John Bollinger, who is best known for his work on trading bands, also has other accomplishments to his credit as money manager, publisher and market analyst. Of late he's been looking at some new concepts: group analysis, which isn't a new concept at all, and fuzzy logic as applied to the markets, which is. To find out more, STOCKS & COMMODITIES Editor Thom Hartle decided to speak with Bollinger on January 23, 1997, via telephone, on topics ranging from group sector analysis to using fuzzy logic in market analysis.
"I felt it was important to create a group structure that reflected the current market, to better represent the modern economy. I wanted to move the entire structure away from the traditional concepts that S&P and Dow Jones offered. I wanted to develop a product for the Internet -- group work seemed ideal." -- John Bollinger
John, you're a money manager, a publisher, and a market analyst. Tell us about some of your latest research into deciphering the markets. What have you been doing most recently?
"Probably the most exciting work that I've done of late is a return to work I was doing years ago, in the area of group analysis. Back when I first started my career, a company called Remote Computing, which at the time owned Dial Data, offered a service called Merlin. Merlin, as part of its daily service, had a wonderful table available. The table was the individual Standard & Poor's industry groups in the order of their deviation from an average."A look at momentum?
Exactly! The service ranked the 90-odd S&P groups by momentum. In the first column, the groups were ranked by deviation from the average, so the strongest group was at the top and the weakest group was at the bottom. Then going across the page by columns, they displayed the rankings from a week before, and the week before that, and so on. It was one of the earliest intermarket technical tools that I used. The service was discontinued eventually, but my interest didn't.So these days, you've been working on a similar approach?
Right. I started out to create an industry group ranking. I based it on the older structures -- the broad economic sectors; consumer noncyclicals; basic materials, energy and so forth -- but I also created some new categories, both at the group level and at the sector level.
The most exciting work that I've done of late is a return to work I was doing years ago, in the area of group analysis.
What else do you look at?
The persistence of money flow. This indicator is based on Marc Chaikin's work. Chaikin looks at the percentage of days in the past 125 days in which money flow has been positive. We find that that's a superior intermediate-term market forecasting measure (see sidebar, "Chaikin indicators"). With one-month momentum, which is a shorter measure, combined with an intermediate-term measure such as persistency of money flow, we have the best of both possible worlds.Give me some examples.
Sure. If you look at a Group Power report, we've got a lot of things going on in it. We calculate advances and declines, and up and down volume based on groups. We calculate an Arms index, and we calculate new highs and new lows. Now, we do this in a different and we think very interesting way, which adds an early warning concept. Not only do we calculate 52-week new highs and lows, but we also calculate 26-week new highs and lows, and 13-week new highs and lows as well.= = = What else are you looking for?
By having assembled a rational group structure, another cut that we take is based on Abe Cohen's work at Chartcraft. We look at the number of groups above and below their key moving averages. We use 10-day, 50-day and 200-day moving averages. Recently, for example, the percentage of groups above each of the moving averages reached 90, which is very overbought, suggesting there was potential for a market correction.Ninety percent -- and how many groups do you follow?
Right now, 130 broken down into lists by performance. We track the top 10 and the bottom 10 by momentum, the top 10 money flow and the bottom 10 money flow (Figure 2) and the biggest changes in short-term momentum.Figure 2: Persistency of money flow groups. Here are the top 10 and bottom 10 persistency of money flow groups on February 5, 1997. They are tracked by money flow as well as momentum. The leaders?
Yes, it's really an interesting table. These are the largest gains in short-term momentum, or the largest declines in short-term momentum. This really makes you focus on where the action is in the market. Of course, a lot of people aren't too concerned with knowing where the action is; they just want to capture the broad trends. They're better off looking at the money flow and the momentum rankings, but for those people with shorter-term orientation who really want to focus on what markets are really experiencing volatility, either positive or negative, we think that those momentum-change tables are really very interesting.
