Episode 44: Tactical Insights with Dan Russo, CMT
01:23:34 Share

Welcome to Fill the Gap, the official podcast series of the CMT Association, hosted by David Lundgren and Tyler Wood. This monthly podcast will bring veteran market analysts and money managers into conversations that will explore the interviewee's investment philosophy, their process, and decision-making tools.

By learning more about their key mentors, early influences, and their long careers in financial services, Fill the Gap will highlight lessons our guests have learned over many decades and multiple market cycles. Join us in conversation with the men and women of Wall Street who discovered, engineered, and refined the discipline of technical market analysis. ♪

Fill the Gap is brought to you with support from Optima, a professional charting and data analytics platform. Whether you're a professional analyst, portfolio manager, or trader, Optima provides advanced technical and quantitative software to help you discover financial opportunities. Candidates in the CMT program gain free access to these powerful tools during the course of their study. Learn more at Optima.com.

Hello and welcome to episode 44 of Fill the Gap, the official podcast of CMT Association. I am Tyler Wood, a CMT charterholder, and joining me as always, David Lundgren, CMT CFA. How are you doing, my friend? You look hungry. Yeah, I'm doing excellent, thanks. Thanks for asking. I'm fasting for Thanksgiving, so getting ready. Let me know how that goes, you know, eating gerbil food. That's probably not good for your brain chemistry. Yeah.

Dave, today we had the honor and pleasure of having Dan Russo, CMT, on our podcast. Dan has had an incredible career using technical analysis as a market maker on the floor of the exchange, as a sell-side analyst, and now as portfolio manager at Potomac. So many different highlights that we can unpack, but talk to me about a few that really stood out to you. Yeah, there were many, many, too many to really cover, to be honest. But not too long ago, we had Laura Martin on.

uh, on the podcast. She's a CMT charterholder, but she's a very well-known, very highly followed fundamental analyst. And right around that window that we had, I think it might've been the day of, uh, she had a short call on Netflix and obviously that was the culmination of very in-depth fundamental work, but with an overlay of technicals, which she was able to derive from her CMT charter. And I think that was just a really perfect example of how folks on the sell side, whether on the, whether in sales or, uh, in, in, uh,

as an analyst, can really make productive use of technical analysis and better timing and becoming better informed of a more holistic view of the conditions for that stock. And I think that was a great example. But with Dan today, we had a really in-depth discussion about his journey through his career and how he started on the sell side and now he's on the buy side. And at the end of the day,

what the technical analysis lens can provide to somebody on the sell side who's trying to provide that incremental data point that a buy-side portfolio manager really needs these days. The value that technical analysis can bring to that decision-making process and the ability to cover an account better

with being able to vet these buy and sell recommendations from their fundamental analysts who work really hard, diligently, super smart, but we know how hard this game is to be able to vet those buy and sell decisions through the lens of technical analysis and just bring a better sense of sort of like context and awareness and timing to that recommendation you bring to your buy side client. I think Dan just hit the ball out of the park in terms of demonstrating the value there.

Yeah. And we've talked a lot about communication. Uh, Dan knows who his clients are and catered to their needs and their timeframes in a really, uh, graceful way, right? Understanding the difference between fast, fast money hedge funds who need tactical moves and they're, they're looking short term, but the flexibility or the, I guess, universality of, uh, technical analysis allows them to also cater to long only and, uh, multi-year investors, uh,

Very different scenarios, very different research needs. But to your point, removing any of the...

bias that there's one discipline that works better than another or that we should dogmatically choose one over the other. I think Dan is a great emblematic ambassador for using both together. And I think the point he made was you got to find a way to differentiate yourself on the street. And there is a lot of crowded research looking at the same set of information. So technical analysis certainly helped him differentiate himself.

The other thing that really stood out to me, Dave, and I think to you as well, was the systems that they're using, a composite approach to multiple technical concepts in their fund management really gets to the breadth of this discipline.

I'm up to my eyeballs in work right now on the 2025 curriculum and just seeing how far CMT Association is pushing the education, not just for those core concepts and principles, but also the application of them in a portfolio management approach. Quantitative methodologies, rigorous intermarket studies, the fact that correlations change between asset classes and where we can look for perhaps discrepancies or regime change within those kinds of models.

what Dan is using includes, you know, a swag bond model, uh, their take on Dow theory. Uh, they're looking at 90% volume clusters, um, lots of different concepts, which I think many in the industry who, uh, perhaps pigeonhole technical analysis to lines on charts or patterns and, and just strictly a data visualization, they really miss out on the fact that there are some, um, pervasive longstanding, uh,

theories of market behavior that help portfolio managers stay on the right side of trends. And that really came through for me from Dan. Yeah, that's been the part of the lore of technical analysis from the beginning. I mean, all those concepts, none of that's new, right? No, not at all. But the way Dan phrased it, which I thought was really brought it home, was that

all technical analysis really is is quantitative analysis. It's just that, you know, it's in its foundations over a hundred and some odd years ago, there were no computers. So it was just kind of graphically displayed. We drew trend lines and put moving averages on it and things like that. But it was, that was just a function of what was available to us technologically. But what we were doing in those early days was quantitative analysis. And so now we can

actually really bring to bear the strength of computing power we have today to do a lot of these strategies for us. And I thought it was really interesting with Dan because I guess in his office he's referred to as Doomsday Dan, which is funny. We laughed about it. But at the end of the day, the value for anybody, really, you don't have to use an extreme example like what Dan referred to because I use it today and I'm actually a relatively optimistic person. But

the value i get and what dan really reiterated was the value of of um checking your biases in your uh your your preconditions at the door because well thought out models of technical models won't allow you to be on the wrong side of trends if you're if you're really truly basing everything on first principles all the way back to john bollinger and and so here's dan

Who's we, you know, we interestingly discuss why he has a predisposition to be somewhat bearish. And the reason was makes perfect sense that the first trade he ever made a lot of money on was a short trade. Right. So now he thinks that's and I know a few people that are like that, that are technicians who shoot the lights out, even despite the fact that that was their first trade.

The first experience. And so it's about listening to the market, not listening to yourself. And I find, and I think Dan corroborated this, was that the times in the trades where you make the most money are where your process and models are trying to get you to do something you don't want to do.

Yes, he had a great anecdote for exactly that. Yeah. You know, I asked you just before we started recording, how are you feeling about this third year of the bull market? And you had a very interesting answer here, Dave. So from where you sit here on November 8th, how are you feeling? Yeah, well.

I personally question the notion that it's a two-year bull market because, I mean, yes, it's a bull market. The S&P is up to new highs, et cetera, et cetera. But it's not a traditional bull market in the sense that the breadth of the market has not been participating with the S&P's gains. So-

The difference between what we've had recently in a traditional bull market is that in a traditional bull market, it's like the wave three of wave three of wave three. It's like it won't let you win. It rips your face off kind of thing. And I think that there's a case can be made that that's what's coming next year because the average stock

Up until just a few months ago, the average stock was still over 20% from its 2021 peak. So there was just a massive disconnect between the popular averages and the average stock. And it's only happened four or five other times since the 1970s. And so when you get this to resolve to the upside, what you get is a rip your face off bull market. And I think that's what we're kind of in the early stages of seeing.

I think you might be on to something. Last month's podcast with Todd Sohn, we talked about that potential for small caps to catch up. Or if you don't have to use a Russell index, you can look at equal weight versions of the S&P 500 and other indexes. And certainly, it was possible that it could resolve down the other way, right? That you see large cap catch down to small cap counterparts.

I know you and I both look at breadth and probably in lots of different ways. But just this week, seeing a number of new securities, now over 280 participants in the S&P 500, not just hitting new highs, but our work suggests they're in uptrend conditions, which is, to your point, early stages of something very beautiful that could happen. Yeah, you can't.

have a traditional bull market without the condition you just described. And so the fact that you have it doesn't mean you're going to have it, but the fact that you do have it opens the door for it. And typically after a three-year bear market, which again is what the average stock has experienced, when you get resolution to that to the upside, you typically have a pretty strong market.

Fantastic. Yeah. We're going to put probabilities on our side. And for all of our listeners, I hope you really enjoyed this interview with Dan Russo, CMT Charterholder.

Hey, Dave, that was a fantastic interview. And one last thing that I wanted to mention was that a lot of our candidates in the CMT program are preparing for their December exams coming up in just a few weeks. Just wanted to mention to them, hopefully listening to these episodes helps tie a lot of that learning together. You can see it in practice. That's one of the

main reasons why I think you had this idea for Fill the Gap was to bring things into context and show some application. So I just wanted to give a shout out to all of our CMT candidates. Don't stress yourself into oblivion. Don't do what Dame's doing and fast your way into the ground. But we wish you all the success on the exams coming up in December. And remember,

Technical analysis is about probabilities. So you win some and you lose some. It doesn't mean that the journey is over. And if you need to retake your level, there's nothing wrong with that.

I hope you enjoy it. If I can give a shout out to my son, Gavin, who works with me here at Motor, he's taking it himself. So I'm pretty excited. You know, I'm thinking the level one exam is pretty accessible to everybody. It's a couple hours, multiple choice tests. But I'm thinking maybe Gavin has been studying a little longer than others. We're roughly 23 years now. He's been at the right hip of a great technician and a fantastic money manager. Thank you, Tyler.

I wish Gavin the best, but I'm guessing he doesn't need any luck. He's going to do just fine. All right, everybody, enjoy. Welcome to Fill a Gap, the official podcast of the CMT Association. In this month's episode, Tyler and I get to dive into all things technical, all things portfolio management, and much more with Dan Russo of CMT.

Most everyone listening will know Dan either from his appearances in financial television, his omnipresence in social media, or perhaps as an investor in one of his technically managed strategies. He's a portfolio manager over at Potomac.

So I know Dan to be one of the more thoughtful and humble technicians in the business. And so I'm really looking forward to getting his take on the world these days, given all that's, of course, taking place. And so really curious to see how he's seeing the world through the lens of his discipline process. So let's get this conversation started. Dan Russo, welcome to Fill the Gap. It's so good to be here. I've been looking forward to this for a while. Dave Tyler, it's going to be a lot of fun. Thanks for having me.

It's good to see you, buddy. You're looking well. Good to see you guys, too. It's been a while. We've been having this conversation back and forth trying to get you on. I know. Busy man. It's about time. We're thankful for your time. Yeah.

So we have a ton to get to. We only have an hour to get to it all. But I really find a lot of value in giving you a moment, although most of our listeners know who you are and know of you, I think it's still worth giving them a perspective on your career, what got you to technicals, and a little bit more about your journey before we dive into your process in markets. Yeah, sure. So

I guess my start is I was 12 years old and I was lucky enough that my father was in the business. He was a sales trader for a long time. And as we approach Thanksgiving, I always think about this because kind of my introduction was I was 12 years old. My father used to take me to work with him every year the day after Thanksgiving and

Not to sound like an old, but back then, the day after Thanksgiving was actually a full day. It was not the 1 o'clock close on the NYSE that we all know today. His office was right around the block from the Stock Exchange, and he took me to the Stock Exchange. And he had a direct line to the Exchange. He knew a lot of people there. He actually started as a runner on the floor of the New York Stock Exchange.

So he still knew a lot of people there. And I was a 12-year-old kid, and I got to go to the New York Stock Exchange in all of its glory, right? You know, this is the late 80s. Paper everywhere, people everywhere. And I just kept thinking, this is the coolest place on earth, right? I had no idea what was happening. People were yelling, and people were eating, and people were laughing. And it was the New York Stock Exchange. I kind of understood the significance of that, even at a young age. But I just thought the place was amazing.

- Rowdier than a elementary school playground, I'm guessing. - It was basically one step above that, but not a big step, at least the day after Thanksgiving. That's the day after a holiday. It was kind of slow volume. So maybe not representative of a typical day, but it hooked me in. And one of my dad's good friends

was a specialist. They're now DMMs. So anybody who knows Jay Woods will know that Jay was a DMM, a designated market maker. But prior to being called DMMs, they were known as specialists. And my dad's good friend was a specialist for a small family partnership down there called MJ Meehan. And he introduced me to his friend. And he told me just out of the blue, he said, you know, when you're 16, tell your dad you want to come work summers. I said, okay, cool.

Four years go by. It's right before the summer. I'm 16 years old. I tell my dad, I said, you have to call your friend down there. He said, I can come to work. And my dad's like, what? I said, that guy at the stock exchange. He said, when I turn 16, I can come work. Now I turned 16 in September, so I had to wait a few months. But so my dad was like, you remember that? He called and he called down and said, you know, Danny remembers that you said he can come work. And he was like, I did. Well, if I did, I said it. So have him come in. And that's literally how I got an internship.

on the floor of the New York Stock Exchange as a 16-year-old kid. And I remember my dad kind of reading me the riot act right before. And he was like, listen, you go down there and you work, right? These people are giving you an opportunity. Don't be, you know, ask questions. Don't be one of those kids who stands around and does nothing. So I remember that. And I guess it worked because thankfully they had me back every summer. And when I graduated college, there was a full-time gig waiting for me.

Amazing. Amazing. And did you go straight to MJ Meehan? I did. No, I went straight to MJ Meehan. And shortly after that, it was a time of consolidation. So I started working full time on the floor of the NYSE the week that AOL bought Time Warner. Couldn't have timed it worse. Dave Keller and I talk about this all the time that we are

kind of predisposed to be bearish because of when we started our careers. I think we started right around the same time, right? And it was going through college, basically like we didn't have the phones back then. So we're cutting class to go day trade stocks. At one point, I was actually going to turn down my job on the NYSE. I told my dad, I said, look, I'm not going to go down there. I'm just going to day trade. I was like, look at all this money I'm making during class. And he's like, listen, Dan, you're not that smart. It's a bull market. Take the job I'm giving you. Yeah.

My dad's a very practical person and kind of calls it like he sees it. So that was good. And I did. I went and started the week that I was a time Warner. So shortly after that, MJ Meehan got bought by, it was a time of consolidation on the NYSE. MJ Meehan got bought by Fleet Bank, which had a specialist unit on the NYSE. Fleet Bank was then bought by Bank of America. And so I was full-time for about two years before I jumped to Susquehanna.

and went to, and Susquehanna had a market making team or specialist team on the floor of the NYSE. So I went there and I was there for about two and a half years when I was then made a specialist. So promoted to be a specialist or a market maker for SIG on the NYSE. And I was there until about, I guess,

2007, the end of 2007. There's a common theme in my career. When I moved, duck, because I started 2000, the week that I bought Time Warner. Susquehanna decided to get out of the NYSE floor market-making business at the end of 2007. So I left the floor with them, went up to their sales and trading desk,

Literally, as the world was beginning to implode. So I was in sales and trading for Susquehanna for a few years, and then I went to a small boutique bank called Needham. So that was an interesting experience because I was working with these fundamental research analysts.

And my clients were hedge funds, mutual funds, some big pension funds, predominantly in New York. I never got up to the Boston set. Dave, you guys don't like us New York sales guys up there anyway. We love guys from New York. Not the sales guys. Not the sales guys. If you're not part of the crew up there, it's like a hostile welcome.

Anyway, I never covered. You needed a 617 area code phone number, Dan, and a bunch of reservations to Italian steakhouses. Correct. So I had neither of those. And no, I covered mostly hedge funds in New York. And that was an interesting learning experience because you kind of got to see how different types of investors view the market. And, you know, from there, I kind of got the urge and the kind of the bug to want to manage money.

And I came here. I started at Potomac in March of March of 21. And here I sit. So March of 21, if I remember, that's about the time that the internals of the market peaked. The internals of the market peaked, you know, and then, you know, it was kind of it was interesting because it was your typical market.

case study in cap weighted versus equal weighted indices. Because if you remember, I mean, the market was still strong. I mean, the market, the NASDAQ 100 and the S&P 500 were still strong into the end of 21 and actually made a new high, I think, in the first couple of days of 22.

before the bottom fell out and we saw the big drawdowns in 2022. So not perfect timing, not as good as starting the week that AOL bought Time Warner, but still pretty close. I know we're recording this and it's going to appear publicly, but how are you feeling about your career at Potomac? Are things going well? Yeah, no, everything is going great here. Any plans to move anytime soon? You got the bug or...

No, no, no. Dave's looking for a top. He's looking to mark the top. Yeah, I know you're trying to use the Dan indicator, and that's fine. Maybe we should build it and test it. I don't know. There's only three data points, though, so not reliable. Yeah, it's funny. I've been in the business a little bit longer than you, and every career change I've ever made has been right at the top or bottom of a major asset class, usually equities. So it must be something about the technicians. We can sense change coming, and so we just – Yeah, yeah.

Just buy some, buy some vol, I guess, if you don't have a directional leaning, but no. So I've been here for about three and a half years at Potomac and it's, and it's been great. I mean, it's completely different going from the sell side, covering accounts to then actually managing money. And I'm sure we can talk through that and anything else you guys want to talk about? Yeah, definitely want to get to that shift. But stick, stick

Sticking with your introduction to markets, pretty unique experience. Most folks don't get exposure to the floor of the New York Stock Exchange before they graduate high school. You also did an MBA at Fordham, which is a phenomenal institution, but a lot of fundamental educators there. What drew you to technicals? All right. So I guess I had a working knowledge of technicals.

from my time as a market maker on the NYC. Now, being a market maker is kind of a unique position, especially at that time, because when you're a specialist, your job was basically, you had this massive time and place advantage at the time to be basically the auctioneer in a two-sided auction market. And because of that, most of the order flow had to come through you. If you were the specialist in a stock, 90% of the order flow had to come through you. So-

You kind of just a good day would be to kind of buy with the buyers, sell with the sellers, make a spread in between, go home flat, not take a view on the stocks that you trade. Now, for that privilege, there was a tradeoff. And the tradeoff was our job was to maintain a fair and orderly markets in the stocks that we traded.

What does that mean? So on a normal day, if you just buy with buyers and sell with the sellers, that's pretty easy. However, we were expected in abnormal times to be the buyer or seller of last resort. So if everybody wants to sell a stock, we had to be the buyer and the market had to be fair and orderly. The New York Stock Exchange did not want to see stocks gapping down like 10% at a clip, right? Just because nobody wanted to stand there and buy them.

So we had this obligation. And in situations like that, as you can imagine, you were going to lose money more than likely. But that was kind of the toll you had to pay to have that time and place advantage the other 90% of the time. And I started to get an understanding of technicals at that point because when you are kind of the buyer and seller of last resort, you start to look for spots where

there could be logical turning points, you know, whether short term or longer term, right? Because you're standing there, let's say it's just a massive sell-off and everybody's selling a stock and you're the only one predominantly buying it, right? You need to look for spots to lighten up because you know it's going to keep coming in. So you need to buy more at some point, right? So I'm looking for these just kind of technical, logical, short-term support levels where I can maybe get some off and then, you know, knowing I'm going to have to buy some lower and then eventually start

start to look for logical spots for real demand to come into play where I say, okay, you know, maybe I'm comfortable having a position here and we can look for a turning point. Maybe the, maybe the selling has subsided. So, you know, just kind of basic, you know, support and resistance supply and demand dynamics, uh, as a starting point as a market maker, then fast forward, I leave the floor of sitting on a sales and trading desk and

And, you know, I'm talking to all these fundamental analysts as clients and I'm working with fundamental analysts on the sell side. And as I'm talking to my clients, it quickly became clear to me that the sell side analysts have zero edge as it relates to an informational edge. Right. If you know, if you cover Apple, you're probably one of 40 analysts covering Apple. You're probably not saying anything new. Number one. And number two is.

Your clients, whether it's a hedge fund manager, a hedge fund analyst, a long-only PM or a long-only analyst, they know these stocks inside out and backwards. So I quickly said to myself, I need to figure out how I can A, differentiate myself and B, add some kind of value. And that's what I kicked around the idea of the CFA, which Dave, I know you have. I didn't go that route. I ended up going the MBA route largely because of the timing issue.

It was end of 2007, early 2008. You could kind of see what was happening. And I kind of had the thought to myself, well, I could end up out of this business entirely. So let me get an MBA instead of a CFA. And so I did that. And then kind of simultaneously just Googling around as I was doing work about potentially getting the CFA, I came across the

then MTA and the CMT designation. I said, you know, this kind of jives with me. I have a trading background. This makes more sense. And I figured out that I could add value by taking the fundamental work that our analysts were doing and then providing a technical overlay.

And that morphed into writing a daily note from the desk to send to clients, which then morphed into actually getting the Series 86 exemption. And I took the Series 87. So I was actually...

technically allowed to publish as an analyst. And that kind of helped differentiate me because, listen, on the sell side, everybody kind of looks the same, right? The research is very uniform. I mean, go read 10 research notes on a company the day after earnings. They probably are pretty much word for word the same thing, right? So it was a way for me to add value in a way that just made sense to me as a former market maker. Super well said. Yeah. One of the...

the thoughts that come to mind is and i had a very similar experience in my earlier career where i started really really short-term focused and i and i just basically uh certain habits and ways of thinking about the world uh and certainly with the way i thought about risk became kind of grooved in how i would behave as an investor and then as my career grew uh or or just kind of like um developed i

began to have to extend my time horizon. And I had to abandon all the things I learned about short-term trading. So that's kind of a similar pattern that you followed. So you learned how to survive trading on the floor of the exchange. And the great thing about technicals is it's just as adaptable to that type of environment as it is to portfolio management, which I can't wait to talk to you about. And it's interesting, too, because as I'm sitting on the sell side, remember, I mean, you're

You're covering all different types of clients, right? From kind of long onlys who are taking this three to five year view on a stock and waiting for things to play out. And they're perfectly happy to be early to kind of fast money hedge funds who are looking for a trade over one or two days, right? And the beauty of technical analysis is the fractal nature, right? I could talk to both of those people, right?

And just adjust the timeframe of the data that I'm looking at, adjust when I was writing my notes, adjust the timeframe of the chart that I wanted to show them. And I could show the hedge fund trader a five-minute bar chart over the past five days, and I can show a longer-term investor a 10-year weekly chart talking about why this looks interesting, and our analyst likes the stock, et cetera.

And I think that's the beauty of it is it does lend itself to, you know, shout out to Brian Shannon, multiple timeframes. Yeah, yeah. I mean, Tyler, that sounds like a shout out specifically to the Southside institutional, the folks that are trying to stand out in a very crowded field.

and how to add value at the client level, get your CMT, right? - Absolutely right. And I mean, I think the CMT program, at least over the last 15 years, major evolution away from single security trading or just the research analyst role, right? Thinking about spotting long-term support and resistance and identifying trends to a much more a portfolio management approach. And I'd love to talk with you, Dan, about

Some of the things are very transferable, but there's also a totally different toolkit in looking at relative strength and market internals and breadth expansion or contraction and a lot more that you use as a portfolio manager than you would for single security short-term trading. Some of those concepts are universal and work across timeframes and asset classes, but there's also a lot more to it, which I think- Yeah, correct. Right? Yeah.

I think that's fair. And there's a lot of sell-side analysts who do great work on market internals and breadth. And you just kind of have to know who your audience is. And I think that if you're writing for a high-level portfolio manager, then a weekly note where you look at things like internals and longer-term trends in the market is interesting. If you're writing for...

edge fund manager with a trading bias, you know, they probably don't care about the market over the past week, right? Like they just want to make money in stocks.

So understanding who your audience is, is huge. Like, as you know, I think both of you know that I teach the college class on technical analysis at Baruch in New York City. And, you know, that's something I drill into my students, you know, as we're going through the course. I mean, just those of you who are interested in, you know, going to the sell side, if you're going to sit on a desk in a sales and trading role, you know, figure out what you like and figure out how you can add value. And that's the biggest thing. And I think a big part of it

is being able to add technicals because chances are, you know, if you're sitting on a sales and trading desk, you're going to have a ton of fundamental resources at your disposal, right? Analysts, strategists, economists, et cetera. Figure out how to take that, put your own tech, combine it with a technical spin or a quantitative spin, and then you can add value.

That came out at the CFA Society of New York event just a couple weeks ago. Three Python quant programming... I'm going to throw around the word genius when I describe these three things. I like that. Legit geniuses. But their whole point was use of quantitative methodologies is very disruptive to the existing industry. And a lot of those sell-side research analysts who are pouring over 10Ks and sitting on all the earnings calls and trying to process that data...

That's not the best use of human ingenuity, and there isn't a lot of creativity in that work. So those jobs are very replaceable. So to your point, Dan, when you're teaching the youngsters at Ziklin, they've got to find a way to add something that cannot be easily replicated by computer technology or just quantitative modeling.

And I think on the fundamental side, there is no informational advantage. And now all of that manual labor is pretty replaceable. Yeah, I, you know, I'm not super in the weeds on how replaceable the fundamental side is. But what I'll say is this, no matter, you always hear people talk about their differentiated view as it relates to fundamental analysis. And I always kind of found that funny because you're pitching me that you have this differentiated view.

But then I look at your model and your EPS estimates for the next quarter are within a penny of the street. All your revenue and margin and earnings estimates for the next one, two, three years, whatever it is, are all within one or two cents of the street. So maybe you have a differentiated view, but you didn't come to a differentiated conclusion. So what's the point? Yeah, yeah.

Really well said. Dan, on one of your comments, you kind of stole one of my points I was going to ask you about, which is the teaching. Because having done that myself as well, which is kind of like we keep finding these commonalities here, which is great. What is, when you think to yourself, what is technical analysis to you? And then how do you...

explain that to a new student who has been just, is it graduate or undergrad? It's undergrad, right? The predominantly seniors. Okay, so they've just gone through three years of schooling, learning, and probably being told that technical analysis doesn't work, if they're even told that at all. So how do you take this opportunity that you have to kind of change minds? How do you convince them that they really need to look at technicals? I don't try to convince them that it's one over the other.

I try to convince them that a combination of the two can probably add value. I know that there are people out there who are technical analysts who don't care what a company does. Apple is a fruit vendor for all they know. They don't care. And that's fine. There's nothing wrong with that. But I think that

I think this comes back to knowing your audience. Again, you know, if you're going to sit on a sales and trading desk and you are going to talk to the buy side, right? So if you go to, you know, you go to the sell side and you're going to be talking to the buy side and you're going to be trying to get business out of the buy side, they're still mostly fundamental, right? So if you pick up the phone or you walk into a meeting and you want to talk stocks and you start with,

I see a head and shoulders bottom in this stock. Like you're done. It's over. Like that call is over. That person is probably never taking your call again. However, if you have an understanding of the company, of the business model, and then you can layer in, you know, something technical along the lines of, you know, my analyst likes it.

Her thesis is X, Y, and Z. She sees these three catalysts over the next year that can get the stock going to the upside. And oh, by the way, the stock just made a new

21 day high rate, so called a short term breakout. And over the past 10 years, every time the stock has made a new 21 day high, it's gone on to return X over the over Y timeframe. It's been profitable, you know, 70 percent of the time right now. All of a sudden you've taken a fundamental stance and put some technical slash quantitative color around it. And that's a more interesting conversation because the person you're talking to is

They know the fundamental story. They know what the catalysts are and they know the path from A to B.

for the price, right? Your color that you're adding, and this is what I did when I sat on the sell side, was that technical component where they're like, okay. And, you know, some people are into it and some people are going to be hardcore fundamental analysts and they don't care about that second half, but at least you stood out. At least you differentiated. Listen, you've had Vern and Bice on the show, right? Yeah. I think the entire buy side would be better off if everybody was set up the way Tom and Vern and their team are set up.

Tom O'Halloran, I give a lot of credit because he's a fundamental investor. He is a CFA. He knows companies inside out and backwards, but he recognizes the value of that technical overlay that Vern has honed and has a well-oiled machine at this point. And I think that if more fundamental PMs were open to that idea,

I think you'd probably, maybe you'd see less, maybe you'd see less funds lagging. So, so persistently, right? I mean, I think that Tom's open-mindedness about the technicals and his willingness to rely on, on Vern for that, I think speaks volumes for technical analysis that I wish more people would adopt because I mean, Tom is one of the smarter people I've ever met in this business. Yeah. When you're, when you're, um,

conducting your analysis and you're managing your portfolios. And just in this conversation, a number of times you've mentioned fundamentals. And I'm curious, to what extent do fundamentals come into you? Zero, which kind of gets back, again, know your audience, right? Knowing your audience, right? So now fast forward. So now I've been at Potomac for three and a half years and Potomac is a fully systematic

money manager, utilizing technical analysis. So at a very, very high level, we have composite models that are made up of what we call systems, but for purposes here, think of systems as indicators.

So we have multiple systems that we combine to create a composite model. And essentially, the composite model is trying to answer the question, do you want to be invested? And if the answer to that question is yes, we have four funds that we manage, and we manage each of those in a particular way. So each fund has an investment universe. We trade mostly ETFs.

Each fund has an investment universe that it can choose from, such that when the composite model gives a buy signal, says, yes, you want to be in the market, each fund then we construct a portfolio for each fund to fit a risk profile and return profile that we're trying to achieve. And then what we do as a firm is we take those four funds, we combine them in different weights to create strategies, and those strategies are available on

various platforms for financial advisors. So if you're working with a financial advisor and you're working to achieve your goals, retire by a certain age, buy a second house, put your kids through college, buy a first house, whatever that might be, travel the world, a lot of times your advisors will have a strategic portfolio and then they'll kind of have this

sleeve of the portfolio that they will use for something else. And we try to operate inside of that sleeve as a tactical manager. We are, I think, one of the few truly tactical managers in that we can, will, and do take the portfolios to 100% cash when the market environment dictates.

And because of that, we generally try to run our main strategy generally runs at about a 50 beta to the S&P and about a 0.5 correlation to the S&P because we will be in cash 40 to 50 percent of the time. 100 percent? We will be 100 percent cash 40 to 50 percent of time in that big strategy. Yeah. Wow. OK. So.

So I still, I want to get a better sense for why you don't use fundamentals. So like, I understand that you don't, but like, why don't you? We hold the view that if it is important, it will show up in price trends, right? And if you believe that the market is a discounting mechanism,

whatever's important should show up in the price trends before you even know it's important, right? In theory. Now I'm saying that a little facetiously, but we just, we hold the view that, you know,

If it matters to the market, it'll show up in price. And that being said, we're not trying to catch tops and bottoms. We are happy to kind of follow the trend follower mentality of catch the meat of the move in the middle. And we're not explicitly trend followers in the CTA sense of the word. Generally, our models, I kind of use the ocean as an analogy for our composite models.

We have systems that are longer term in nature that are designed to identify the underlying market environment and the kind of the bigger picture trend of the market. Think of it as the intermediate to longer term trend of the market.

And I think of that as kind of identifying the tide, right? What's the tide of the ocean? Is it rising or is it falling? And then once we've identified the tide of the ocean, we then have different indicators that are likely to fire given that environment. So we'll use breath thrust indicators, right? Um, to confirm a bullish trend, you know, we'll use the advanced decline line, uh,

We use a lot of breath to confirm the bullish trend, right? And if the tide is going out and there's a bearish trend in the market, it will become harder for us to get invested and stay invested. But we recognize that there are opportunities.

even as the market is heading lower. So we have some countertrend indicators that are designed to fire kind of when the market has gone down too far, too fast to the downside. We recognize that there are these mean reversion trades that can happen to the upside, right? I mean, trading bear markets is hard because you get these kind of face rippers to the upside, 15%, 20% sometimes. And we're not trying to catch the 15%, 20%. But we have some indicators that use inputs like the VIX,

If the VIX is over a certain level while also above a certain shorter-term moving average, that tends to be a signal of a short-term bottom. But we'll be in and out of those countertrend trades fairly quickly, two or three days on average, while trying to basically sidestep the meat of the move to the downside. So

It's predominantly a trend-following methodology, but we recognize that there were opportunities for mean reversion in certain environments. You mentioned breadth, and I think that's exactly one of the topics I wanted to talk to you about because of your unique sort of bird's eye view to what it's actually like

to see stocks trade on the floor, which is, you know, that's where breadth is made. But what we know about the last, say, 20 years is we've seen high frequency trading. We've seen the decimalization of trading. We've seen the proliferation of ETFs and what that's done to individual stock level decision making. Like today, you don't build a portfolio of industrials. You just go buy the XLI and that makes everything go up.

So you just indicated that you have a heavy emphasis on breadth and thrust and things like that. So I'm curious, in your in your recent experience, have you had to adjust your how you measure breadth and come up with creative ways to actually overcome the fact that a lot of the traditional breadth measures have kind of lost their efficacy simply because the nature of training has shifted? It's not the same as it used to be.

No, I think that that's fair. I think you hit on some good points, especially as it relates to decimalization. And I think the biggest thing you see there is that there are just fewer unchanged stocks from 25 years ago and before that. Largely speaking, we use breadth predominantly as a confirmation tool.

And you generally, this is anecdotal, at least from what I've noticed, is that, you know, if you're in an uptrend, you know, negative divergences used to matter. And I don't think they don't seem to matter as much anymore. The market kind of tends to work through those pretty quickly. So I don't actually, now that I think about it, I think that this goes for kind of, if you're in an uptrend,

and you're looking for reliable signals to get you out, they tend to, in my opinion, just not be as good as the same signal to the downside, right? Mean reversion signals,

after a sell-off, I find are much better than mean reversion signals in an uptrend, right? Obviously, the market has an upside bias. It has an upside drift, right? It's hard to sell things. And like I said, no one wants to be bearish more than me, right? My nickname here is literally Doomsday Dan because, you know, I just, my predisposition is to be bearish, which is why I have to be at Potomac because we are fully systematic because I would literally be the guy with like cash and gold bars, right?

and never be invested. What's the reason for that, Dan? It can't be as easy as, well, it's because I joined when AOL took over Time Warner and the whole thing fell apart. What do you think the other reasons are? It's more than that.

That's kind of step one. I'm in college. I graduated college in 1999. And you have the boom of the 90s. And I'm like, this is so easy. I'm literally cutting class to go trade stocks in the library on my national discount broker's account. And it's all the hype of the new millennium. And I get to the floor of the New York Stock Exchange. And it's the year 2000. And all of a sudden, things start collapsing.

Right. The market is rolling over. And I'm like, this is weird. This is not how it's supposed to be. It's supposed to be puppy dogs and ice cream. The year 2000. And it's you know, it's just and it wasn't playing out that way. You know, fast forward. I'm still working on the New York Stock Exchange. I have a front row seat for 9-11. I was working. I was working for the specialist firm that was the market maker in Enron.

So I was not involved in any way, shape or form, but the stock traded like 20 feet away from me as it was blowing up. Yeah. Right. And everything was coming out. So, you know, and then you then things kind of got better. Oh, three coming out of it. Then we go into the global financial crisis and you just realize that these.

Once every hundred year events seem to seem to keep happening. Yeah. And then for every 10 years, the icing on the cake for me, I think would be that as a market maker, my first really big winning trade was a short. There you go. So it's like, okay, so the world can get bad. The world can get bad quick.

And you can make money when things go down? I was like, all right, count me in. This is awesome. And it's not awesome. It's not the way to be. I am the first one to admit that you should not be this way, right? You know the stats. Over any given 12-month period, the market's probably up 75% of the time. It makes no sense to have a bearish predisposition.

And I recognize that. And I guess I'll pat myself on the back a little because I recognize it. And I know that I have to be a systematic investor and follow rules and not argue with the system once it's in place and once you're comfortable that your system works.

And that's my high level thesis on why I am the way I am. If you're young and you're listening to this, don't be like Dan, because it doesn't make sense. I hope you find your couch comfortable.

What's that? I hope you find our couch comfortable. No, it's great. It's fine. I've had this conversation. I tell my students. I said, this is not the right way to be, but it's kind of my pitch for systematic and a rules-based investment process. And because you just don't argue...

You just don't argue with the rules, right? You follow the rules. I mean, just to give you a prime example, right? 2022 was a great example of our system, right? It was predominantly a bearish trend. Our system that we look at

that identifies the tides, correctly identified that the tide was going out, right? But then the shorter term systems, which I refer to as the waves, right, they just keep coming and going, right? So the tide of the market is heading out, right? The market is heading lower. But every now and then, probably about five or six times throughout the year, we got these counter trend signals,

right, where it said, okay, too far, too fast, probably makes sense to be invested here for a brief amount of time. And every time those signals would fire, you know, myself and Manish, who is our CIO and also the portfolio manager, I would literally send him a message through Teams that said, I hate buying stocks here. But we would buy stocks, and that's the point, right? Yeah.

Dan, Doomsday Dan didn't want to buy stocks, but the system says buy stocks. And we did. And we follow the rules. Can I just interject there only because I think it's, there might be people listening who, who overweight the fact that you, you've self-identified, if I'm using the word correctly, to be like a perma bear or dooms type outlook on the market, obviously not in life. Yeah.

But you don't need to have that perspective to actually benefit from TA. I mean, I've always said, and I'm actually, I'm generally a more optimistic person, but I benefit from TA constantly because I'm wrong a lot. And what I have found, I just said this to somebody the other day, in the moments when I've made the most money, it's been those trades that I did not want to do, but my system forced me to do it. Correct. Right?

So that's, that's one of the values of, of TA. So, so when I was, when I was on the floor of the NYSE, I had a bad position in a stop. Stop was going against me and managing director who, or the associate director who was overseeing our unit at the time was like, you know, you feel okay. I'm like, not really. He's like,

you feel like you're gonna throw up i was like yup he's like goodbye more right it's like the trade you don't want to do and you know that was probably the bottom right and it's the trade you don't want to do when you're kind of doing things a little bit with a little bit more discretion right oftentimes and which is kind of what it was what it was then but i think you hit on a good point like we we like to be right and i think that's the biggest difference tyler you kind of alluded to this earlier the difference between the sell side and the buy side right is when you're on the sell side

and you're talking about ideas, I actually, I think you have to be right a lot more often than you're wrong because then you're, otherwise your clients are just going to stop listening to you, right? Whereas when you're on the buy side,

no one's probably keeping track of how often you're right or how often you're wrong, right? And we all know, right, the whole, the kind of the trend following mantra, make more when you're right than you lose when you're wrong. And you could actually have a batting average that's sub 50% and still be very successful. So I think that's one of the biggest differences

between the sell side and the buy side is on the sell side, you have to try to be right. I have the Ned Davis book over here, Being Right or Making Money. And I guess, Dave, it was probably one of the CMT events where I guess Frank was on stage and he was talking about it from the buy side perspective. He's like, so I buy a little of this stock and if it goes against me, I just sell it. And I'm like, well, I'm sitting on a sales desk and if I got to talk to clients, I'm like,

I probably got to be right 70% of the time. So while this all sounds awesome, I, you know, I got to find something else. Right. So I think when you're on this, I think when you're on the sell side, you actually probably lends itself to more of like a mean reversion mentality because you're looking for those stocks that have become maybe short term oversold. Right. I mean, I'm sure you've done the work.

I think, you know, shorter term mean reversion systems have a higher hit rate than trend following systems. Right. So I think the mindset shift is, is exactly, is, is the title of Ned's book, right? Being right or making money on the sell side, you have to be right. Right. Because you're not managing money. So what you need, what you need is for your client to continue to take your call. Right. And, and on the, on the buy side, you need to make money.

- Yeah, I will say. - On that perma bear. - I am not a perma bear by the way, I have a bearish predisposition. - A bearish predisposition. - I will tell you this. So we host a conference every year for our clients in the past and we do it usually the end of September, beginning of October. And for the past two years, I have stood on stage and been bullish. - Hey, congratulations, Dan. - It hurt me to do it, but I was on stage and bullish.

I think you and I were, um, I guess I'm a little bit younger than you. I, I felt like we were part of the youngsters at CMT events back in 2012, 13. And after a particularly dark doom and gloom world is ending talk, uh, you pulled me aside or we were having a coffee and you just said, look, I get it. If, if your career is basically over, you've reached that sunset period of your life, uh, and you have one last big bearish call, uh,

No problem, right? Of course, you don't really depend on the system to keep working.

So I would never call you a perma bear. I'd say you're a skeptic and maybe a realist, which is actually really great for spotting those 30, 40 percent drawdowns, getting your clients into cash because you're trying to manage their wealth and manage money in order to continue to manage that money. Right. Capital preservation is job one. And correct. I mean, the most important metric is.

to us, and I don't think you hear this enough from the investment community, the most important metric to us is maximum drawdown. We pay attention to that a lot. And largely because that is the ride you take, right? We all know the

behavioral finance riff, right? That clients are going to sell at the worst possible times. And we all know that whatever, you know, if you're down 50, you got to be up a hundred, right? And if you're down 25, you only have to be up 33, right? We've all, we've all parroted that or some version of it, but it's true, right? To compound compounding long-term is,

is more about losing less in the bear markets than making a lot more in the bull markets. Yeah, is it great to make a lot more in the bull markets? Of course it is, right? But maximum drawdown is the ride you take or your clients take, right? So a lot of times people can see a strategy or they can look at a fact sheet and say, wow, this looks interesting to me. And I could probably withstand that, right? And

In actuality, you probably can't, right, if you're living through a 40%, 50%, 60% drawdown. So we are maniacal about maximum drawdown. So we monitor, like I said, we have systems, and those systems are combined to create composite models.

And we monitor the max drawdown of every specific indicator as well as the composite models themselves. And if anything ever exceeds its maximum drawdown, we just kind of shut it off, look at it, try to understand what's going on, try to understand what's happening and figure out if something's broken or if this is just the market environment you're in. But that max drawdown number, I think, doesn't get enough attention

In the investment community, everyone loves to hump returns. But, you know, somebody might have a strategy with 25, 30 percent annual returns. But if you have to live through, you know, down 70 to get them. Yeah. You're showing your clients the three year returns, but they don't have a three month horizon. Some of them. They're looking at their quarterly statement. Like people are just irrational a lot of times. Right. How many people. Right. People love to quote Peter Lynch's career. Right.

How many investors in the Magellan Fund saw the returns that Peter delivered? Yeah. And are you probably zero? Yeah, it's a very, it's like, I think the statistic is like the average shareholder return is something like 4% and he compounded 29%. Correct. Right. Because why? Because they're probably selling. If he has a down year, he's selling, right? People are selling. And sometimes you just have to sell for,

real reasons, right? The environment, the environment that produces an S&P 100, S&P 500 down 50 percent and a Nasdaq 100 down 80 percent is probably an environment where your job might be at risk or your neighbor just lost their job. Right. So sometimes you're making these decisions irrationally, but, you know, you're going to sell at the worst time more often than not. So we try to make that worst time a lot better than the market's worst time.

Yeah. Well said. Um, uh, there's a lot going on, uh, globally. So I wonder if, uh, we, you maybe give us a, give us a take in your process, given how systematic it is. Do you guys weigh into market analysis at all? Like do you care that gold's at all time highs and what Bitcoin is doing and oil and rates and inflation and all that stuff? We do intermark. So our process has three legs of the stool. Um,

What's the trend in the market? Pretty obvious, up, down, sideways. From there, how healthy is the trend? And that's market breadth. In a strong bull market, we expect to see more stocks going up than going down. We expect to see more stocks making new highs than making new lows. And we expect to see more volume trading in the stocks that are going up than the stocks that are going down. And then the third leg of that stool is then confirmation via intermarket analysis. So we have...

We have an indicator that is a riff on Dow theory where we look at the transports in conjunction with the S&P 500. So not Dow transports, Dow industrials, but we pay attention to the transports, right? So our riff on Dow theory. We have another system that is a take on the Zweig bond model, right? So we're paying attention to interest rates,

Corporate credit rates. And we actually have it. It was amazing to me when I first got here three and a half years ago and I was digging through the individual systems and the indicators. We actually have an indicator that looks at the commercial paper rate. And I was like, I literally was like, do people still trade commercial paper? Like I heard the phrase commercial paper in years, right? And I think that what's most amazing is our system

is extremely sophisticated. The combination of indicators and the way that it's done is sophisticated. But if you break every indicator down at base, it's not this black box model, right? We're literally using a riff on Dow theory. Dow theory is what, like 120 years old? Yeah. Right? We have, I mean, we have a breath indicator that looks at the way

90% volume days cluster.

Is that a new thought? Is that a black box thought? Absolutely not. I mean, the underlying principles of technical analysis are everywhere in our systems and in our composite model. Are we using them the exact same way that they're laid out in the book or the CMT curriculum? Absolutely not, right? There's different spins and takes on it and they're being tested in different environments.

So, yeah, intermarket analysis is a big theme. No Bitcoin yet as an indicator, but we do pay attention to what commodities are doing. We certainly pay attention to what the bonds are doing. Yeah, it's just, what's the trend? How healthy is the trend? It's very intentional on your part that you start with the price trend of the market, then go to the market health, then go to intermarket analysis.

We're looking at all of those things simultaneously. What happens if you have price trend is up and to the right, like all the popular averages are up and to the right, but the breadth is not strong, which has basically been the last three years, and then commodities and rates and everything are doing what they're doing. Does that temper your bullishness, even though the indices look fine? The indices do look fine. So what will happen is

The different combinations of systems that we use, as they start rolling off, moving from a buy signal to an exit signal, that will change the makeup of the composite model. And over time, as more and more of those systems roll off, it will become easier for the composite model to...

than give a sell signal, right? It's not the market made an all time high, but the advanced decline line didn't. So the composite model is going to go to a sell, right? It's a combination of different systems and how those systems work together that will get us out. And that's by design because oftentimes the things that get you out are not going to be the same as what get you back in and vice versa.

So, you know, if you have, right, if all you have is a hammer, everything looks like a nail, right? And so we're not believers in just one indicator, right? Just one way of looking at things. It's the mosaic. And what's important to understand is that mosaic changes over time, right? I think- What's important changes.

What's important or what's moving from an intermarket perspective, what's moving together changes. I just look at the past week or so, right? All you've heard for the past year is how a rising dollar is bad for stocks. Well, the dollar is ripping and so are stocks, right? Correlations change over time, right? More high level and probably more important, quite frankly, is when CPI goes above 3%, that tends to be the flip for stock bond correlation, right?

And so you had, you saw this in 2022. And I think it's something you're going to see more of is in a more inflationary environment, right? This is kind of like John Murphy, Intermarket 101. In an inflationary environment, stocks and bonds prices tend to move together. The trigger point for that tends to be around 3% CPI. We've done the work on it. And a lot of people have done the work on it. So, right, if all we said was, okay, you know,

if all we did was look at the data from 2000 to 2020 and said, okay, stock bond correlation is positive. So when bonds are up, stocks are up, right? And then when bonds are down, stocks are down, right? And that was our only way to get in and out of the market. Like 2022 would have been a disaster, right? But just because that correlation flipped, so maybe our bond model or our bond system starts to act a little finicky, but we have all these other systems that

can drive the composite. So it's never just one thing. Yeah, it's a little more sinister than that even because in actuality, during the 2000s, when rates went down, that was actually quite bearish for stocks. So not only was it not

the traditional bullish, it was actually a driver for it. So you could have actually flipped the response mechanism in your model to make it bullish, not bearish, because we were fighting deflation back then and it actually was a different environment, right? Fair, yeah. But my point is that stuff shifts over time. Exactly, yeah. If all you had was equity trend and a bond model,

Right. Well, then what worked as a signal for 25 years stopped working. Yeah. And, you know, because look, market environments change. So you can't rely on just, you know, one or two, one or two things for your investment decisions. That's how we view the world. So for us, it's always the combination of.

It's always the combination of systems that filter up to our composite model that drive the investment decision. Do you want to be invested? Right. And different combinations, right, different combinations of systems that are on a buy signal can get us in and different combinations can get us out. Right. It's never the same one rule in one rule out because the market environment is so dynamic. Mm hmm.

And the final arbiter of truth for you guys is still price action? The final arbiter of truth for us is our composite model. Got it. It is our composite model. It has to be a blend of those. Which is a blend of price trend, breadth, intermarket analysis, right? And then from there, as I said, each of the funds...

I don't use the word mandate, but each of the funds is then trying to manage to a specific risk reward profile. So it has an investable universe that the fund can look at. And generally speaking, what will happen is, you know, for three out of the four funds, what we'll look at is, all right, if the composite model says be invested,

All right, now where do you want to be invested? So then from there, we'll apply trend and momentum analysis to the basket to figure out where we want to be invested in the market.

I feel like this is the coverage that I wanted to get to, right? Single security trading on the floor of the exchange. You weren't really concerned about Zweig's bond model. Didn't care a whole lot about your market analysis. My goal was to go home flat every night. I honestly didn't care. I knew what the companies I traded did, obviously, because I'd have to talk to their management teams from time to time. But-

But I honestly didn't care because a good day, like I said, buy with the buyers, sell with sellers, go home flat, don't take overnight risk, certainly don't take over the weekend risk, and come in and do that again tomorrow. And then the next day, and then the next day, and then maybe once out of every 20 days, it might be a runaway market in that stock where you got to be the only buyer or the only seller. And hopefully you don't get hurt too badly.

And then you go back to buy with the buyer, sell with the seller, go home flat.

That was the goal. Go home. I think a lot of the short-sightedness for the institutional community or academia that isn't quite understanding what technical analysis is yet is that they associate it only with a moving average cross or a Fibonacci extension of retracement. And that's their limited view of what technical analysis is. But as you've just laid out for us, it's so much more. And it is a museum. Technical analysis...

Technical analysis is quantitative analysis. Yeah. And the chart is nothing more than a graphical representation of data. Because again, getting back to who's your audience, if you are a sell-side technical analyst and you're going to walk into a meeting with a buy-side portfolio manager, nobody wants to stare at a spreadsheet of numbers. Right.

Nobody does. Yeah. You can't make sense of it. It doesn't tell a story. Nobody wants to look at that. Right. But if you have a chart with some notes on it, especially if you personalize it, I think people like to graph too great. Like the notes on the chart are handwritten. Right. I think that's amazing. Right. Because.

like I said, nobody wants, I can run, right? We can run, Manish and I, we can run our entire strategy without ever looking at a chart, right? If I run our software where all of our systems are coded, where the composite model is coded, the output that I see when I run the model is essentially a spreadsheet, right? With ones and zeros and, you know, scores for the composite based on which of those systems are on a buy, right?

For marketing purposes, no one wants to look at that, right? So charts are just, I think people hear technical analysis and they think charts and they think trend lines and they think head and shoulders and triangle. And what I try to do, especially in the class that I teach, is start with that because that is the history of the discipline. And I always tell my students or I ask them first, how many of you can code? Usually a handful of them will raise their hand.

But then I said, what I said, your goal should be, if you're interested in pursuing this further, take what you learn here and then learn to code it and test it. And then ask yourself, can this be tested? We have a phrase here at Potomac, if it can't be tested, it can't be trusted. And we kind of live by that because, you know, you see, I mean, I don't know, like you all have been around this long enough. Could you write code for a head and shoulders pattern?

with strict rules that tell you when to get in and when to get out. The stricter the rules, the less accurate it would be, right? Okay, so how far below the shoulders does the head have to be, right? The patterns, while viable, are really subjective. Yes. And I always ask myself, could I code this? And if the answer is no...

It's probably subjective technical analysis that gets a bad rap. And the other question though, Dan, is, and I think I know what's going to be your answer to this, but the actual question is, should you even have to code it? I think so. You should have to code a head and shoulders?

Well, I think for us to make investment decisions, if we, like I said, if it can't be tested, it can't be trusted. No, what I mean is for you as a trend following systematic investor for your program in your, your portfolio. No, no, no, no, we don't have a, we don't have a head and shoulders indicator. Yeah. I think that's the takeaway, right? Like it is, but it's what you see, right? And it's what to Tyler's point is what people think about when, when, when TA gets a bad rap, that's what it is. Or it's the misunderstanding of,

that it's always more than one thing, right? I think it's, I think it's every year or every so often we'll write an article where they take 10 or 15 different technical indicators, RSI, MACD, Golden Cross, Death Cross, whatever, right? And they show you the stats for that indicator for some look back period. The stats are,

for those indicators on their own, usually not great. Some are okay, some are bad. And their conclusion is using technical analysis will make you underperform the market, right? Well, I've tested it. If you take the RSI, which I love that indicator, if you take the RSI and test it, 14-day RSI, buy a 30, sell at 70 on the S&P 500, like it's a disaster. It's a bad signal. Yeah.

Now, okay, if you take that same indicator and change those parameters to something shorter, and then you also say, well, I'm only going to buy oversold if the thing that I'm trading is in an uptrend, and you start combining indicators...

you get a much different outcome, right? That's what we're doing. I mean, I'm not trading oversold RSIs, but the point is it's a combination of systems. And I think technical analysis gets a bad rap because people tend to, number one, think of it in terms of like these patterns and like you hear, well, how big is your crayon, right? Did it break support? How big is your crayon? Like, I hate when I see that.

Because I think there's a fundamental misunderstanding. Technical analysis is quantitative analysis, and the chart is nothing more than a graphical representation of data. And I'll argue it just one point further. Dave, you might remember this conversation with David Aronson a decade ago, which is the quantitative world and quant finance that is parsing through big data sets.

can oftentimes find something that has alpha over a short period, but there's quick alpha decay.

And more important, there's a certain sniff test to looking at market-derived data. And the analogy that Mr. Aronson gave us delightfully was, all right, so you've got low-orbit satellite imagery and you've got all these different data sets. Let's just say you find correlation between S&P 500 returns and seal populations in Antarctica.

And he said the point he was trying to make was maybe years from now we could track the fact that international shipping lanes warmed the waters or there's some pollutant and that created algae blooms, which creates these fish that then feed all of the seals. And so, yeah.

economic expansion might be observable by seal populations. It's like, but that's not grounded in any kind of economic reality. And so you find seal population data correlates to S&P returns. Like you're not going to trade off of that. You would never manage client money using that as your signal. And so I, I feel like the, um, the benefit that you're getting at Dan is the,

mosaic approach, using things that have a first principle. So momentum, right? If momentum is totally washed out, you've had this correction in an otherwise healthy uptrend, there's some rationale to that. Investor behavior is observable. And is it an absolute perfect 100% every time? Of course not. But like you said, the portfolio managers aren't going for a 100% hit rate.

Correct. I think that's, I think, yeah, that's, that's a hundred percent true, right? Like, or just to simplify it a little further because I'm not deep in the weeds on the seal population. Like if every time a blue car, every time a blue car went out, my drove past my window, stocks went up, like, okay, cool. But eventually that's going to break down. I just think, you know, I think it is, it's, it is a form of quantitative analysis. And I think if, if more people thought of it that way,

it wouldn't get some of the negative, the voodoo connotation that it gets. And like anything else, it evolved, right? 100 years ago, 70 years ago, you didn't have the computing power we have, obviously. So you drew things like trend lines on the chart, right? And you saw these patterns playing out in the chart, and that made sense. I think that the three of us could look at a chart, and if you said, draw a trend line, come back with three different things.

And so that to me is, it's interesting. I still like to sit sometimes like on a Sunday morning, I just like to sit and roll through charts. Just look at them because you can get a feel for the market and a sense for what's happening. If you look at enough charts and you notice the patterns that are playing out, but you know, that's not going, I'm not going to, you know, then come into the office on Monday morning and say, this thing's breaking out, let's buy it. Right. It has to run through,

We code it. We test it. Right. Our process is we're looking at indicators. We code them. We test them on their own. Then we test it in conjunction with all of the other indicators that we're using or the other systems that we're using. Right. So it's that composite approach. You could have an indicator that is really good on its own.

But when added to our composite, detracts value from what we're currently doing. Likewise, you could also have an indicator that on its own doesn't look that great, but when you plug it into our composite model, adds value.

Yeah. Right. And you kind of so we always do the work. We always do the testing. We don't immediately love something that looks good on its own. We don't immediately hate something that looks bad on its own. It's that mosaic. Right. Is the phrase that is the word that gets thrown around a lot. We use composite. Right. This thoughtful combination of indicators or systems to create a model that answers the question, do you want to be invested? Mm hmm.

So I remember fondly a financial news media anchor asking David Harding what he thought about the markets. And knowing that Winton Capital is entirely 100% systematic, he said, I don't even know what I own. So I'm going to take the risk here, Dan. I do know what we own. How are you feeling about markets these days and anything you're keeping an eye on? We are...

I mean, listen, the trend in the market is up. Breath is pretty healthy, right? If you look at intermarket themes, I told you we pay attention to things like the transports and some of the commodities, right? And the transports made a new high the other day. We're recording this, what, on November 8th. So I think the transports made a new high on Wednesday, two days ago. So that would provide some level of intermarket confirmation. So it...

It's hard for me, doomsday Dan, to make a strong bearish argument. Now, if I wanted to make a bearish argument, I would tell you that the fact that I can't make one probably is the bearish argument, but that really can't be tested, so it can't be trusted, so we just come full circle. We're back in the counseling session. I love it. No, listen, I think the biggest things that we're paying attention to are the things that we always pay attention to, the trend in the market, market breadth.

and intermarket analysis. And until those point in a different direction,

I can't make really make a bear case other than maybe you run into a situation where the market is, you know, maybe it can happen in the short term, a little too far, too fast to the upside. It's not a reliable intermediate long-term signal, but you could, you could run into a situation where you just stretch the rubber band a little too far to the upside, but intermediate from an intermediate term trend perspective, it's hard for me to make a bear case.

Yeah. Which I've now just said publicly. So we'll tank from here and I'll yell at why this is why I'm never bullish. But I love it. We can play this game all day.

Dan, it's so good to see you and looking forward to something in three dimensional interaction coming up later on this month in New York City. But thanks for taking the time to chat with us today. For all the listeners of Fill the Gap, where's the best place for them to get in contact with you and Potomac?

Well, Potomac.com is our website, so you can see what we have to say there. We do make some of our thoughts and our content available on the site and kind of through our blogs. I'm fairly active on Twitter at DanRusso underscore CMT.

And you can find Manish at the Comedy Cellar every Wednesday morning at 9 a.m. It's part of the amateur hour. You will find Manish on LinkedIn more so than Twitter. And I am on LinkedIn as well, I guess, under my name with CMT. It's a picture of me on the Bloomberg set. I think there were a few Dan Russos, but I'm on the set of Bloomberg, I think, is my picture. So that's the one to hit.

Fantastic. Awesome, Dan. Thanks so much for being here with us. Guys, this was so much fun. Thank you. Thank you, Dan.

Fill the Gap is brought to you with support from Optima. In addition to candidate study of the official CMT curriculum, Optima provides a full video course on all of the material that candidates need to know for each level of the CMT exams. Each course is broken up into modules ranging from 15 to 45 minutes, depending on the complexity and length of the topics being covered. Learn more at Optima.com.

Bye.