INTERVIEW
He's The Original Encyclopedia Guy
Robert W. Colby, CMT
by Jayanthi Gopalakrishnan
Robert W. Colby is senior investment strategist at TradingEducation.com
and RobertWColby.com. He is also a consultant to institutional and private
investors and traders, providing custom research services and trading systems
tailored to clients' objectives, whether it's short-term trading, long-term
investing, stocks, or commodities. Why is the name so familiar? Well, if
you've been around technical analysis for any length of time, you've probably
flipped past the name. Colby is the author of The Encyclopedia Of Technical
Market Indicators (second edition, 2003), the standard reference for
indicator and trading systems design. Colby previously worked at several
large Wall Street firms as a proprietary trader, technical analyst, fundamental
analyst, and adjunct instructor at New York University and New York Institute
of Finance, where he developed new courses on investment analysis and market
timing.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan conducted
a telephone interview with Colby on October 5, 2006.
The market can shift its modes suddenly. That's the problem with any strategy. You have to stay flexible. Few people are able to do that successfully.
I know you've been in the industry for a long time. Since...
Forever! 1969.
I understand you did fundamental analysis when you started out.
Yes, I did.
What made you focus more on technical analysis?
What cemented it for me was the bear market of 1973-74. I could see
the fundamentals meant nothing because stocks were in a downtrend and that
was all that mattered. It didn't matter how much net cash assets the companies
had, or what their earnings were. Things went down anyway. Down, down,
down, day after day. That was an eye-opener for me. I was working as a
fundamentalist at A.G. Edwards & Sons and getting paid for it, but
it just became obvious the market sometimes just ignores all fundamentals.
Fundamentals just didn't matter. I saw it again later on occasions where
stocks would be undervalued with earnings growing at above-average rates
for years on end, but the market would just ignore it.
So fundamentals were being completely overlooked?
Yes. It was particularly evident during the late 1970s. The market just
didn't care. Investors weren't willing to pay up for stocks. The uptrends
didn't last, and stocks were really cheap and stayed that way for years.
Now, it's a little different. The dividend yield, for example, was fairly
high during the late 1970s, compared to recent years. The bull market came
in the 1980s and valuations started to increase all the way up to 2000.
At that point, stocks got very expensive. Since 2000, stocks have become
less expensive -- but not cheap.
Over the past three years, corporate profits have been growing unusually
fast, rising at double-digit rates. Earnings have been going up faster
than stock prices. So, valuation standards such as price/earnings ratios
have moderated. Nevertheless, stocks are still relatively fully valued
by long-term historical standards. As bad as the market was in 2000-02,
stocks never got cheap.
What indicators did you start using once you realized technical analysis
was the way to go?
Even as a fundamentalist, I was aware of technical analysis. I became
aware of it when I was still in college in the late 1960s. I spent two
months researching a paper based on the indicators in Joe Granville's first
book, including the 200-day moving average, the advance-decline, new highs
and new lows, and volume, all of which are industry standards today. Now,
everyone knows that if stocks are above their 200-day moving average month
after month, it is a bullish trend and prices are heading upward. In the
past three years, most stocks have been above their 200-day moving averages,
and these moving averages are still moving up. It has been a more persistent
bull market than a lot of technicians thought it would be. It has been
an ususually long bull market by typical four-year cycle standards.
And the 200-day moving average is still being used today, nearly
40 years later.
Yes, it seems like everybody I know knows where the 200-day moving average
is and which direction it's moving.
Are there any indicators used earlier that are not really popular
any more?
One that comes to mind is odd-lot/short-sales ratios or generally short-sales
ratios. You don't hear much about those any more. The market has changed
structurally, and it is hard to know what the short-sales ratios mean any
more.
...Continued in the December 2006 issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2006
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2006, Technical Analysis, Inc.
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