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From school teacher to tech wiz: Louise Yamada

Published on Fri, Jun 13, 2008 at 11:42 | Source : CNBC-TV18

Updated at Mon, Jun 16, 2008 at 13:46

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Louise Yamada, Managing Director, Smith Barney

Nifty

BSE | NSE 31/05/12

Are Mutual Funds betting on Nifty?

Method, it is said, is the master of the masters. The methods and the modus operandi of this Wall Street's biggest maven says she is carrying on as Adam Shaw's clone by identifying long-term structural trends.

Louise Yamada , Associate to Managing Director at Smith Barney, was a schoolteacher, who is now a world-class technical analyst. It was her part-time vocation that became a lifelong passion. She has worked at and later headed Smith Barney's legendary chart room for 25 years and when she talks, Wall Street listens.

Excerpts from an exclusive interview with Louise Yamada:

Q: You have often been quoted in your book and in your personal life, Adam Shaw has had a huge influence in your life; what did he teach you about technical analysis?

A: One of the main things that he was noted for and which hopefully I have carried on as his clone is identifying the long-term structural trends.

Q: You said trend is important, the trend is your friend, is a well-known Wall Street maxim, but how does one study the trend, what do you look for and how do you decide that Dow is in a secular uptrend or gold is in a secular downtrend?

A: Because you see the parents of price that represent accumulation that is a series of higher lows put in place.

Q: Which means the demand is kicking in?

A: The demand that is present does not allow the price to fall below the prior low. That is your aggressive demand, which creates what we call the uptrend and each time you have the demand come into place, you expect to see a higher high come into place as well. Now it is when those forces begin to shift when you no longer see the higher highs put in place and you either get equal highs or lower highs is a sign that somebody is now selling into those rallies.

Q: Supply?

A: Exactly, so your demand portion is now becoming a little bit more overcome by supply. It is not until the support level, the prior low is actually broken that you see the evidence of aggressive supply and when that low is broken, it really signifies that the technical analyst that somebody out there's perception of this company has changed and they are now willing to accept less money to get out. That is not something that happens frequently on Wall Street.

Q: What are the other tools that you use?

A: We basically follow the trend and the forces of supply and demand and yes, we use moving averages because they are an important aspect in understanding the direction of price. When the upward momentum is slowing, the moving average starts to go flat; frequently you will find that 200 DMA coincides with the visual price support.

Q: How about volumes?

A: Volume is very important; it is a weapon of the bull. You cannot go up aggressively without volumes, you can go down without volume because all it takes is an absence of buyers and that is when sometimes if you do not have a buyer, you get what we call these black holes where stock can go from 30 to 15 and we have seen that with some of the financials in this cycle.

Q: Bear Stearns?

A: To name one.

Q: Enron to name another one previously?

A: Exactly and that was a period when we were in fact getting people out when that hopping process came into play.

Q: Having studied so many bull markets, your office is cluttered full of charts, what is harder to find - a bull market bottom, a new bottom, or finding a top in a market?

A: That is an excellent question, if you have an extended period of distribution, where you have this slow rolling top and tops can take off formations. They can be re-tops which are very hard to peg and re-bottoms that are impossible to peg, you just cannot do it because you do not have any extension of the evidence of accumulation or extension of the evidence of distribution. So it really depends on how that progresses.

Q: Are they mirror-images of each other, the tops and the bottoms?

A: Not necessary for the same stock for its own configuration, but tops and bottoms tend to take on; yes similar parents.

Q: What are the signs that you look for that a stock has topped or rather a market has topped out? Are there any signs in terms of sentiment, psychology?

A: I think it is less psychology; for us as technicians the bull market from 1982 to 2000 every pullback, including the crash of 1987, held at a higher low until March of 2000. That was the first time in eighteen years that the equity market slipped to a slightly lower low.

Of course, under the surface you had other things happening; you are really headed two-year negative divergence in your advance/decline line. I do not recall necessarily what the volume characteristics were at that point but there were enough signs of internal underlying deterioration, one of the longest in that period because the Dow really had a rounding top.

Q: But a year later, it went and made a new high after 2000, not the Nasdaq, but the Dow made a new high?

A: We have had what we considered to be a hybrid market, because to this day, we have stocks that are in the structural bear markets that began in 2000. You could take any number of pharmaceuticals, Pfizer for instance, is still going down; Merck not so much, it tried to breakout and General Motors is at a new low.

Q: That has been in a bear market in thirty years?

A: Exactly and these are what we dubbed way back in the 90s 'all tech' because they have not been enabled to compete on a global front, which is why we head this hybrid market. Those stocks, primarily small and midcap stocks, come to the fore as of 2002 and have been participating in that having used the last 10 years to utilize the new technological skills to become efficient, streamlined and cost effective and moved into the global arena. So we have some stocks financials, consumer discretionary, healthcare that in this country are really in structural bear markets. You have the other stocks in the industry such as energy, materials, possibly the utilities even, that are in a structural bull market experiencing a cyclical pullback along with the global markets.

Q: Your hypothesis is for II-tier markets perhaps?

A: Yes.

Q: We talked about bull market tops and bear market bottoms, let's go and do some real life analysis. In 2003, your research story on surprising strength in a surprising asset category?

A: We started to see early signs of higher lows in gold suggesting that if gold could move out through USD 300 per ounce, we would also break the 22-year downtrend. Something can't go up until it stops going down and a breakout through an existing downtrend, especially a long structural downtrend of that dimension, is very significant. It was also suggesting to us that a new bull market for gold was taking place and could last for a decade or two.

Q: In 1979 gold peaked out at USD 900 per ounce, it made a bottom in the low of USD 150 per ounce and USD 200 per ounce range, so in fact it had a basing area of almost 30 years from USD 200-900 per ounce?

A: Yes, that's true for the horizontal span, but the actual evidence of the demand coming in was about a five-year period.

Q: So technically what do you project the price has gone-will you give some very scary numbers to the Street?

A; Yes, I have and unfortunately its meeting them. We had targets all the way to 1,000 and now we have an outstanding target at 2,000 with may be 1,200-1,500 in between. There are other studies as well that you can utilize in gold to suggest even higher prices, there is a Dow gold ratio depending on what happens to the Dow.

Q: Let me drag it to another market, which had a long-term bull run - the Indian Sensex went from the lows of 3,000 in 2003 to 21,000 - have you looked at the chart of the Sensex?

A: Yes we have charts of the Sensex and you had seen from 1991 to about 2003 almost 12 years of a base.

Q: Like the Dow between 1966 and 1982?

A: Exactly. If you are going to collide it with that period in time, it is a perfect example. A breakout to 5,000 to 6,000 was a major structural event, which one could argue with the time meant that this Index has entered a new structural bull market.

Q: So the move up didn't surprise you then because it moved out of a long basic period?

A: Exactly. But I would suggest about that it is more like 1987 because this pullback has been held at a higher low. As long as you maintain above 12,500 you are still in this bull market position that began with the breakout through the long-term base.

Q: So a breakdown below 12,500 would be nervous for you?

A: It would then bring it to the uptrend, which would come in actually almost at the same level. So whether it drifts down to 12,500 puts it right at the 2003 uptrend that would be the desired event - for it to come down, to stabilize, go sideways and then lift off the 12,500 level.

Q: Does the Sensex chart tell you when it will make a new high? When you can cross 21,000?

A: No, I don't think so. It was such a sharp pullback that I think the best-case scenario at this point would be for stabilisation. The most dangerous aspect of running up again is that more people come in and take profits. Whereas if it can stabilize and you see slow accumulation coming into place over a period of time, the way 1988 and 1989 saw after a decline and in 1987 in the Dow, that would be a much more constructive pattern and indication that thereafter higher highs can be put in place.

Actually if we think about the global bull market which we believe started in 2002 and should extend a decade or more, this pullback in the global markets is a cyclical decline very much similar to our 1940 to 1966 bull market and the first cyclical decline was 1946 to 1949. Given the excesses, I think it is conceivable that we see several years of stabilisation.

Q: Do you think that the odds are that we make a final top in this bull market or it's just too early to say that?

A: I think this is a bull market that's going to go on as long as the global development is in place. This is just the first leg up.

Q: First leg of this great bull market?

A: I think so.

Q: A lot of people, including from the west have called this an end of the era. That this global gravy train of equity markets is slowing down. Would you think that we could end a period globally of bear markets and commodities will be where money is made?

A: The commodities are also going to represent equities in one way or other whether it's fertiliser companies or construction companies that are ploughing the land by proxy. It is a capital goods out performance cycle in which the industries, the energy and materials have been taking the lead. You will have cyclical decline in an ongoing bull market; some of them are sharp, some scary.

Q: If you advise a young person to look at a particular country or a particular sector. Where would you point him in 2008?

A: I think I would be looking for emerging markets still.

Q: In Africa or Asia?

A: I think you would stay with some of the leaders. I think Africa is probably very risky at this point; they are called frontier markets at this point. But I think you have an ongoing development in Eastern Europe, in India, in China, in Far East Asia and I don't think you are going to turn that off lightly.

Q: What is your favourite maxim about stock markets? Forty years of watching it. What's the one truism that you find is always true?

A: In price there is knowledge.