Analysts to Hedge Funds: Stop Screwing with the Canoe!

Growing up long-ago in Canadian cottage country we had a supposedly untippable canoe. It had these styrofoam runners down each side, put in place to keep the thing from flipping, even if you leaned waaaay over.

At least in theory. Because telling a pre-teen that a canoe is “untippable” is never a good idea. All it does is encourage some passengers to focus entirely on finding a way to dump the thing in the drink.

After some experimentation, we realized that the canoe wasn’t untippable at all. As long as you overloaded the canoe with friends, and then everyone jumped in sync from one side to the other and back, you could get a nice rhythm going and eventually flip the unflippable Canadian canoe. It was wonderfully satisfying, in a bull-in-china-shop sort of way.

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I was reminded of the preceding in reading an article in Monday’s WSJ about how hedge fund managers are messing up some analysts’ favorite market signals. Where some folks used to use flip-flopping heavy-buying and heavy-selling days to indicate a market bottom, those days now come along all too regularly — computer-equipped hedge fund managers are like teens trying to flip a canoe — and the value of the signal has dropped to nada.

Ned Davis Research in Venice, Fla., has long tracked what it calls nine-to-one days based simply on trading volume — days when 90% of the shares traded move in the same direction. There has been so much volatility of late that the firm has adjusted its system. For up days, it now counts only 10-to-one days, because there are simply too many nine-to-one days.

“This used to be a good signal of a major bottom,” says Tim Hayes, Ned Davis’s chief investment strategist. “Now, it could be turning into a signal of the end of a less-significant market correction — or it could be turning into an inconsistent signal” that simply means investors are anxious.

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