Analyze data and trends using historical models
Investors looking for a leg up on their next trade shouldn't put so much faith in the news, because market cycles, not daily headlines, are ultimately what determine an investment's future price direction, says one of the top technical research firms in North America.
"The news will reinforce the cycle, but the cycle was all set in motion years ago," said David Gurwitz, managing director of Charles Nen-ner research, a U.S.-based firm that identifies cycles in stocks, bonds, currencies, commodities, and economic indicators. "We don't know what the news will be, but if there is a cycle top, the news will be perceived negatively. If there is a cycle bottom, the news will be perceived positively."
Charles Nenner founded his eponymous research firm in 2001 after serving as a technical analyst for Goldman Sach's fixed-income trading group.
His research over the years has shown that cycles can determine highs and lows of an asset class or index by looking at repeating historical patterns.
A cycle is determined by analyzing a data series of trends that are then combined in aggregate using mathematical models. Predictable cycles require enough data to work with and upwards of 30 different sets of data can be analyzed for any one asset or index.
"You can't do Facebook," Mr. Gurwitz points out. "The stock hasn't been public long enough so there isn't enough data."
Once a cycle top or bottom is identified, additional analysis is deployed to determine price targets, again using mathematical analysis and other technical indicators. recommendations to buy, hold or sell a security are only warranted if the cycle, targets and technicals line up.
While cycle analysis is obviously sophisticated work and not for everyone, a growing number of investors - both retail and institutional - are seeking it out in order to inform their decisions.
For his part, Mr. Nenner provides clients with periodic cycle forecasts on several different fronts. This week, for instance, the Bombay Sensex Exchange is expected to bottom at the end of the year and he looks to go long in 2013. China, meanwhile, is already bottoming, so he's buying now.
Mr. Nenner also said the short-term cycle for the S&P 500 is still up for a few days and that cycles are still down in bond prices.
Perhaps his best call so far this year is Apple Inc. In early September, he said the iPad maker could still reach his upside price target of US$710 per share, but added the cycle looked "toppy," suggesting investors buy some put options if the stock closed above US$700 per share. The stock broke US$700 later that month, but has since tumbled 20% to close at about US$553 on Wednesday.
"We took profit on our Apple puts, but the cycle is still down," Mr. Nenner wrote this week. "We could even see US$500 per share."
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