Now What?

By Kathryn M. Welling

Technically,
A Nonpareil Legacy
That young fellow gazing from the next column is Alan R. Shaw, who last week capped a 45-year career at Citigroup Smith Barney (and its countless predecessor firms) in typically Shavian fashion, updating a prickling intellectual challenge he first lobbed into a complacent market around the first of the year—and choosing to focus on just one, certifiably contrarian, stock in his valedictory contribution (No. 2,197) to Market Interpretations, the weekly technical research report he has penned for 42 years.

I stopped by his chartroom in Lower Manhattan early in the week to offer good wishes, share some Chinese takeout with Alan and his colleague Ron Daino, and try to absorb just a little more of the master technician’s accumulated market wisdom. Which Alan, gracious as ever, provided.

But first, a digression, in the spirit of full disclosure: Alan and I have a history of crossing professional paths at critical market junctures that goes way back, to the summer of 1982. I was barely 30, and trying desperately to pretend I knew what I was doing as the freshly-minted managing editor of the leading magazine for investors amid a pervasive atmosphere of gloom and doom in Wall Street. Two years had passed since rival Business Week had published its now-infamous “Death of Equities” cover and the Dow—having once again tried and failed to break through the 1000 barrier—was languishing even lower than when BW delivered its eulogy. But what did I know?

Another Alan (Abelson, the incomparable writer, editor, financial analyst, mentor and, I’m proud to say, friend, for whom I labored at Barron’s for 25 years) possessed market savvy more than sufficient for the both of us, and for the magazine we edited. At Barron’s, it was Alan Abelson who became more and more convinced during that summer of ’82 that stocks were finding a bottom of considerable import. And, though the details are lost in the mists of memory, I have no doubt it was Alan Abelson who came up with the idea of putting a positive spin on the market scene by interviewing Alan Shaw that summer.

In any event, interview Alan Shaw, I did. Alan had been issuing a string of increasingly optimistic technical pieces since spring, but was being met with more skepticism than cheers. He nonetheless jumped at the opportunity to spread his good news. The resulting cover piece, headlined, “More Advances Than Declines,” appeared in Barron’s just days ahead of the Dow’s Aug. 12, 1982 explosion to the upside. For the cover of our next issue, we commissioned a sassy drawing of a sunbathing bull, the framed original of which graces my office wall to this day. Alan was more pragmatic. The original interview, the newsprint yellow with age, is preserved in his scrapbook, but visitors to Smith Barney’s chart room have long been able to read one of the thousands of reprints that the firm ordered, which is tacked to the wall.

The thing is, that chart room has very crowded walls. They are lined with hand-drawn floor-to-ceiling-scale market charts on sliding panels, some of which go back many decades before the 1980s—and they are decorated with copies of the many seminal research pieces Alan has issued over the years, as well as a profusion of press clippings on same.

Actually, Alan’s uncanny record of accurately calling most of the market’s major twists and turns stretches all the way back to 1966. That October, he proffered a piece suggesting that it was safe for Harris Upham clients to dip a toe back into the water after the sharp plunge that had followed the Dow’s first failed assault, the previous February, on the 1000 level. Alan still has the point and figure chart illustrating what he correctly read as that developing “head and shoulders” bottoming pattern. He used it on the first page of the Oct. 23, 1966 issue of Interpretations to bolster his bullish case.

Not long after, the New York Institute of Finance asked Alan to give a guest lecture on technical analysis, a one-night gig that, to this day, is still a weekly assignment. Alan modestly insists there’s no better way to learn your discipline than to teach it. Yet through his classroom over the years has passed virtually every now-well-known practioner in the field of technical analysis. Many of the best of whom, like Daino, the irrepressible Ralph Acampora and Louise Yamada, who has been so ably leading Smith Barney’s technical research department since Alan semi-retired five years ago, he subsequently hired to work in his chartroom.

Even a mere listing of the critical turns Alan called over his career reads like contemporary market history. That first cyclical bull run he called in 1966 lasted two years, topping out fewer than 15 points shy of 1000, in December 1968. The market then began drifting lower amid increasingly bad news from Vietnam, the inner cities and a political season of generational strife and discontent. Alan ratcheted up warnings in his reports all through 1969, as the market meandered south. His January 1970 forecast: An important low, late in the first half. It came on May 26, and was “a classic,” Alan recalls. “Things couldn’t get worse,” is what he wrote , and the headlines, indeed, were dire: Kent State, Cambodia, Penn Central, bankrupt and Bernie Cornfeld’s IOS, kaput.

So, just as Alan predicted, things got better, at least for the glamour growth stocks in the Nifty Fifty. The Dow sailed to a high just over 1000 in January 1973, before again starting to drift, ominously, it seemed to Alan. He wrote “a hell of a think piece” in April- May ’73, as the trend was unfolding. “It was not necessarily a bullish piece,” he muses, focused, as it was, on the baleful impact of the Arab oil embargo and the topping process unfolding in the Nifties. “But in those days, I was permitted to publish it.” And to follow it up, a little more than a year later, with a tome on the “rise and fall” of what he euphemistically called “The Tier One Empire.” It hit just before the Nifties tanked for good.

“My favorite story about that era,” Alan reminisces, “is when I went, on bended knee, to visit an institutional client, a trust department. They had 1.5 million shares of Avon Products. I said to the chief investment officer, ‘I am just this little guy who keeps charts, but I’m going to say it’s a top here. Nobody is around to buy these stocks because all of you institutions own them. You have well over one million shares, would you sell 100,000, just to humor me?’ He did, but he wouldn’t sell more. To this day, when I run into that fellow at a Wall Street gathering, he reminds me of that meeting. They went down the tubes with over a million shares of Avon—as did all the other institutions that forgot a great company can become a rotten stock.”

How could Alan follow that act? Clearly, by calling the bottom in 1974. That report, issued astride the bottom, asked: “Is Steel A Steal?” Alan remembers the times fondly. “Market timing wasn’t a pejorative. We were in the right groups— steels, papers, chemicals and aluminums—when the market emerged in 1975, simply because they were not going down when the market was cracking under the Nifty Fifty’s final demise in 1974. It was exciting. A buy-and-hold strategy didn’t cut it [through the 1970s.]”

If you’ve noticed a pattern, that Alan tended to pose questions in the titles of his research pieces, you’re paying attention. It was quite intentional, but not—as is sometimes is said disparagingly about market strategists—to be equivocal. “I’ve never really thought that anything I’ve said has been a forecast. it’s been a question, could this happen? If it was a positive question, I would go long and if it was a negative question, I’d get the hell out. So I’ve always approached everything I’ve ever written—and Louise has always done the same—as a think piece. They haven’t been done to proclaim that we discovered ‘the truth’ but to develop mindsets that could explore possibilities.”

“We certainly didn’t have any sort of ‘inside information’ when we said in 1985 that ‘the best bond bet in a person’s career could be at hand.’ We didn’t even believe it enough ourselves, in the sense that in retrospect we should have loaded up on bonds in our personal accounts. We just wanted to draw attention to the potential—and to show that we had conviction in what we were saying. Besides, interest rates were 12%.” (That bull, they say now, is obviously closing out its run, but its top could be a several-years-long, drawn-out saucer affair.)

In like vein, Alan and his crew suggested a “New Bull Market Extension” was likely to take off amid January of 1989’s gloom. Then they came on strong again in 1994, asking “Will The Dow Do 10,000 by 2000? Yet as Y2K and a 7-digit Dow became a reality, the technical commentary issued by Alan and Louise grew increasingly “uncool.” Simply because they dared to explicitly urge caution. Not that they were surprised, knowing full well that calling tops doesn’t win market strategists many fans, except in retrospect. But they held to that stance, until early April ’03, when their charts surprised them with intermediate-term buy signals that the rally which had begun just a couple of weeks earlier had potential to develop into a solid bull cycle. Small wonder their research department’s reputational stock has soared, even as that of sell-side research in general has been shredded by the post-bubble revelations and recriminations.

Yet even now, they just can’t help themselves. They keep asking pesky, probing questions. Alan contributed his last special feature to Interpretations just before the holidays: “Will Dow 10,000 become 1,000 …or 100? He took pains, to be sure, to make it clear that his title was not a forecast. But the piece, chockablock with a wealth of historical market data and insights, nevertheless dared to confront the possibility that the stock market may remain range-bound for years to come as the 10,000 level exerts a kind of inverse magnetism, in much the fashion that earlier markets found the Dow 100 and 1000 levels barriers basically impenetrable for many years. If so, he asked, what does history teach investors to expect? And it was that prickly question that Alan chose to update, and pose again to clients, in signing off.

Alan’s reasoning has nothing to do with black magic or some mysterious property of numbers made up of 1s and 0s. Nor does he attempt to turn shrink and psychoanalyze the market’s collective unconscious. His hypothesis stems from his conviction that great bull market of the 1980s and 1990s was “a textbook once-in-a-lifetime event.” Which leads him to wonder if the market’s most recent upside secular spectacular might not be followed, as have been its predecessors, by a long stretch in which the indices achieve essentially no change in altitude, yet display plenty of cyclical volatility within a trend. To examine his hypothesis, Alan carefully examined the “curious coincidence” that it took 18 years for the Dow to sustain a rise above 100 and “17 frustrating years,” as he remembers all too well, for the Average to successfully breach 1000 [chart, page 6].

What he found were more coincidences: “The 100 flirtation contained 5 cyclical bear markets and 4 cyclical bull markets. Sure enough, the flirtation with 1000 contained 5 cyclical bear markets and 4 cyclical bull markets.” What’s more, the time between those cyclical peaks averaged about 43.5 months in both episodes. (Ranging from 34 to 50 months around 100, and from 34 to 55 months, around 1000.) “Mind you, we were using a small sample here, by definition.” Still, when they stepped back, Alan adds, and realized that 49 months separated 2000’s top from the cyclical peak in February, “it made us a little more, attentive, if that’s the right word.” Sure enough, on March 22, Louise and Ron issued a tech@lert, as they got intermediate-term weekly sell signals reversing last April’s bull call.

Alan’s parting take on “the current 10,000 experience?” He puts it this way: “A savvy market observer” could say the first cyclical bear ran from Jan. 14, 2000 to Oct. 9, 2002. “And, just maybe, the first cyclical bull market is ending, and the second cyclical bear market may have begun.”

He elaborates, “What our study allows us to think about—not forecast—is the possibility that the major trough bottom of the experience is 2008, which could be a Dow in the 5-6-7,000 range. Then, the next secular bull market that we’ll all be privileged to live through commences in 2018.” The point, Alan makes quite clear, is to provide an analytical framework for interpreting the market’s future zigs and zags. One that, should it pan out, implies that, once again, the sort of cyclical market timing and stock and group selection work that he remembers in the 1970s should enjoy a revival. A prospect that he views with anything but trepidation. “Gosh, I loved that period. You had to be alert, you had to be on your toes—and that is what make it so much fun. In fact, that’s the most exciting thing about the market. It’s always changing. What we always want to do is be ahead of the curve, ahead of the change—and not sit there. Especially if you’ve made a mistake. I mean, there are only two losses you ever have to report: money or an opportunity. So you’d rather be out of the market watching the stock go up than in the market and watching it go down. It is that simple. And why my parting message that this environment will require agility and brainpower is a positive one.”

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