug these two types of iuterpretatious of high-low data
are rather subjective.
The shortcoming of subjectivity of interpreting the
high-low index was addressed by Abe Cohen with the
Chartcraft High-Low Index. He displayed his High-Low
Index 011 a point aud figure chart. The index is cou-
strutted by dividing the uumber of uew daily 52-week highs
on the SYSE by the sum of new highs and new lows. .A
simple lo-day moving average of Llie rcsultiiig percentage
data (((Highs/ (Highs t LOWS)) / 10) is theu plotted 011 a
point and figure chart using a box size of 2% and a three-
box reversal arid bounded on the top by
100 aud the bottom by 0. The result is a F,GURE,
chart that is elegant in its simplicitv aud
I
ohjectivitv because it filters ou; the
“noise” ok small ((6%) reversals and
shows reversal points clcarlv (the rever-
sal from X’s to O’s or vice versa is un-
equivocal). Cohen considered levels be-
low 10% to be oversold aud ihose above
90% 10 be overbought aud a reversal from
those extremes to be buy (from oversold)
and sell (from overbought) signals.
Cohell’s logic seems to go oue step
beyond that of previous indicators. Us-
ills the decision rules in the paragraph
above, this indicator gives iiot only ali
easilv determiued indicatioil of extreme
overbought and oversold levels, but also
provides au objective method for deter-
4
mining when these conditions are reversing. This siguifi-
cantly enhances the usefulness of high-low data because
it allows them to be used as a timing tool for intermedi-
ate-term moves. Unfortunately, the market rarely gets to
the extreme 10% or 900/o levels before reversing, aud this
can strand the investor in a reversing market without get-
tiug a signal from the indicator. Cohen’s rules resulted in
only two completed signals in the lo-year period studied.
When invested, the Cohen method returned a respect-
able compounded annualized rate of return of 18.9%.
However, it was in the market only 16% of the time aud
captured only a little over a quarter of the total up move.
For more useful entry aud exit signals, some alteration of
the decision rules seems in order.
Method
Testing was done using Cohen’s calculatiou and plot-
tiug methods, described above. 0111~ long positions were
taken using the following decision &les:
Buy: Indicator reaches 40% or less alld reverses up
by 6 percentage points.
Exit: Indicator reaches 70%’ 01‘ greater aud reverses
up by 6 percentage points.
Sell Stop: Indicator reverses prior to the sell signal above
aud declines to a level below the low of the
column of O’s preccdiug the buy signal. The
sell stop would be triggered, for instance, if the
indicator falls to 38 and reverses up to 44 or
greater (crcatiug a bottom at 38) alld thcu hlls
lo 36 prior 10 risiiig to 70.
The indicator is illustrated irl Figure 1.
1
!
j
i
 These decision rules were established empiric&
based on the author’s experience. The levels of 405
and 705 looked as if thev would give a good balauce
of profitable signals VS.“whipsaws” and would achieve
the primary objective of developing a tool to assist an
equity investor in achieving results superior to a buv
and hold strategy Therefore, the investor is either
long or out of the market for the purposes of the test.
X secondary objective as to have drawdowns due to
market fluctuations that were significarltlv less than a
buy alld hold strategy.
The testing was doue over the lo-year period from
19851994. This period 1va.schosen because Grst, the
method for reporting the underlying data ivas cousis-
tent, and second, it produced enough signals to give
reliable results.’

Results
The results for the studv oeriod indicate that the
high-low iudki can be verv useful for
FIGURE 2 timing entry into the equity market.
The buys and sells are listed and sum-
marized in Table 1 and illustrated irl
Figure 2.
The high-low index aud the decision
rules described above resulted in the
investor being in the market for a total
of 3.76 wars out of the 9.74 years be-
tween tde start of the first signal and the
end of the last signal. The compounded
annual rate of return’ \vhilc illvested was
23.57%, excluding dividends. The
maximum adverse excursion was 7.26%.
(:Ilnximum n&r.sr: txxusion is the maxi-
mum percentage dccliue ill equity due
to market lluctuatioll of the eouit\
placed illto each ~xtc. This differs
from the term drtudown, which is the

FIGURE 3
I maximum percentage dccliue irl equity due to mar-
ket fluctuation from the previous peak Icvcl ofequitv.)
The equity
. curve for using the high-low index during
Equity Curve using High-Low Indicator the study period is conta:led in Figure 3. The start-
I ing point for the curve is the S&P 500 level at the
begiuuiug of the test period.
If one had instead bought the S&P 500 at 167.16
on December 19, 1984 and sold at 467.91 on Novem-
ber 3, 1994, OIIC ivould have achieved au 11.14%) conl-
pounded annual rate of return. excluding dividellds.
for the 9.i4 year period. Using the buy a11d hold
method. the maximum dra~vdo~11 ~vould have lxxm
34.23%.

Discussion and Conclusion

The High-Low indicator produced reliable
. signals
and performed \\~ll versus a buy and hold stratcg)
during a period \\.heu INN and hold tvorked extremeI\
well. The trading signals’ for the studs period had the

36
following fworable characteristics:
l 70% were profitable (20% with no ad\Terse excursion)
l High annualized rate of return while invested (23.57%)
l Low adverse excursion from entry (7.26% maximum
and 2.07Y0 average)
. Ratio of % gain to M loss was very favorable (7.31%
avg. gain vs. 2.78% avg. loss)
l Total Gaiu/Maximum Drawdown ratio was 9.46 vs. a
ratio of 2.67 for S&P 500 buy and hold
l .A Student’s T test of the results indicates that they are
highly significant, with only a 1% probability that’the)
were achieved by chance
In addition, the indicator has the advantages of being
objective aud easilvmaintaincd from readily available data.
The indicator gate an al’eragc of only two completed
signals per year and the exit rules had an in\.estor out of
the market for two-thirds of the time studied. These char-
acteristics may be considered to be either a positive OI
Ilegativc dcpcnding 011 one’s i1lvestment objectives; ho~\~-
ever, thcv dicl result in lolvcr-than-market risk. The most
significant disad\autaqe to the indicator rvould seem to
be that it tends to bc iarly with its exit signals. Examiua-
rion of Figure 2 reveals that one would haye forcgo1le sig-
uificant upside movemeut iu both 1986 aud 1989 by us-
ing this indicator as an exit tool. This would suggest that
other indicators might be useful adjuncts to more pre-
cisely time market exits. It might also be useful to exam-
ine SOIW other decision hcnchmarks in the future. NW-
ertheless, this illdicator, with the current benchmarks,
resulted iI1 the investor capturing two-third of the points
iu the up I~OYC iu the market during the study period
~\+ilc being inwtcd for odv one-third of the time.
MTA ,lOURSiU.,‘SprinS-Summel-
‘Annualized rate ofreturn was used because the author’s decision rules
resulted in being invested for nearly four)ears or a little over l/3 of the
total time studied.
Bibliography
Cohen, A.1V.. How to Usethe Three-Point Reversal
Method of Point 8: FicrureStock Market Trading, Sew
Rochelle,Sli, Chartcraft, Inc., 1987
Colby Robert M’. and ThomasA. Sleyers,The EnclcloDe-
dia of Technical hlarket Indicators, Homcwood, IL, DOW
Jones-Irwin, 1988
Fosback,Sorman G., Stock Market Lozic, Fort Lauder-
dale, FL, The Institute for Econometric ResearchInc..
1986
Pring, hlartin J., Technical AnalvsisEsnlnincrl, McGraw
Hill, New York. 1985
Harold B. Parker, Jr., CMT
Harold B. Parker, Jr., Vice President alld Scnio1
Portfolio Manager, started his investment career as
an account executive with E. F. Hutton L&Co. in 19i8.
He left E. F. Hutton as a Portfolio Manager in 1985
to joiu Smith Barney. Mr. Parker joined Dorsey,
M’right ,Y: Associates in 1994. Their management
style is focused 011 using point and figure analvsis
for stocks, sectors, aud the owrall equity alld fixed
income markets.
l9<)(i 37
38 MTA \OPRs;\L Sprint-Summer IW
 Answering the Bell of Sentiment Indicators
Submitted by Brent 1. Leonard, CMT Program - Level III
The put-pose of this review paper is to list, explain, attd
evaluate several well-known stock market setltitnettt indi-
cators over many periods of time. These indicators itt-
elude Option put/call ratios, advisorv letters, short inter-
est, mutual futtd cash, and other contrary against-the-
crowd statistics.
The reason that this is a Review article rather than Re-
search is that there has been much written ott these ittdi-
caters by the experts of the industry (although very little
recently, which I hope to update). Each indicator’s peaks
and troughs will be juxtaposed with the appropriate itt-
dex or average. I intend to first define and describe each
Indicator and assess its efficacy; then, in a Discussion sec-
tion, I place each on a Bell/Growth Curve model itt its
appropriate place itt time.
These littdittgs should be of use to attyotte who ttceds
to ascertain markel direction attd reversals for tradittg.
Much has been written over the years about cotttrar)
opinion; it has becotne widely accepted and clever to go
against the crowd - “When everyone looks 011e way, look
the other!” Although primarily a true concept, there are
a few considerations I would like to bring to light. Most
serious investors arc familiar with the South Seas Bubble
and Tulip Bulb Mania from Mackay’s Extraordittay Popu-
lar Delusions and the Madness of Crowds. Although his-
tory repeats itself, it almost never does it exactly in the
satne way. Try developing a tulip craze in Holland today,
or, observe the Deutschbank’s tight stance against ittlla-
lion after the wheelbarrows of DMarks decades ago.
111his talk at the 1994 attttual TSAR cotlferettce itt Satt
Francisco, John Bollinger stressed how importattt it is to
know against whom to be cotttrary. Should otte take a
position against the world being round, or the SUN rising
tomorrow! Rather, the successful ittvestor has to estab-
lish, through introspection, att ittterttal tnottitor which will
wart1 hitn when he has stopped doing his own analysis and
has begutl relying on peers, tnedia itetns, or a guru for
opiniotts, “tips,” and timing.
In his book, Humphrey Neil1 explains that cotltrar~
opiniott is not necessarily cynical or negative, but sees both
sides of att issue using ottc’s experiettce and logic to see
reality. Just as some oscillators can be useful in the middle
of a trend but wrong at the extremes, so are the majorit)
often correct during a Bull or Bear market but mauicall!
wrong when it reverses, especially when they are required
to act, like buy or sell, rather than just observe. Examples
of herd logic at these junctures are “This titne it is differ-
ent,” or “What cat1 possibly go wrong.” Or at the nadir,
MTA JOUILUr-\LISprin~-Summer
5
“This company is doing cvervthing tvrotlg - it’s hopeless.”
In the following pages I would like to illustrate which itt-
dicators are the most effective in forecasting markets, itt-
dividually and in combination.
One category of setitimettt measuremettt is the surveys
found in Barron’s and elsewhere ott advisors, letter writ-
ers and investors. Although the majority of these surve\rs
only go back a few years, their roots can be found (a;-
cording to Keill) itt an SEC poll before the Crash of ‘46
where advice from Brokers and Advisors showed a bear-
ish per cent of only 4.1%.
Earl Hadady of the Bullish Consensus feels so strongl)
about this ittdicaror that he feels (itt his excellent article
itt the 1986 11T.A lourttal) that Polling is a third and most
importattt tnethod of attalvsis, above Technical attd Futt-
dametttal. The basic qu&ott of why investors bought or
sold (the public tteeds attswers, the media attempts to fill
that need, either in honest attctnpts or in some cases itt-
tetttiottally misleading) is ttot important; rather what the
public is really doing, as tnanifest itt the Technical signals
of Price and l’olume over Time. Cttfortunately, just as
the media and economists range widelv in their beliefs
and advice, so do technically oriented ‘gurus and letter
writers. As Hadady points out, extreme examples (70%
or more) occur less than ottcc a year. If 80% are of otte
tnittd, ottlv 1 of 5 traders (especially in zero-sutn Futures
markets) hold a cotttra positiott - therefore they are the
strong hands of Richard \\‘yckoff’s Composite Operator,
or the Big Money that controls markets), itnpervious to
tnargitt calls or scared motley and itt tto hurry to get out
without a large profit when the majority is sated - as indi-
cated whet1 favorable ttcws now has tto effect. It is at this
point that shorts are covered, tnargitts arc full, and com-
placency is rampant.
In sumtnatiott then, by way of paraphrasing into an
anagram, Edwin Lefevrt? in Reminiscences of a Stock Oo-
erator, the tnotto F.I.G.H.T. could represent Fear, Igno-
rance, Creed, and Hope over Titne exetnplifyittg the emo-
tions which we need to control to be the ultimate, dispas-
sionate Cotnposite Operator. or ideal Lradcr.
One way to analyze tnarkets by the notion that there is
a “cotttrollittg factor” or IVyckoffian Composite Operator
behind tnarket movements l\.as portrayed in a white pa-
per lvritten by Dr. Henry “Hank” Prudett for a class at
Golden Gate University He likens the market to a cloth-
ing Fashion Cycle wherein otte or tnore top designers in
the haute couture world decides a new dress length, style,
color is needed, it is thett created and diffused through-
out the fashion elite, adopted and itnitated by the general
public, until the last housel\ife in a fartn community itt
199~ 39
the Midwest has given in to the new look. Magazines. cess before the current bull market, for the following rea-
stores, media shows have “told” the public what to wear, sons: only 2 major spikes above 13 occurred in this 12.
driving existiug dresses, ties, and other clothing into pre- year time frame (see chart 1). Although both preceded
mature obsolescence. Indeed, if print and television me- large upmoves, they were the result of a sideways trading
dia cau “hype” or market athletic events, songs aud mov- range (1986) and a sharp selloff (1990). However, seven
ies, why uot glamor stocks, mutual funds and other secu- other smaller spikes above 10 did not render bull mar-
rities? kets. Conversely low readings did riot indicate down moves
in the market wtth three exceptions- 1987, 1990. and mid-
The Indicators 1991 - versus several that preceded upmoves. Other rea-
The odd-lot short ratio is derived by taking odd-lot sons might include these: smart money was shorting in
purchases added to odd-lot sales, dividing by two (much small odd-lots to avoid the uptick rule, now extant in over-
like open interest in Futures is obtained), aud dividing the-counter stocks; some shorting was used in a derivative
that into odd-lot short sales. I did not find this iudicatot fashion to hedge arid box positions, more than in the past;
au effective contrary tool, especially in relatiori to its suc- mauv odd-lotters with scarce mouey moved to index and
equity options over the past fifteen to twentv years.
CHART1 NYSE SHORT RATIO; S&P 500
Merrill Lynrh data 1965-94
Looking at monthly data ou NYSE short inter-
est ratio aud its effect on the S&P 500 Index, his-
torically this was an accurate measure of contrar\
opiniou. where the earlv adopters of trend xvere
correct and profitable, and those at the manic end
(see arrows 011 the left side of the bottom part of
Chart 2) were 180% wrong. Sharp rallies, abetted
I I ,
by short covering, ensued in cyclic fashion. Once
I

j(Q.1, --.-.--I-..-.. -..- ..-.-.-.-.-.-._.__.” ..-..-.-.-.--..-.-.- - .-.- --.--- .-.-.-._._, .,.... -

we euded the 17-18 year trading rauge cycle and
,n.,, --.----.I .-.- - .--.
started the curreut bull market of 1982, things
,“.j( --.-.--.--.--.--.-.
noticeably changed: shorting became and re-
,*o,a, --.-.- - -.-------.-.
mained excessive, again mostly due to derivative
,#,@I --.-.-.- - .-.-..-.-.-.-.-.-..-. -
hedging wherein shorts do uot have to be covered
*go,&, -- ..--.-..-. “.- . . -. - - .-..... -
aud strong hands do not have to meet margin calls.
*w,j, -.1-. - -.-.-..-.-. - .--.-.-I--.
Another factor to cousider is that currently over
10% of the NOSEis Closed End funds, mostly bond
,$0.00 -.-.-.---.-.--.--.-.--.--.
and country types. Still, as the arrows continue to
IoI.01
show, rising spikes seem to jibe with up moves 011
ID.001
the S&P 500, with the one exceptiou.
 SPECIALIST SHORT SALES VS. PUBLIC cedes either substantial declines, or at least long, sidewavs
l&nill Lych data 1975-94 trading rarlges. Obversely from the 1987 Crash until wdll
What appears to be a better indicator of shorting senti- into 1989, Mutual Fund redemptions exceeded sales
ment, although far from perfect, is the Specialist versus throughout that up market, just in time to buy (A] into
Public ratio, shower below (Chart 3). Specialists are the the next decline (BJ.
closest persons to buyers’ and sellers’ decisions, although
there is a oue to two-week delav in finding their actions.
We can observe that not only are the Buy aud Sell signals
mostly accurate (B & S not mine), with an occasional mis-
fire (O), but over the long haul, timing market trades would
afford you better than 50% gain over buy-and-hold. The
“middle clip” iu Charts 4 & 5 refers to the areas between
the dotted lines, lower half.

CHART 3

MUTUAL FUND CASH RATIO

CHART 4
ICI Nrd Davis Resenrrh 1978-93
Chart 4 right illustrates
how excessivecash can power
markets upward while, at least
iu a major Bull market, too
little doesn’t always correlate
to a major decline. One rea-
son for this is that the pressure
of short term performance,
especiallv with “Money Man-
agement Consultants” de-
manding low cash ratios for
clieuts, poses the threat of L

moving them to another

monev manager who will “ro-
tate” the cash iuto auother
sector.
III addition to the fact that
excessmutual fund cash does
precede rallies, the reciprocal
occurrence of mutual fuud
buying climax (asdepicted in
the X’cd Davis Chart 5) pre- I rrio, Stock Mutual Funds Cash/Assets Ratio SOL”<..Inr~,lm.nt C.rPP.“” ln*“t”t.

MTA JOURNAL/Spring-Summer1996 41
 CHART5 cur at or near the bottoms,
when the call buyers ivould
benefit, especially in the
mid-198586 span.
Cur-iously, from August
17, 1987 to October 16,
1987. the OEX put/call ra-
tio was locked in a 60-100
range. actually risirig iuto
the last few davs before the
crash (theoreticalh bullish).
The highest reading ever
~va.sin late 1983 - 9.28 - iu-
terestiugly just before the
big decline of January 1984
of some 30 OEX points.
Being a veteran Option
Specialist for the OEX’s larg-
est trading firm and author
of an article iu the 1993
MTX ,Journal (#41) 011
L’.O.I.C.E., a treatmerit of
OEX Ii>lume aud Ooen 1 In-
:I
CHART6
MARGIN DEBT 1967-93;
Mend1Lynch dntn
As the long term chart iudicates (Chart 6 with the op-
posiug arrows) Margin Debt has historically beeu a cor-
rect indicator of major tops, especially iu 1973, just be-
fore 1982 and dramatically iu 1987. After the 1990 cor-
rcctiotr caused the last Margin debt reconciliation or cov-
ering, the chart shows a straight up trend, reflectiug the
investiug consumer’s, gownmcnt’s and even global ap-
petite for spcudirrg 011 credit. Although accurate, like
maw oscillators the trerrd cm stay iu its extreme mode
seemirrgly iudefirritclv 1 0111~
, warning of its imminent burst-
itig.
As I mentioned earlier iu the odd-lot short paragraph,
wheu the option market got popular, especially iu March
1983 with the advent of the OEX (S&P 100 Index), the
least accurate of traders, the uuderfiuauced public,
switched from odd lots of stock to optious OH stocks aud
indices. At the prcseut time, more than 1500 stocks, OI
7.5%of the stock market capitalization, hasequitv options.
The uumbcr of sector indices hasalso burgeoued dramati-
cally It has been commonl!; thought that when put vol-
ume heavily outnumbers call volume, this is a contrarv
irrdicator that the market OI- uuderlriug entitv will rise.
This is true for the short-term day trader; however, look-
ing at the history of the OEX on a weekly basis(Chart 7))
the opposite seemsto be true. Over the 12 years, usiug
Reuters parameters of below .Z OEX put/call ratio as
bearish arid over 1.50 being bullish, Ive cm see the high
slumbersare almost alwavsat the top, proving the put buv-
crs correct. Similarly the lower numbers cousistentlv oc-

42 MTA ,JOURVAL/Spring-Summer19%
CHART 7 Intermediate, position-trading Master Indicator, for
which I am currently collecting data and fine-tuning,
possibly for a future paper.

terest input into a TRIN formula with excellent results

(asdid,Jim M-LI .tm, Ray Hines, John Bollingcr, aud others
in slightly different ways), I was quite surprised bv thcsc
lindiugs. Obviously further study using moving averages,
;uld daily data abstracts arc uccessarv to \-crib this COIIULI-
drum. Looking at current dailv data in the next chart. we
do see a more positive correla;iou bctlveeu high put vol-
ume, both in the OEX and all-equity CBOE charts, and
upward price movement. This is line for dav and short
term trading, but I cannot use a high cocffi~icut in In\

43
 OPTION PREMIUM RATIO BY CHRISTOPHER
CHART 8
CADBURY, 1986-94
Option PutfCall Ratios Stocks L? Commodities Jlagazine
A rather recent indicator that hasestab-
lished many valid instances, primarily due
to extensive research aud several aiticles
by Christopher Cadbury (to whom I owe
much gratitude for endless data), is the
Option Premium Ratio. This cau only he
found in the Sentimcut \\‘indoiv, Chart
Page of Investor’s BusinessDailv, item #.5,
and essentially combines Put/ Call Option
seutimeut with Implied Volatility of the
11X, only it includes all equity options, not
just the OEX Index. Based on data from
10 years, (although listed options have
been around over trventy) di\idiug put pre-
miums by call premiums has ranged from
.03 to a hqh of 1.74. Cadbury established
that values below .29 and above 1.I8 indi-
- ------

Market Action cate a continuation of the trends down and

up respectivclv - like extreme levels of
other oscillators. Couverscly, OPR’s from
30 to mid-60s generate buy signalsand lev-
els to 1.18, sell signals iu about 200 differ-
cut combinations of occurrcnccs.
Most of these abstracts are proveu al-
most unanimouslv bv 10 to 20 test ex-
amples, such as. “F&k co~lseculive davs of
gaius or uuchaugcd values for the 6PR
starting from .32 to 51 have always pro-
duced siguificaut rallies in the stock mar-
ket”. X fewzhowever, such as“Ideutical val-
ues for the OPR iI1 the range between .SO
to .88 separated bv .i to 7 tlavs have alwavs
prod&l siguificaut declines in the stock
VIX INDEX market” have iusufficicut testing aud bor-
CBOE 1983-91 der 011the “\\,hencver I wear a red tie 011Friday the mar-
Just a brief word about the L?X Index, Lvhich measures ket goes up for 3 days” categorv. Below is a data table of
the Volatility of the OEX Iudcx (S&P 100) from mid 1985 oue of the most hcavilv tested’“pattern recognition” ex-
011,as shown iu Chart 8 above. It actuallv de-
picts the Implied I’olatility of 8 OEX optiolk, iu
CHART 9
aud out of the moue): uear mouths. Since it
has only bceu around in a Bull market, its onl! -we
--- s :I
consistent behavior seemsto be: down or non-
\,olatile during moves of the major uptreud, [bit11
sharp up spike when the market declines, and
Ilat or coiliug during trading ranges. Chart 11
showsthe historical high of 150 in the Crash of
1987,and siuglc digit loinsduring 1993 and 1994,
possiblv ai1 harbinger of things to come. Al-
though the VIX is verv good for trading strate-
gies (busing or selling options depending 011the
volatility), I find it lessuseful than the Option
Premium Ratio, which combiues put/call senti-
meut with volatility (see next page).
 TABLE1 opinions of over 100 ad-
Significant Rallies in the Stock Market visory letters everv week
DJIA points and DJIA points and on CKBC arid later in
Date Values days before rally time of rally Barron’s. Since 1966, this
(W (Days) (Pts) (Days) (Wks) has beeu ;1u excellent
Jan 28, 1986 .51, .51, .51, .56, .78 4 2 303 coutrarv indicator with its
12
Sep 23. 1986 .34, .37, .38, .40, .40 43 4 144 “trading range” giving its
6
Sep 30, 1986 .36, .37, .38, .40, .40 0 0 133 best signalsfrom high 30s
5
Kov 24,1986 .32, .47, .51, .57, .62 10 25 510 14 (Yo of Bulls) as a Buy sig-
Sov 25. 1986 .4’i, .51, .57, .62, .65 16 24 510 14 ual and mid-iOs asa Sell.
Jml 01. 1988 .36, .37, .42, .61, .iO 12 1 106 22 Although the Buy signals
I Nov 28, 1988 .36, .38, .42, .42, .45 0 0 266 10 have proven verv consis-
~ YOY 29, 1988 .38, .42, .42, .45, .54 9 3 255 tent, the Sell indications,
9
~ Nov 30, 1988 which before 1989 were
.42, .42, .45, 34, .% 22 2 255 9
Mar 29, 1989 quite consistent although
.39, .41, .42, .43, .43 0 0 250 13
Mar 30, 1989 .41, .42, .43, .43, .43 0 0 250 13 very early (sometimessev-
Mar 31,1989 .42, .43, .43, .43, .53 2 4 eral mouths), have been
239 11
Apr 03, 1989 .43, .43, .43, 33, .5j 13 3 239 11 effective in signaling trad-
Dee 12. 1990 .4i, .49, .51, .52, .57 64 6 122 6 ing ranges as our strong
Dee 13. 1990 .49, .51, .52, .57, .59 73 :‘, market ellsues.
122 6
May 04. 1990 .42, 52, .54, ..54, .57 0 0 289 10
Dee 23. 1991 .50, 33, 36, .57, .81 0 0 268 10
~ Juu 22. 1991 .33, .34, 38, .42, .44 0 S&P 8 22 S&P 6
~ Four consecutive days of gains or unchanged values for the opGon premium ratio starting from
.32 to .jl have ahvavs produced significant rallies in the stock market.

amples: it includes the date the 5-7 day series began and
the OPR values; the next four columns list the number of
Do~~~Joucs points aud days just before the event, and the
uumbcr of points in the subsequeut rally with the uum-
bcr of day or weeks to com-
plete it. More will be heard CHART10
from 011this excellent iudica-
Y.“dd,D.I. II/Jim. 1,2,/94 IL., 2-r.I,,
tor - I intend to include it in Standard & Poor’s 500 Stock Index
469
mv \laster Indicator. 416 L .,,cc)”

SENTIMENT INDICATORS -
OPINIONS
h7on ‘s Polling Sw7qs

The follolvillg section dis-

cussesthe derivation of the 4
major Scutimeut survevsfrom
Se~vslctlcm along \\?th’Charts
l\lhich show Buy and Sell
points. and their rcspectivc ef-
c
fectiveuess, as showrl 1)~ BULLS I BULLS + BEARS Enrem, Optlmlrm -- “n‘a”o”bl, !

’ bGailis - again, this paper is . .

lo review. ilot to research the
gathcrilig details. .\lost effcc-
live. 1fouled. \cere the \larket
\‘aue alld .\UI Sw.sletters.
1. INVESTOR’S INTELLIGENCE
1966-95
Iuvestor’s Ilitelligelice is The.MOnIn
.aueraoe
published by \lichael Burke’s
Advisory Sarwce Sentiment
Chartcraft. aid cxprcsses the

45
 shows,there were a few very
minor price reversals on
i major Sell signals, especiall)
in the coiling action of both
the S&P 500 and the indica-
tor the last 3 years. Still,
profits would have bested
the market as measured by
the Buy-Hold strategy (see
upper left corner of chart).
As I write this paper, this in-
dicator has reached a four
year high of 67 (twice), ver-
susa 71 in the first quarter
of 1991.
3. MARKETVANECORP.,
198&94,PASAOENA,CA
An even better sentiment
indicator is found in the
Market Vane of Market Vane
Corp., Pasadena,CA. Com-
prised of 100 of the top In-
vestment Advisors from Bro-
kers, aud obtained on Mon-
day each week, information
2. CONSENSUS,INC.1984-94, KANSAS CITY,MO appears on a 900 phone
The Bullish Consensus, from Consensus,111~.in Kan- number and in Barron’s 011 Saturday of that week. Chart
sasCity, X10, also uses opinions from advisory services, 12 indicates a more precise correlation between reversals,
mostly investment advisors from major brokerages using although again the sell signalsin a strong Bull market tend
house organs versus newsletters. These figures also ap- to be more of a reaccumulation trading range than SAR
pear on a 900 liuc arid Barron’s 011 Saturday. As Chart 12 (stop aud reverse). Once more, the last several vears re-
semble coiling action (ex-
tension waves of lesser de-
CHART12 grees) with lower highs and
higher lowsin the Indicator.
The chart ends with the
spring of 1994 correctiou as
the O/P lille portends a
large upmove in the uear
future. During the writing
of this paper, it rallied up to
62 for the iirst time since
1987. At this time, March
25, 1995, it is curiously near
midrange, or 47 to 53 area,
uot forecasthig the selloffs
I of the previous 3 indicators.

46 MTA JOUR~?LL/SprinS-Summer
IVN
 CHART13 and uot an actual frequency
distribution. The Growth line
represents a Price line and an
accumulation of the aggre-
gate Indicators, while the Bell
Curve depicts Volume aswell
asthe timing phases.Beneath
the Bell and Growth Curves I
have listed the indicators un-
der studv
Odd-lot shorting would be
the highest early in A, with
Public entering in the C seg-
ment - they would have to
cover by C, with the Special-
ists startmg to short at E.
Mutual Fund Cash would
be large at A, fueling the run
through D, when it would
drop into the single digit per-
centage. Conversely, Margiu
would bc at its low at A, be-
coming manic at C and D,
where the rising slope is
sharpest. After au iutensive
study of the history of the
4. AMERICAN ASSOCIATION OFlNDlVlDUALlNVESTORS SURVEY
-1987-95 OEX Index, I can onlv find it useful iu a contrary way 011
The final Iudicator of the Barron’s group is the AAII, a very short term basis. Another look at Chart 7 shows
or American Association of Individual Investors of Chi- that in almost all cases,except iu tops of 1986 and 1987,
cago, IL, the true retail trade. With 25 postcards mailed high numbers were found at tops, low at the bottoms,
out each day of each week, uearly 100 come back with meaning traders were correct in the 101lg view. I must say
each investor’s opinion of the market for the next six that our current Bull market has had high uumbers from
months. As might be expected, this indicator has an al- hedging and from those speculators trying to call the top
most perfect correlation exemplifying the aforementioned of this market. Similarly, the VIX Index aud the Option
“crowd” svndrome. Gains Per Atmum show more than 3 Premium Ratio, derived from option premiums rather
to 1 improvement over buy aud hold. thau V’olmnc, are short term, a11d lvould therefore be dif-
ficult to place on the Chart.
Discussion Section Finally, Bearish Sentiment and gloom from Investment
letters and media (magazine covers, financial newspapers
In assembling and aualyziug all of the above data, what
and TV) respectively, would be pervasive coming into A;
becomes iucreasingly evident is the difference in the time
they would gradually mutate into complaccucy through
factor of each. After working uearly a year on coustruct-
C, aud outright euphoria aud certainty by E.
ing a Master Indicator from the most successfulof these
Sentiment Indicators, it isvery apparent that each of them
has a different time frame. For example, the timing of
the Put/Call OEX ratio is much more short term thau
Margin Debt or Mutual Fund Cash. Sot OI+ that, the
optimum position ou the Bell/Growth Curve (taken from
the work of Everett in 1970) 011 the uext page is quite
different. It is only through a corroborating “nesting” of
several Iudicators that we cau hope to validate the Master
Indicator, which would be a great topic for a future paper.
Using Table 2 asa guide, with help from data by Yale Hirsch
in his book Don’t Sell Stocks 011 Moudav, I will try to place
each Indicator OII the Curve 011 Chart 14 somewhere be-
tween A aud E. The graph is a \lodel illustrating a homo-
geneous population of Investors and sentiment indicators,
 CHART 14 Sentiment is as important as an: other
technical tools used by Technical Analvsts.
and will continue to be so as we enter’ the
area of “Behavior Finance” employing Seu-
90% ral Networks to quantik the Psycholop of
Investing.
80%
V. Bibliography
l The Crowd br Gustave Lc Bon, 1982. Cherokee
Publishing Cb.
l The Art Of Contrarv Thinking by Humphrey B.
% I r i Keill, 1992, Caxton Printers
t. 50% Reminiscences Of A Stock Operator hv Edwin
t- : l

s I Lefevre, 19?3, Doran, Fraser Publish&s

z2 40%
- l Don’t Sell Stocks On Slondav bv Yale Hirsch,
c I’ /I 1986, Facts On File Publication;
30% - r/ l Sletastock Technician Odd-lot. 1982-94
,’ : ] i’:, I ._
l Trendlines Odd-lot Short Sales, 1991-95
20% -
/ ; j ;z.;i l SE5E and Specialist Short Sales - XIerrili Lynch
4’ : :, - :;:& _ D;Gl
10% -
: : Uri‘..? - I...’
c ,’
LULY fMlY
, AooPms: UNoRlTI : KUOP~:;;I ‘W;tMOs l Investment (:ompany Institute - .\lutual Funds
0 . yyx 1 133% ! 14X.’ : ,(X <I’>: 1. - 161’ : .
%/;:\- ‘A’ ‘@I 1 ICI 1-y I Ii l .Ned Davis Mutual Fund Buying
l-h
l VIX Chart, CBOE (Chicago Board of Options
Exchange)
Indicators A B C II E
l Option Premium Ratio by Christopher
Shorts: Odd-lot Public Specialist Cadbury
Mutual Fund Cash: High Low
l Merrill Lynch charts on Inwstor’s Intelligence,
Margin Debt: Low High
Consensus, Inc., Market \‘ane Corp., and
Put/Call Ratio: High Low American Association of Individual Investors
Volatility Iudcx (WX): Low High
Option Premium Ratio: Low High l OEX put/call ratio data, Bloombcrg Sew
Opinion Letters: (B~o~us. . OEX charts - Reuters/Quotron Advantage AE
.\tivisors.AAll. Sew Xledia) Gloom! Euphoric
Emotion: Fear Creed Complaccnc!

Conclusion
In conclusion, what I have learned in researching and
writing this paper is that although the basic concepts of
Sentiment and all of Technical Analysis are eternal, some
things do change as markets change. For example, senti-
ment indicators such as Odd-lot Shorting were rendered the Technical Securities Analvsts Association of San
less effective by other inexpensive derivatives, such as op- Francisco, and is completing ilis Master’s ill Finance ~
tions. and Le\rel III of the ChlT designation.
Also, just as some Oscillators change parameters in Bull Brent has taught classes in technical analysis at
versus Bear markets, Sentiment indicators are less reliable Golden Gate University and Schwab University and
in cases like the present, where the stock market dots vir- has lectured before various groups such as X.;\.I.I.
tually nothing but rise. with an occasional sideways trading He has written several articles on technical analvsis
range. Nonetheless, the most effective of the previously both locally and nationally.
reviewed categories, newsletter polling results, mutual fund Brent attended Stanford Vnivcrsity and Uniter-
cash, specialist short selling, and even option put/call ra- sity of Pacific, receiving a degree in education, later
tios, should be monitored for giving reversal signals at ex- completing a business curriculum with honors at
treme excesses, in conjunction with other technical tools Mesa College in San Diego.
such as cycles, oscillators, and support/resistance.

48 MTA ,lOURN?LL/Spring-Summer 199ti

 Using the Z-TrendOscillator for Long-TermBond
Market Timing
Submitted by Robert T. Zukowski, CMT
March4. 1996
6
Because it reflects mass psychology, the Coppock Curve
Overview is labeled by tnost technicians attd traders as a setttimettt
This paper examines the concept of modifying the indicator. As a result, the curve siguals market tops and
Coppock Curve to better identify major tops attd bottoms bottoms quite well and proves to be a valuable addition to
in the bond futures market for lottg-term positioning. The atty trader’s tool kit. Coppock combined art 1 l- and 14
modified versiott of the Coppock Curve is referred to as mouth ROC, smoothed over by a lo-tnottth weighted mov-
the Z-Trend Oscillator. Most oscillators are used for trad- ing average, which cat1 be explaitted by the yearly titne
ing periods of price consolidation, but the Z-Trend Oscil- cycles frequent in tnost tnarket indices. A buy signal oc-
lator is specifically used for trading all market cottditiotts curs when the curve turns up or becotnes positively sloped
from accumulation, to trending, to distribution. while below the zero litte. A sell sigttal occurs when the
curve turns down or becomes negatively sloped while
Introduction to Rate of Change and the above the zero line.
Coppock Curve
Otte of the older, sitnpler tcchttical ittdicators to un- The Problem - Indicator Consistency
derstand is the rate of chattge or ROC for short. ROC catt When the Coppock Curve is applied to the monthly
confirm tnarket trends and forewarn of market reversals. continuation chart of U.S. Treasury Bottd future prices
The ROC tneasures the pace at which price is chattgittg (UST’s) , traders are confronted with the probletn of indi-
for any titne period under study. For example, a lo-da) cator consistency. This tneatts that the cottfidettce level
ROC is calculated by subtracting the price today from the for each future buy/sell signal is significantly reduced be-
price 10 days ago. The result is thett plotted as a cotttinu- cause the ittdicator’s extremes or overbought/oversold
ous series that oscillates above and below att equilibrium levels vary frotn sigttal to signal. Notice how well chattges
level that is usually set at 0. The closittg price is getterall! in the curve coincide with each major top attd bottom in
used whett calculatittg the ROC. However, the ROC cat1 UST’s (see chart 1). Again, the problem is that the ittdi-
be altered to isolate volume attd other ittdicators such as cator does ttot offer a high level of consistency for future
moving averages. Trettdlitte analysis and indicator/price buy/sell signals. In other words, traders are not sure how
divergettccs arc other aspects of the ROC that catt be used low or high the indicator will go before a signal is given.
to enhance reliability. With this kind of versatility, traders
can mattipulatc the ROC itt mattv useful ways.
Edwitt S. Coppock, best kttowtt for the developtnettt of
the Coppock Curve, used ROC as the basis for his work.
First introduced in Barrott’s itt 1962, the Coppock Curve
was ettdorsed arouttd the world as a long-term ittdicator
used to forecast foreign and domestic equity markets.’ The
goal of Coppock’s tnometttum rvork is to smooth a price
series in such a way as to make the peaks attd troughs in
ROC data significant. Smoothed mometttum (referred
to as the Coppock Curve) looks attd acts much like a sitte
curve or an overbought/oversold oscillator as it moves
from positive (overbought) territory to negative (oversold)
territory attd back again. Coppock hypothesized that the
market’s emotional state could be determined by addittg
up the percetttage price chattges for the time period uu-
der study to get a settse of tnarket tnometttutn. The result
is a long-term curve that effectively measures tnarket mo-
mentum and filters out short-term attd intermediate-term
tnarket swings.

‘Dudnrk, Gail S., C,IfT, SbfP Group dnnlyis ,\,Jonthly Briejng

(Feb. 1996), p 4.

MTA ~OCRML !Sprin+mmer 1996 49

 useful. It maintains a long-term position during a side-
ways trend by decelerating as the market’s price ranges
become more narrow. (3) The buy/sell equation is writ-
ten by combining the slope of the indicator with over-
bought/oversold extremes to determine if a profitable
trade exists (see table 1 for calculations).

TABLE 1
Calculations: Z-trend Oscillator in Computrac
Snap version 4.2 -
coef: coef 6.
study: rt-chg rt-chg(close, coed)-100 [see below]
L coef: coef2 8.
[z-tnagscau-aug study: I-t-chg2 rt-chg(close, coef2)-100 [see below]
user: sum-rot rt-chg t rt-chg 2
coef: coef3 10.
study: wtd-ma \vtd-ma (sum-rot, coef3)
studp: rsi rsi(wtd-ma, 10)
user: z-trend-osc (2 * rsi)-100
studv: mov-avg rnov-avg(z-trend-osc, 5)
user: buy (z-trend-osc > z-trend-osc [l] &
That could lead to the wrong position in terms of timing, z-trend-osc < -40)
(see chart 2). 111chart 2, two examples of false signals user: sell (z-trend-osc < z-trend-osc [l] SC
that resulted in big lossescan be seen in June 1980 and -trend-osc > 50)
January 1992. Basically, the curve failed to keep traders user: sold sell * .5
in a long-term position during these periods of price ac- trade: trade trade(buy, sell, sell, buy)
tion. trade: open-p1 open-pl(trade, close, j/32, 2/32)
trade: trad-pl trad-pl(trade, close, 5/32, 2/32)
The Solution - Modifying the Coppock Curve trade: clos-pl clos-pl(trade, close, 0, 0)
By modifying the Coppock Curve, traders can isolate user: equit) open-p1 t clos-pl
overbought/oversold conditions and buy/sell signalsmore [Note] - 1st step selert and add the rt-rhg study in snup. 2nd step:
effectively. The added value is a high performance mo- manually edit the rt-rhg stud) 6~ tJjb]g in -100
mentum oscillator with fixed buy/sell zones. The Z-Trend There are four advantages to using the Z-Trend Oscil-
Oscillator usesthe same basic calculation asthe Coppock lator over the Coppock Curve: (1) It is smoother and less
(;urve. but has a few added dimensions. (1) The indica- volatile, (see chart 3 for a comparison). (2) The ampli-
tor is optimized wily OI~C time and then back tested to tude is controlled through the modified version of the
lind optimum KOC and smoothing periods. Interestingly,
CHART 3 us Boms-mmi C3rr:mT:oH
the ROC part of the indicator when optimized coincided
\\ith the 2 l-week cycle, and the weighted moving average
portion coincided with the 40-week cycle, much like the
yearly cycles Coppock found in most equity markets. Both
the 21-week and 40-week cycles were popularized by Jim
E. Tillman, CMT, of Interstate/Johnson Lane, and are fre-
quently used in forecasting turning points in UST’s. (2)
The indicator usesthe concept behind J. Welles Wilder’s
Relative Strength Index (RSI) to identify overbought/over-
sold conditions. III other words, the Z-trend Oscillator is
a11RSI study of the Coppock Curve. First, the raw num-
bers of the Coppock Curve are substituted for the usual
closing price within the RSI calculation to normalize it on
a scale of 0 to 100. Second, this modified version of the coppocx
RSI is multiplied bv itself and then subtracted from 100 to
make it oscillate above and below 0 and between defined
Lanes. A&l example of defined zones would be between
-70 and 70. This will identifv proxies of overbought/over-
sold. Once that is accompli&ed, buy/sell signalsbecome
more visible. This is where the Z-Trend Oscillator becomes

50 MTA ~OUIWWSptin~-Summer 1996

RSI formula. (3) Major buy/sell signals become more
visible. (4) Overbought/oversold zones are identified.
The only disadvantage noticed is: (1) It is iueffective when
used over shorter time periods such as weekly, daily arid
intra-da):
Using and Customizing the Z-Trend Oscillator
A buy signal occurs when the Z-Trend oscillator (this
month) is greater than it was (last month) and is less than
-40. A sell signal occurs when the Z-Trend Oscillator (this
month) is less thau it was (last month) arid is greater than
.iO. Lead time is significantly increased over using
CHART4 3s BONDS-ncNTHLYc3h7m*~:~?l
Ius -, -n hue
Coppock’s original bu~/sell strategy (see chart 4). X more
couscrvative buy/ sell approach would be to wait until the
indicator crossed above or below the 0 line. However, the
Lero lille trade reduces profit and iucreases risk because
siguals occur well after a top or bottom has beeri com-
plete.
A histogram is used to display the indicator for clarity
but is just as accurate ~vherl displayed as a liue chart. A 5-
moutil simple moving average of the indicator cau be used
to help cuulirm market direction. Since this moving a~-
cragc is ouly used as a coufirmation tool and not part of
the buviscll equation, it was uot optimized. If the indica-
tor is above lhc 5-month simple moviug average, there is
buviug coulirmatiou. 011 the other hand, if the indicator
is below the 5-mouth simple moving average, there is scll-
iug co1lfirmatioIl. AII expolleutial moving average could
also be used in place of the simple moving average. Trad-
ers are eucouragcd to expel-iment with other moving a\-
et-ages and time periods because trading styles vdrv.
Applying the Z-Trend Oscillator to Market
Conditions
From late 1977 to early 1996, the Z-Treud Oscillator
generated a total of 0 ollt of 9 wimling trades. (see chart
I
Iz-tnd-osc lou-aug
,/!a19 Uuill Hod3 hri% dul88NouSE
kar9 Ai?5 1
5). From September 1982 to Jlarch 1983, the UST mar-
ket was considered extremely overbought, which was eli-
dent by an indicator reading of greater than 70. That was
a waruulg sign suggesting traders should start looking for
a new sell signal. In fact, the signal was giveu in April
1983 when the indicator began to decelerate while still
above the trigger level set at 50. The result wasa 1Gmonth
trade Ccldiug 12.69 points. From September 1987 to So-
vemb& 1987, the Z-Treud Oscillator rcachcd a rcadiug of
lessthau -70, which warned of a potential market reversal
from down to up. This oversold rcadiug bcgau to unwind
in December 1987 when the indicator touched the bul
trigger level set at -40. The result \va?sa 24-mouth trade
for 10.25 points.
Other examples of the Z-Trend Oscillator iI1 action ca11
be sew during 1983, 198.5, 1988, 1991 alld 1994. These
periods were major cougestiou zones, but uoticc that the
indicator kept each position active by not getting too over-
bought or too oversold during each of these periods. 111
fact, the indicator hovered closer to the zero liue \\heu
price rauges became more uarrolv. 01lce price ranges
begau to widen and the market resumed its original di-
rectiou. the iudicator accelerated. This is an important
aspect \vhcu dealing rvith long-term tiuiiug iudicators be-
cause false buy/sell signals tend to occur during a uon-
trending (consolidation) period. [Note: During a sidc-
wavs price trend, the Z-Trend Oscillator’s maximum draw
dowl (licgative open profit/loss) cau kcomc greater.
This is caused by slippage/ commission aud price \olatil-
ity Hoivever. these lossesare kept to a miuinlum and arc
Iiltcrcd out ouce the price trend resumes iI1 its original
direction.]
Testing The Z-Trend Oscillator
Since UST futures oulv started trading in late-19Ti. the
 best way to show that the Z-Trend Oscillator is uot a “b! Buy and sell signalswere also modified, (see chart 7 for
chance” indicator is to conduct a number of tests (see chart the indicator and table 3 for the results). Conclusion:
6 for the indicator and table 2 for the results). In the first The results were a little better, but false signalswere still
test, the Coppock Curve was applied to UST’s using present. Therefore, the onlv solution was to optimize
Coppock’s ll- and 14month ROC, smoothed over by a the ROC and smoothing peiiods.
lo-month weighted moving average. Also used rvas
Coppock’s buy/sell strategy in an attempt to show that
this indicator needs to be modified in order to work prop-
erly when applied to UST’s. Conclusion: Due to the num-
ber of false signals and poor results, the only solution was
to modifv the curve. In the second test, the Z-Trend Os-
cillator was used, but the ll-, 14 and lo-month param-
eters were maintained.

TABLE 3
Trading Results: Risk management overlay for UST
futures using Z-Trend Oscillator from 1977-1996
[ll- and 14month ROC with a lo-month smoothing]
net profits 69.41 points
5%wins 71%
wins 5
losses 2
long wins 2
TABLE 2
long losses I
Trading Results: Risk management overlay for UST long win 57 67%
futures using Coppock Curve from 1977-1996 short wins 3
(1 l- and 14month ROC with a lo-month smoothing) short losses 1
net profits 34.00 points short win L/;.# i5%
7; wins 55% max. cons. wins 3
wins max. cons. losses 2
losses i largest win 25.91 points
long wins 3 largest loss 1.91 points
long losses 1 average win 13.67 points
long win ‘;I; 75% average loss 1.OO point
short wins 2 average w/I 9.92 points
short losses 3 max. draw down 9.44 points
short win Y’i 25% longest draw down 15 months
max. cons. wins 4 slippageicomm. T/32
max. cons. losses 2 months winning 102 months
largest win zS,Ljl points months losing 36 months
largest 10s~ i.13 points
averagewin 10.25points In the third test, the %-Trwd Oscillator wasoptimized
werage loss -1.mr
I L)points
;wrage wi I 3.78 points IO liud optimum ROC alld smoothing periods (see chart
max. d2-XV down 19.09 points 8 for the indicator and table 4 for the rcsultsj. The opti-
longest draw down 34 months mization process resulted iu a fi- and H-month ROC.
slippage; comm. 7/32 smoothed over bv a lOmonth lveightcd moving average.
months winning 74 months Conclusion: The’optimizatioll process enhanced the e6
months losing 92 months

52 MTA ~CILK\.U Spriny-Summer ICM

fectlveness of the Z-Trend Oscillator, which is reflected in
the results. However, to show that the 6, S-and lo-month
parameters were valid, the Dow Jones-20 Bond Average
(DJ-20 Bond Avg), a proxy of LIST’s going back to 1915,
was tested.

r
Qndgsc aou_aug

TABLE 5
Trading Results: Risk management overlay for DJ-20
Bond Avg using Z-Trend Oscillator from 1915-1946
[6 and &month ROC with a 1O-month smoothing]
net profits 59.97 points
% wins 100%
TABLE 4 wins
Trading Results: Risk management overlay for UST losses t
futures using Z-Trend Oscillator from 1977-1996 long wins 2
(6- and S-month ROC with a lo-month smoothing) long losses 0
long win c/c 100%
net profits 156.81points short wins 2
c/cwins 100% short losses 0
wins 9 short win % 100%
losses 0 max. cons.wins 4
long wins max. cons. losses 0
long losses R largestwin 20.94 points
long win 7 100% largest loss 0 points
short wins 4 averagewin 14.99points
short losses 0 averageloss 0 points
short win ‘;% 100% averagew/l 14.99points
max. cons.wins 9 max. draw down 5.94 points
max. cons. losses 0 longestdraw down 7 months
largestwin 31.56 points slippage/comm. 0
largestloss 0 points months winning 316 months
averagewin 17.42points months losing 21 months
wcrage loss 0 points
averagewi I li.42 points
max. draw down 5.03 points
longestdraw down 6 months
slippage,‘comm. 7/32
monthswinning 150months
months losing 21 months

To make it a thorough aud fait- test, 3 separate tests

from 1913 to 1946, from 1947 lo 1977 a11d from 1978 to
1996 were conducted, (see charts 9, 10 and 11 for tbc iu-
dicators and tables .i, 6 aud 7 for the results).

MTA lOURUAL./Sprin~Summer1996 53
I Uun84Pm leb89Nun91KM93WI6
pct19 lFt?bsZ I

TXBLE 6 TABLE 7
Trading Results: Risk management overlay for DJ-20 Trading Results: Risk management overlay for DJ-20
Bond Avg using Z-Trend Oscillator from 1947-1977 Bond Avg using Z-Trend Oscillator from 1978-1996
[6- and S-month ROC with a IO-month smoothing] [6- and S-month ROC with a lo-month smoothing1u-
net profits 52.67 points net profits 73.40 points
5%wins 71% % wins 78%
wins 12 wins 7
losses 5 losses 2
long wins 4 long wins 4
long losses 4 long losses 0
long win R 50% long win % 100%
short wins 8 short wins 3
short losses short losses
short win ?‘I AS% short win % iO%
max. cons. wins 3 max. cons. wins 3
max. cons. losses 1 max. cons. losses 1
largest win 13.21 points largest win 19.35 points
largest loss 2.21 points largest loss 5.26 points
average win 4.tiO points average win 10.39 points
average loss 1.31 points average loss 3.17 points
averagc IV: I 3.29 points average w/l 8.15 points
max. draw down 3.70 points max. draw down 4.22 points
longest draw down 21 months longest draw down 9 months
slippage/ comm. 0 slippage/comm. 0
months winning 294 months months winning 150 months
months losing 75 months months losing 18 months

The first test from 1915 to 1946 was a partial success.

The &, S-and lO-month parameters worked extremely well.
Howewr. the indicator failed to react to the different
market conditions. The second test from 1947 to 1977
leas also a partial success. The 6-. 8- aud lOmouth param-
eters generated excellent results, but the indicator failed
to react as it should have. given the different market con-
ditions. The third test from 19% to 1996 was a complete
success. The 6, 8- and lOmonth parameters worked ex-
tremely ~vell, aud the indicator operated properly given
the different market conditions.
Conclusion: Though the Z-Trend Oscillator seems to
work better on UST’s than on the DJ-20 Bond Avg, the Bibliography
results are very encouraging. Since the Z-Trend Oscilla-
tor managed to signal every major top and bottom over Colby, Robert W. & Meyers, Thomas A., The Encvclonedia
of Technical Market Indicators , 1988, Business One,
an 80 year period in the DJ-20 Bond Avg, the results re- Irwin, p. 414.
vealed that buy/sell signals did not occur “by chance.” In
an attempt to show that the Z-Trend Oscillator can sig- Faber, Bruce R., “The Rate of Change Indicator,” Techni-
nificantly increase profit potential, one last test was con- cal Analvsis of Stocks & Commodities, Volume 12;
October 1992, p. 13.
ducted that revealed using the Z-Trend Oscillator is more
profitable than using a simple buy-and-hold strategy, (see Hayes, Tim, “The Coppock Guide,” Technical Analvsis of
table 8 for the results). Stocks & Commodities, Volume 11; March 1993, p. 50.
Kemplin, Raymond, “The Coppock Curve: A Famous
TABLE 8 Indicator Flashes a Long-Term Buy Signal,” Barron’s,
Comparison: Z-Trend Oscillator versus buy-and- November 22, 1982, p. 10.
hold strategy Middleton, Elliott, “The Coppock Curve,” Technical
Market Z-Trend Oscillator Buy-and-Hold Analvsis of Stocks & Commodities, Volume 12; November
1994, p. 59.
DJ-20Bond Avg (1915- 1946) 59.97 points 12.19points
DJ-20Bond Avg (1947- 1977) 52.67points -36.50points Pring, MartinJ., Martin Prine on Market Momentum,
DJ-20Bond Avg(1978- 1996) 73.40points 9.34 points 1993, Probus Publishing, p. 52.
UST futures (1977- 1996) 156.81points 25.13 points Wilder, Welles J., New Concerts in Technical Trading
Systems , 1978 , Trend Research, p, 112.
Conclusions
Based on the results of all tests, it was well worth the
time and effort to construct, customize, optimize, back
test, and update the Z-Trend Oscillator. The tests show
that a complete and effective indicator can be used to sig-
nal every major top and bottom in UST’s. Traders now
have a long-term indicator within their technical arsenal
that can (1) Consistently identify an overbought/oversold
condition within the market; (2) Locate buy/sell signals
with a much faster lead time; (3) Identify the long-term
trend of the market. Traders who follow other markets
could try this indicator on those markets. Note: The op-
timized parameters would most likely be different in other
markets and overbought/oversold conditions could also
vary. For example, instead of being overbought at 70 and
oversold at -70; a market could become overbought at 50
and oversold at -50. Traders should consider isolating
dominant time cycles within the market and using those
cycles in place of the ROC and smoothing periods.
Long-term trend analysis is a very important aspect of
technical analysis, and if done correctly, there is no rea-
son why traders shouldn’t be on the right side of the trend.
During the research, a few areas that warrant further at-
tention were discovered: (1) Using indicator and moving
average crossovers as the basis for the buy/sell equation.
(2) Fitting the indicator to weekly, daily and intraday time
periods. (3) Applying the indicator to commodity mar-
kets, currency markets and mutual funds.
Despite these minor troubling aspects, the Z-Trend Robert T. Zukowski, CMT
Oscillator can do what was once thought impractical: con-
sistently signal major tops and bottoms, and identify the Robert T. Zukowski, CMT, is a Senior Technical
trend for long-term positioning. Analyst at MCM MoneyWatch, a financial advisory
firm located in New York. He is also a board mem-
ber of the professional Market Technicians Associa-
tion in charge of public relations.

MTA JOURNAL/Spring-Summer 1996

L

MTA JOURNAL/Spring-Summer 19%

 A Study in Volume and Price Alerts
Submitted by David Bryan
From my earliest readings on technical analysis at the
genesis of my investment career, to my present day more
experienced view of the markets, I have learned that the
role of volume in security analysis plays an important role
in predicting the future path of stocks. Despite the belief
that this role of volume analysis was true, somewhere in
the stubborn Missouri - like recesses of my mind persis-
tent doubt existed as to the actual validity of this concept.
Yes, we have all seen stocks blast off with high volume and
continue to advance. But as a group did they perform
any better than the averages? From my readings there
existed no recollection of a specific study correlating the
subsequent price action of a stock after an unusual vol-
ume occurrence. Many authors have stated that price fol-
lows volume, but is this an educated opinion or is it a fact?
Joseph Granville, in his book Granville’s New Stratew of
Dailv Stock Market Timing for Maximum Profit’, states
that “stocks do not rise in price unless demand exceeds
supply. Demand is measured in volume and thus volume
must precede price.” Although Mr. Granville was writing
about his technique of “on balanced volume,” also known
as OBV, which is an accumulation of positive or negative
volume over a certain period, accumulation and distribu-
tion volume patterns point to probable changes in price.
It is not the purpose of this paper to prove or disprove the
usefulness of OBV, per se. The reference to Granville’s
OBV is to only lay the foundation for the basic belief that
most technicians adhere to the concept that volume pre-
cedesprice. However, in this paper a tack is taken that is
different from Granville’s approach. The primarv goal of
this paper is to offer evidence that a sample of iust one
tradine dav of unusual volume can predict subseauent
price action.
Martin J. Pring, in his book Technical Analvsis Ex-
plained*, asserts the principle that volume goes with price.
Most technicians willingly accept this principle at face
value. Mr. Pring observes that a price rise accompanied
by expanding volume is a normal market characteristic.
He also writes that a breakout from a price pattern that
occurs on heavy volume, especially on the downside, acts
to confirm the price trend. Why do most technicians ac-
cept the concept that volume confirms the price trend?
Or do they simply wish to believe it to be so? Indeed,
what are the true probabilities of price following volume?
In this study, we make a major departure from the usual
pattern of relating trend of volume over extended time
periods to the study of a single occurrence of abnormal
volume. Data were collected over the course of eighteen
months in which stock prices, after an unusual day of vol-
ume and price behavior, were compared to the S&P 500
Index.
MTA JOURNAL/Spring-Summer 1996
7
The data studied in this paper use either a combina-
tion of volume and price alerts or simply volume alone.
The study does not incorborate any bersonal technical iudments.
The study quantifies the action of stocks during the one
year period of July 10, 1991 through July 9, 1992. The
level of the S&P 500 was recorded along with the entry of
each stock that qualified for the study.
Methodology
Before delving into the results of the study, a review of
data sources and review methods shall be presented. We
are cataloging securities whose shares demonstrate un-
usual volume characteristics and a combination of unusual
volume and price characteristics. The study gathered data
drawn from the stock listings in The Wall Street Tournal
beginning with the letter “A” on the New York Stock Ex-
change. The “A” section, chosen for our sample, repre-
sents approximately 13% of all stocks listed on the NYSE.
We deem this a meaningful sample for our exploratory
considerations. The stock listings in The Wall Street Tour-
nal underline the issues that are among the 40 largest
percentage changes in trading volume, compared with
average daily trading volume over the past 65 days. These
issues are labeled “volume alert” stocks. Stock quotations
in boldface have experienced price moves in excess of 5%.
These issues are labeled “price alert” stocks. Issues printed
in boldface type and underlined are labeled “volume &
price alert” stocks, which signals that the stock had both a
volume and price alert. The study breaks down into two
specific areas of volume activity: first, on stocks exhibit-
ing a volume alert (underlined), and second, on stocks
exhibiting a price 8c volume alert (boldfaced and under-
lined). These two types of occurrences are the focus of
study. Prices of securities and the S&P 500 were measured
on the opening price the day after an alert was noted.
The study excluded stocks under $7 l/2 and preferred
issues. Measurement periods were one, three, and six
months. The total number of occurrences compiled dur-
ing the period studied totaled 375. The collection of alerts
occurred for a period of one year and then an additional
six months to collect the data for the longest comparison.
The best and worst performing stocks in each group were
disallowed in an effort to reduce any unusual distortions.
Each study covered stocks with up and down alerts. For
example, an underlined security closing up for the day
qualified as an up-volume alert. The two methods are:
1) Stocks demonstrating a volume alert, both posi-
tive and negative.
2) Stocks demonstrating avolume & price alert, both
positive and negative.
57
 Each of the foregoing study methods constitutes the
remainder of the composition. If volume is believed to
be an indicator of subsequent price action, then the sec-
tions labeled as down alerts represent periods in which
the securities should perform inferior to the market. For
example, in advancing markets the down alert stocks
should lag behind the market. In declining markets, they
should fall further than the market decline. In the up
alert study, the securities’ performance should exceed the
market’s performance. The S&P 500 is the measure of
the markets performance. The percentage gains or losses
present a net average of all stocks, as well as the S&P 500
for each category. Periods are broken down into catego-
ries of up or down alerts, not of a rising or declining mar-
ket. In real time it is obvious that one knows only the
direction of the alert.
Years ago I began trading securities that broke out to
new highs from any of several different types of consoli-
dation patterns. My actions, then and now, are no differ-
ent from those of many other technicians. Merrill Lynch
Inc., for example, with whom I was an account executive
for eleven years, publishes a report each morning called
Dailv Market Observations3. One of the items covered in
this report is a listing of stocks that demonstrate unusual
volume characteristics, categorized by direction of price
movement. The report, compiled by Philip L. Rettew, vice-
president at Merrill Lynch, is an important source of vol-
ume data. In a later telephone conversation with Mr.
Rettew regarding this report, I asked if a study had ever
been undertaken to study the after- effects of positive and
negative volume alerts. His answer was, “no, because that
is not the objective of the report. It is published for the
reason that its name implies. It is used for observations.”
Mr. Rettew went on further to say that occurrences such
as selling or buying climaxes, new offerings and programs
trades might run counter to the perceived trend of the
observed alert. These factors would make it all the more
difficult to measure the performance. A high volume sell-
ing climax and the subsequent negative alert that it dem-
onstrates should, and in most cases, actually be interpreted
as a potential positive signal by the alert technician. Mr.
Rettew says that “the report tries to identify or observe
occurrences from a daily sea of data in which one should
further explore.” Our study will attempt, despite the in-
stances of buying and selling climaxes and other market
noises, to determine if unusual activity in volume and price
are worthy anticipators of subsequent price movements.
In our case, we make observations without judgment.
Volume Alerts
The tables that follow are arranged so that each stock
is measured against the corresponding movement in the
S&P 500 index. For instance, in the first table the section
for down alerts under the one month heading rose 1.2%
compared to the S&P 500’s rise of .82%. We would wish,
if volume is a useful indicator, to have the down alerts
stocks decline more than the market. Following each pe-
58 MTA JOURNAL/Spring-Summer 1996
riod a 20% stop loss was also measured in an attempt to
counter bad signals. It is a commonly held belief by most
traders that the use of stop loss orders can effectively in-
crease one’s odds of being successful in trading. This con-
cept is utilized in this report simple as an easy addition to
view the results with a small dose of money management.
TABLE #l
Volume Alerts
Sample Size - 116 Down & 115 Up
DOWN ALERTS
One Month Three Months Six Months
Stocks S&P Stocks S&P Stocks S&P
+1.2% +.82% +1.86% (1.69%) +4.55% +4.1%
Use of Stop Loss
+0.72% (0.17%) t&34%
UP ALERTS
+3.02% +.42% +4.12% (1.66%) +3.94% +3.55%
Use of Stop Loss
+3.23% +5.01% +5.76%
Under the down alert category, the results were disap-
pointing because the securities rose more than the mar-
ket despite a negative volume alert. The three-month study
was a particularly rough environment for the down alert
securities because they actually increased in value during
a declining market environment. The six-month period,
although showing a smaller difference in percentage
changes, also failed to perform as desired.
As an adjunct to the study, the 20% stop loss program
was conducted, which significantly improved the desired
results. Although massaging the results with a stop loss
program does not necessarily add validity to the test re-
sults, it does add strength to the case for the use of sound
money management principles. The employment of the
stop loss narrowed the results for the one-month period
to nearly neutral results. For the three-month period the
results improved as the down alert stocks declined by
0.17% rather than rising by 1.86%. The six-month study
showed the greatest improvement as the down alert stocks
rose only 0.34% as compared to the nonstop loss gain of
4.55%. Although it might appear that the improvement
of results by the use of a stop loss program might infer
that the volume alert does not work, nothing could be
further from the truth. The improvement of the results
by the stop loss actually reinforces the significance of the
results. Because a stock signals a report, perhaps in many
cases a selling climax after a long decline, or even a buy-
ing climax after a long uptrend, it alerted us to a develop-
ing and changing situation. The stop loss simply prevented
the continued loss of funds. The well used phrase to cut
your losses and let your profits run still applies.
As illustrated in table #l, the up alerts produced de-
sired results for all periods. The one and three-month
studies managed to beat the averages by several percent-
age points. The three-month gain of 4.12% favorably com- stocks declined in value even though during the one and
pared to a market loss of 1.69%. The disparity represents six-month studies the market rose. Evidently securities
a sizable difference not explained by chance. The gain with a sharp rise in price accompanied by a sharp increase
from the three-month period to the end of the six-month in volume performed as expected.
period declined to only a 0.39% gain in favor of the stud- The evidence is also compelling for the up alerts, as
ied stocks. they best the market by large margins. In the three-month
The use of the stop loss program again supplemented period the alerts rose 2.16% during a market decline of
the desired results. The use of the stop loss improved the 2.11%. During the six-month study, the alerts did nearly
three-month results by roughly 20% from a gain of t4.12% 33% better than the market.
to a gain +5.01%. The six-month results benefited by 44% The use of the stop loss increased the results in all cases.
as the gain increased from t3.94% to t5.76%. For instance, in the three-month up alert study, the re-
sults increased by 50% from a +2.16% to t3.08%.
VOLUME ALERTS COMMENTS
From the data gathered in this study it is clear that the PRICE & VOLUME ALERT COMMENTS
use of a positive volume alert can benefit the trader of The results obtained when combining both volume
securities. As to why the positive alerts performed better alerts and price alerts in conjunction appear to be more
than the down alerts, one can only guess. Many of the than just random results. When the alerted securities go
negative alerts appeared climactic in nature and could counter to the market by wide margins, then indeed the
easily explain part of the difference in less than antici- proof of a one-day event effecting future stock prices is
pated results. As noted the use of the 20% stop loss did hard core evidence of the theory’s validity.
improve the results in most categories.
General Thoughts & Conclusion
Price 81Volume Alerts From the data shown in both categories of study, it is
The second part of the study combines the volume alert clearly evident that volume does indeed precede price in
with the price alert. As previously noted, a price alert is the sense that high volume alerts lead to improved per-
demonstrated by a price move in excess of 5% in one trad- formance of securities in relation to the market. It is more
ing session. evident that a combination of unusual volume combined
The following table outlines the results of the combined with a 5% or more price movement improves the random
results. results of equity trading even further. The trader should
carefully examine each alert to determine its best use. In
TABLE #2 many of the stocks measured, a signal occurs, which to
Price & Volume Alerts the average technician represents a selling or buying cli-
Sample Size - 31 Down 8c 48 Up max. In reality, most technicians would probably not trade
the signal, and some would have been tempted to go in
DOWN ALERTS
the opposite direction of the alert. These contingencies
One Month Three Months Six Months in no way weaken the case for the use of using volume
Stocks S&P Stocks S&P Stocks S&P alerts for trading. It is not, nor was it ever contemplated,
(4.65%) +0.67% (7.28%) (3.9%) (3.88%) +2.14% that this study should lead to a system of trading securi-
Use of Stop Loss ties based solely on volume or price & volume alerts.
However, if one wished to utilize the methods presented
(4.95%) (7.94%) (4.72%)
as a system, it is certainly plausible. The odds of success
UP ALERTS appear to be favorable.
(0.55%) (0.42%) +2.16% (2.11%) t4.32% +3.54% The primary intention of this study is to examine the
Use of Stop Loss effects that a one-day volume event might cause to future
(0.43%) +3.08% +5.24% price changes. The evidence presented makes a strong
case that volume alerts, either singularly or with price,
In every period measured, except for the one-month should not be ignored. It is a tool that can be used to
up period, the alerts worked in their direction of signal. alert the technician of possible impending change. Per-
The down alerts worked in an exceptional manner by haps the alert is part of a larger technical pattern that is
under-performing the S&P 500 by wide margins, even signaling the end or beginning of a technical pattern. It
deQing the market’s general direction. For instance, the is a sign to investigate.
down alert stocks declined in the one and six-month periods de- After collecting and analyzing the data over a period
spite an advancing market. During the six-month period of l-1/2 years, and after trading in real time some years
the advantage to the trader was six percentage points. Had later, I find that I am constantly searching for unusual price
a trader shorted all of the stocks in the six-month study, and volume behavior in any stock. In my own particular
he would have had a positive return of 3.88% during a trading methods, I look for several types of consolidation
period in which the market rose 2.14%. In each case, the patterns for equity purchases. A volume or volume/price

MTA JOURNAL/Spring-Summer 1996

 alert signals me to scrutinize the security. Often the ac
tion may be signaling the commencement of a new trenc
or perhaps the death of an old trend. The individual trade]
must make that call. The investor will find that in addi
’ tion to the previous day’s trading results, he or she wil
find a useful technical tool that, if used consistently, car
increase trading profits. Earlier in the paper, we statec
that the purpose of the study was to determine if the ex
amination of our “alerts” would prove their utility as a tech
nical tool. The data presented points to a positive conclu
sion.

The Final Word

A popular theory among technicians is that price fol
lows volume. The evidence pathered in this study clearlv ind;
cates that it would be we abtn@niate to state that brice follow
an explosion oftice and volume. The initial kickoff of largl
price moves, and higher than normal volume, leads tc
continued outperformance in equities. It does not aF
pear to be important if the volume signal was positive o
negative.

Bibliography
1 Granville, Joseph Ensign, Granville’s New Strategy of
Daily Stock Market Timing for Maximum Profit.
Prentice-Hall, Englewood Cliffs, NJ, 1976
2 Pring, Martin J., Technical Analysis Explained. McCraw-
Hill, Inc., New York, 1980

Services
3 Daily Market Observations, Merrill Lynch Inc., One
Liberty Plaza, New York, NY

David Bryan

David Bryan is currently a vice-president and port-

folio manager with Wilmington Trust FSB in Vero
Beach, Florida. Previously he was an account execu-
tive with a major national brokerage firm for eleven
years, and Chief Investment Officer for trust invest-
ments for eleven years with a major regional bank in
North Carolina. David is a graduate of Mississippi
State University and the Stock Market Institute. His
favorite equity scenario is a lengthy consolidation,
extending three years or more, accompanied by im-
proving fundamentals. He finds that using techni-
cal analysis hand in hand with fundamental analysis
alerts him to the best opportunities in the best com-
panies. His hobbies include collecting old invest-
ment books and material, collecting bull and bear
statues, fly fishing, and shotgun target shooting. He
is married and has three children.

60 MTA JOURNAL/Spring-Summer 1996