Yesterday, I met with Oppenheimer & Co.'s aptly named technical analyst, Carter Worth, who describes his analysis of stock trading patterns as "cheating." (Oppenheimer is a subsidiary of Toronto-based Oppenheimer Holdings, Inc. (NYSE:OPY).)The analogy he uses is that in school, if you sit next to the valedictorian and copy her test answers, you'll ace the test. Of course you'll also get kicked out of school.
However, Worth -- who started out as a fundamental analyst -- believes that the pattern recognition analysis he performs on stock trading patterns enables him to "cheat" legally. He puts absolutely no stock in the predictive value of analyzing a company's industry, its profitability, balance sheet, earnings prospects or valuation. Instead, by observing closely the price and volume trends of stocks, Worth believes he is able to track the trades of the biggest, most confident stock traders. In his view, these people are the stock market equivalent of valedictorians.
In his view, people who make big bets have conviction because they know more than the market. Either they have done more homework than anyone else and therefore know that a stock is going to move up or down. Or they are using inside information, probably illegally. Worth believes that his pattern recognition skills enable him to predict stock price moves.
And he's developed intricate sets of rules that enable him to feel confident putting his cheating skills on the line each week, producing weekly lists of stocks which he believes are likely to move up and down in the coming week. For example, on December 8th, Worth included Crane (NYSE:CR) among the stocks he thought would decline. Since then, CR has fallen 6% from the $38.05.
I did not fully understand Worth's reasons for the prediction that CR would drop. He mentioned that CR's price volume correlation was bearish, and its relative strength was bearish -- meaning CR's price was going down while the market was going up, and its 150 day moving average went down.
I have been growing increasingly skeptical of fundamental analysis because I see so many cases of stocks that go up when their financials are down and vice versa. I'm not sure how well Worth's analysis has made accurate predictions but since he is a disillusioned fundamental analyst, I am intrigued by his relentless pursuit of insight into what makes stocks move.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Crane or Oppenheimer Holdings.