January 14th, 2009

Cramer and COP

As a chartist, I can’t help but feel violated and incensed when I hear (and read) Cramer do his “technical vs. fundamental … which is better” shtick. It’s a set-up and blatant lame attempt to put charts and technical analysis down (don’t believe that he’s trying to teach technical analysis).

For example, last night he presented a technical interpretation of ConocoPhillips (COP). He said he has,

“plenty of respect for technical analysis, too, especially since this approach seems to be driving the market right now [my emphasis added] …. thinks technicians are willing to give up on COP too easily when there are so many bullish reasons to like the stock. Technicians study charts showing past action to predict future performance. These charts say Conoco’s a buy at present levels – $51 – but below $48 the trade’s done and gone. Cramer, however, disagrees. The fundamentals show, he said, that COP is even more of a buy if it drops that low.”

Where should I begin? There’s so much to chew on – a spit out! I’d like to start by pointing out that I analyzed the charts of the three integrated oil companies (XOM, COP and CVX) last October 14 when I wrote: “…take a look at what’s happening to the some of the largest cash machines, the major integrated oil firms. Are they confirming we’ve reached the bottom or will the lower boundary of their channels going to be busted also (note these charts cover 23 years!).” Here’s the chart of COP I included in that post:

Cramer showed a short-term update of the COP chart:

Here are some of the errors in Cramer’s presentation:

  • Technical analysis doesn’t say the COP should be bought at today’s prices and sold if the price went to 48. Technical analysis says that there’s a potential for support at the long-term trendline at 42 and purchase after a bounce off that support would be ideal. If the price doesn’t decline here but instead moves up, that a break above the resistance level at 56 would be an excellent jumping in point (because the odds favor a quick continued further upside after that).
  • Technician and fundamentalist both agree that buying lower is better than buying higher and selling higher is better than selling lower. It’s really only a question of what signal to look for to indicate to you that the odds favor the stock going higher from the current level and less risk of its going lower. Fundamentalists (and Cramer) have no such signal. As he says, “if COP is a buy at 50 then it’s a buy at 48.” But would it also be a buy at 80 or 70? Or 45 and 35?
  • The odds are technicians might have sold COP as the market was in the midst of the bear market last summer when oil was above 135 and COP hit the top of that 24-year channel. It would have been a perfect time to sell and wait for it to go lower. But Cramer was out regularly touting COP at those high prices. For example, as the price of oil was skyrocketing, he wrote in his blog on July 1 when COP was 94, “last week Conoco (NYSE:COP) should have exploded, but it couldn’t because it is such a big part of the S&P. Chevron (NYSE:CVX) and Exxon (NYSE: XOM) are no different.” A few weeks later, on July 24, 2008 (COP was 81.79) on his Stop Trading segment he said “For the oil and gas sector, Occidental Petroleum (OXY) and ConocoPhillips (COP) are too cheap.”

I could go on and on citing similar examples. But the bottom line is that valuation is a transitory thing. One day, something might look cheap fundamentally and the next day look expensive. You may come up with the same value for the stock both time but the yardstick you use to measure is made of rubber. It stretchs and contracts. With fundamental analysis, there’s no standard against which to measure the yardstick itself.

Technical analysis reveals how all market participants value a stock (or the market) and how their collective valuations changes over time. Stock valuations are dynamic, not static; those valuations follow trends (momentum) and those valuations reflect being in demand or out of favor. Techncial analysis focuses on the trends (rather than the causes) and descern when those trends might change (based on when they had in the past).

As a footnote let me add that I wrote CNBC the following:

If you want to want to make a fair presentation of technical analysis launch a show which would be a spin-off of the Million Portfolio Challenge. Put a couple of real, true tech gurus (like Carter Worth or Louis Yamada) up against a couple of fundamental analysts and let them battle it out on the market, on industry sectors, on individual stocks. Each would talk in their own terms (technical talking momentum, charts, etc. and fundamental talking about sales growth, profit margins, fair value). Each show would cover several topics (perhaps on a viewer call up/email basis) and the teams would be allowed to invest a certain amount of their portfolio on each decision.

Part of each show would be a follow up on recommendations made several months ago. There would also be a running Portfolio balance (vs. a benchmark like the S&P 500 Index) to see which “team” (technical vs. fundamental) has the best on-going performance.

But please, muzzle Cramer from talking technical analysis.

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