The Chartman Answers Back

Contrary to Brenda B.'s assertion, Gary B. says that you can indeed effectively chart mutual funds. Pick sides with a post on our message boards.
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Hmmm, so

Brenda B.

wants to take on the Chartman? Well, that's what she tried to do in

her column. But really, isn't that always the way of these fundamentalists, looking to boost their own position by tearing down the technicians? Boy, talk about playing the zero-sum game. It's like these fundamentalists can't win unless someone else loses!

Taking on the Chartman: Join the discussion on our

message boards.

Nah, I'm just ribbing Brenda. Honestly, I love that woman and have the utmost respect for her. And, frankly, as opponents go, there are few around who are much tougher. I mean look at this pedigree:

Rhodes Scholar




Cable Ace Award

winner. Plus, she's pretty darn nice.

So I'm going to have my hands full countering her arguments -- arguments that essentially say that you can't chart mutual funds. (This was in rebuttal to

my column, which essentially argued that you


chart mutual funds. In fact, I made the further argument that you can chart anything as long as the vertical, or y-axis, is bounded by physical, emotional or psychological support and resistance. Hence, the recent

chart of my daughter Diana's swim times.)

OK, so let me take Brenda's points one by one and see if I can make any headway.

    "With a stock, you're charting the same darned company. But a mutual fund is an ever-evolving entity," Brenda wrote. Her point was that a manager like Legg Mason's Bill Miller can change the fund's mix at any time. She uses Miller's sale of America Online (AOL) as an example. This is a valid point, but I wonder how valid? Let's assume Miller sold a huge chunk of his AOL holdings. Furthermore, let's assume those holdings amounted to 15% of his portfolio. So even if he sold 75% of his AOL, only about 10% of his portfolio would be affected. And that's the worst case. Since AOL seems to be his biggest holding, his other positions in companies like Dell (DELL) - Get Report and Nextel Communications (NXTL) amount to barely 5%! So if he sold 75% of those, the net impact would be less than 4%. So, sure, these funds are somewhat fluid, but let's not overestimate the impact of changing positions. These giants are like battleships, with any change registering like a bullet hit on the hull. Furthermore, what did he do with the AOL proceeds? I'm betting he sank at least part of that back into another company in the tech industry. A company that I'm betting has pretty much the same chart characteristics as AOL. Judging from his holdings and his methodology, it's pretty clear that he didn't sell AOL to buy Newmont Mining (NEM) - Get Report. No, he sold AOL and probably picked up something like Microsoft (MSFT) - Get Report. And to further weaken Brenda's argument, Miller's annual portfolio turnover is a measly 19%. Not only does he steer a battleship, but he turns it slowly --- slowly enough so that what we're really charting is the sum of the stocks that make up his fund. Remember, I never said charting a fund was as clean as charting a stock, but if Miller's fund is any indication, we can certainly get close enough. "Lots of managers keep a cash cushion. It can change depending on their market outlook. That can throw a curveball to a chartist, too," Brenda wrote. Let's see, as of June 30, Miller had 6.59% of his assets in cash. 6.59%? Certainly 65.9% would pose a problem, but 6.59%? If that's a curveball, it's certainly hanging up right over the strike zone. No, this amount of cash might make charting the fund a bit impure, but we'll settle for 93.41% accuracy! "Should you use technical analysis to try to trade funds as you do stocks? No," Brenda wrote. She says that the reasons you shouldn't do this are that it's "really hard to do well," and that it's expensive. She concludes: "TA is no shortcut. Boring and basic as it is, you have to do fundamental work." Let's take this one step at a time. "Hard to do well." Yeah, OK. So what? Is doing the fundamental work on these funds any easier? I'm betting it isn't because I can chart a fund in 30 seconds, but I know I couldn't do the fundamental work on a fund in 30 seconds! "It's expensive." Yes, perhaps it is. But if you had avoided some of these funds' 40% declines, those extra loads and fees become a nit compared to what you end up saving. "TA is no shortcut. You have to do the fundamental work." Well, I'm not sure we have proof that TA isn't a shortcut. In short, how do we know? Right, we don't.

Brenda makes a number of prior arguments, and if they had been stronger, we might have concluded that TA was worthless. But I don't think that's the case. And while she might have made the point that TA on funds isn't as strong as it is on stocks, that's no different than my original contention.

But let's say I bend over backwards, concede her every point and grant that using TA on funds is hogwash. So we're then left with fundamental analysis, which Brenda implies is superior to TA with funds. But how do we know that? Has there been a test? Some sort of rigorous evaluation whereby a fund's "fundamentals" are matched with its results?

You see, in the end, I'll confess that TA gives you an edge -- but only an edge -- in analyzing both funds and stocks. But if you're thinking you get a better edge by using fundamentals, well, I think you're reaching a bit, Brenda. The fact is, you've neither negated my arguments for using TA, nor made a strong case for using fundamentals!

The ball is in your court...

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at