The morning fund management meetings held at MitonOptimal play host to many different personalities; Professors with academic backgrounds, hedge fund managers, big picture strategic thinkers, tactical asset allocation mindsets, a geologist, many experienced fund analysts and quantitative technical analysts. Whilst pondering recent market weakness, we turned to the technical charts (or “tea leaves”) to give us the liquidity driven guidance in volatile times – when focusing on fundamentals matters less in the short term – we stumbled upon the upside chart concept.
Fig 1
Fig 2
The first chart (Fig: 1) is the MSCI AC World share market index since 2008. The red channel has held on multiple occasions over the past 2-3 years and has now broken down. The natural tendency is to remain bullish, believing the red channel will just been redrawn after a healthy 5-10% correction.
The second chart (Fig: 2) is exactly the same chart, but drawn upside down! The natural tendency is to become bullish on this chart as a clear break to the upside has occurred and a multi year bull market is about to commence. Same chart, possibly an entirely different conclusion.
Recent analysis by one of our underlying volatility managers concluded that when 5-year annualised performance rises above 20% per annum for the MSCI, and there has been a peak in this measure, then typically the five-year forward return is very low or even negative. Are these charts showing a change in the 5-year trend or a correction in the current one?
1422376990wpdm_Weekly comment Week 42 2014 - Upside down Charts - SC .pdf
