USING IPOs AS A CONTRARIAN TOOL
Fear and greed are those ubiquitous emotions that can cause so many problems for an individual’s P&L statement, both at market tops and bottoms. However, because financial markets are driven by humans, who tend to repeat emotional reactions during exciting market rallies and tops (don’t want to miss out on the profits) and the panicked, frenzied selling that often accompanies market bottoms (just can’t lose any more money), these repeatable patterns can be quantified and then used by those relying on more objective forms of market analysis.
GO AHEAD, BE CONTRARY
Within the field of technical analysis, contrarian indicators were developed to capture a snapshot of the emotional extremes that tend to emerge at pivotal market tops and bottoms. Widely used contrarian indicators include the put-call ratio, sentiment surveys and volatility measurements, such as the VIX.
The basic premise is when a contrarian indicator registers an extreme (either high or low), then a signal is generally triggered. The indicators are called contrarian because when they reach a historic extreme, let’s say bullish, the signal would actually be a bearish sell trigger, and conversely an extreme bearish reading would actually be a bullish buy signal.
MTA DOW AWARD
Shifting gears for a minute (we’ll get back to the contrarian thought), each year, the Market Technician’s Association honors an individual with the Charles H. Dow Award, which is given to the author of a winning paper that represents excellence and creativity in technical analysis. The 2009 award was presented to Kevin J. Lapham, CMT, of Ned Davis Research Inc. for developing a new indicator that uses initial public offerings (IPOs) to offer insight on sentiment at the sector level.
Lapham first became interested in markets and eventually technical analysis while working in the merchant marines, traveling the North and South Atlantic oceans. “I worked on a container ship, and sometimes the cargo was wheat or crude oil, and I started seeing patterns in supply and demand,” Lapham says. His interest was piqued, and he began to explore commodity and stock trading while at sea.
He quickly found out that trading off of fundamentals “didn’t really work out that well,” so he began reading and exploring various technical analysis indicators and methods. When he left the merchant marines, Lapham knew he wanted to become involved in the financial markets and initially worked at the Raymond James brokerage house. A broker at that firm was a good trader and market timer, this led to even more technical analysis interest on Lapham’s part.
In 2000, Lapham jumped at the opportunity to work at Ned Davis Research Inc., a prominent independent financial research...