LOUISE YAMADA: Even if you're a short-term trader, you have to know where you are in the longer-term trend, whether it's in the bond market, or the stock market, or individual stocks, or industries. I remember a fundamental analyst-- when I went out and said Tyco will probably be next-- he was in my office within two-- how dare you comment on my stock?

KATIE STOCKTON: Oh, goodness.

LOUISE YAMADA: Went down three days later. Some things aren't working the way they used to. Volume is one. I have a concern that these bank stocks are making secondary tops.

JUSTINE UNDERHILL: We're really excited to have two of the premier voices of technical analysis, Louise Yamada and Katie Stockton, join us for a discussion about how the industry evolved from the early 1980s to today, and how technicians are adapting to a new world of algos, HFT, and a host of other factors that are masking trends. Hope you enjoy.

KATIE STOCKTON: My name is Katie Stockton. I'm here Louise Yamada, legendary technical analyst, somebody who I've aspired to in my career.

LOUISE YAMADA: So sweet.

KATIE STOCKTON: And I guess today we're just here to have a casual conversation about our backgrounds in the markets. And I know that you actually got into technical analysis-- it wasn't what you studied in college, per se.

LOUISE YAMADA: Not at all. No, it wasn't.

KATIE STOCKTON: I would like to know more about how you got into it. I remember it's a little bit of a different story.

LOUISE YAMADA: It's a fluke completely. My master's is in early childhood development. And I taught nursery school for quite a few years, and then ended up as a single parent with a 10-month-old child and trying to figure out what to do. And in the course of buying stocks and putting them away, you'd see them go up and you'd see them come down. And I finally said to the broker, how do you know when to sell? So I got all these technical newsletters, and went to the Finance Institute.

And of course, Ralph Acampora, who just recently did an interview with Alan Shaw, taught the first class. And then Alan taught the advanced class in his office, which was like a gymnasium filled with hand-done charts.

KATIE STOCKTON: That must have been neat.

LOUISE YAMADA: It was fabulous. And he offered me a job. So that's how I got into it, and was there ever since. I started in 1980 part-time, and then when I finished the school year with the nursery school children, I went full-time.

KATIE STOCKTON: Wow, that's incredible.

LOUISE YAMADA: Yeah. It was fun.

KATIE STOCKTON: It's almost like you've stumbled into it.

LOUISE YAMADA: Yeah. Was really fascinating learning on the job.

KATIE STOCKTON: Yeah. So I was more on a track to become a technical analysts. I feel like it was somewhat kismet though, as well, and that I studied finance in college and ended up taking an internship with one of the brokers, at the time. And he had on his desk a piece of paper that had Xs and Os on it. And I said, what on Earth is that, Tic-Tac-Toe or something, as a college student. And of course, it turned out to be point and figure charts.

LOUISE YAMADA: Exactly.

KATIE STOCKTON: And I worked for Dorsey Wright then, who was based in--

LOUISE YAMADA: Oh, you did? Way back then?

KATIE STOCKTON: --in Richmond, Virginia, where I went to school.

LOUISE YAMADA: But I remember you saying that you had loved it since you were a child, even before school.

KATIE STOCKTON: I guess I considered myself a child back then. I have always had a passion for, I guess, mathematics. And to me, to be able to apply indicators to the markets, which is, of course, what we do on some level, really is not only something I enjoy doing, but I think there is huge value into take some of the gray area out of the market. And there is, indeed, a lot of gray area. But I'd love to hear more about how you proceeded with Alan and what he taught you. He's obviously a major force in your career and a mentor.

LOUISE YAMADA: Absolutely, absolutely. He was a good mentor. It wasn't as though you went in and had a lesson. You just listened-- listened to his presentations, listened to what he was looking at in the chart room. And one of the first things I remember-- it must have been 1981, as we were going into that final decline before coming out in 1982 into the next great bull market-- is I would plot all by hand-- we didn't have the computers back then-- plotting these huge charts of relative strengths for each sector, for each industry.

And the consumer staples came out of a-- broke out in relative strength in a 30-year base.

KATIE STOCKTON: Wow.

LOUISE YAMADA: And I said, Alan, I just plotted a 30-year break out. And that started the whole commencement of the consumer staple rise. And you saw Clorox break out, and you saw all these incredible stocks coming out of very long bases. And I remember that after Clorox, as an example, was up five points, the fundamental analysts wanted to pull his buy.

And Alan and went to talk to them, and said, no, no, no. He said, you can't. The bigger the base, the higher in space. There's more to go

KATIE STOCKTON: One of Ralph's phrases, right?

LOUISE YAMADA: Exactly, exactly.

KATIE STOCKTON: Well, that must have really shaped your methodology. I remember the first thing we really connected over, in terms of methodology, was sector-relative strength and our usage of it. It's something that I value hugely.

LOUISE YAMADA: Yes.

KATIE STOCKTON: And now, of course, we have tools to do so much more than we could when we were plotting by hand, as I did as well, with the point and figure charts.

LOUISE YAMADA: Yeah.

KATIE STOCKTON: I know that you tend to be somewhat long-term in your view, and it sounds like maybe Alan shaped that a little bit?

LOUISE YAMADA: I think so, because I think, even if you're a short-term trader, you have to know where you are in the longer term trend-- whether it's in the bond market, or the stock market, or individual stocks or industries. And as an example, in 2000, we were starting to see these huge two-year tops in the drugs and in the consumer staples. This was after they'd been going up since 1882.

KATIE STOCKTON: Right.

LOUISE YAMADA: And it was incredible. There were just some of the largest distribution patterns I'd ever seen. And we made the call for the 2000 bear market. And then, as I went on my own in 2005, as all the large houses were getting rid of their technical--

KATIE STOCKTON: I remember that all too well.

LOUISE YAMADA: Yeah, exactly, getting rid of their technical department, which I think was a legal issue as a result of the 2000 crash or collapse, if you will. Because we were allowed to function independently. So we saw these tops, and we were telling the brokers to sell. And then it moved into the industry, and you had Tyco breaking down, and you had Enron breaking down under 60.

KATIE STOCKTON: And these were major long-term developments.

LOUISE YAMADA: And these were major long-term tops. And I remember fundamental analyst when I went out and said Tyco would probably be next, he was is in my office within two-- how dare you comment on my stock?

KATIE STOCKTON: Oh, goodness.

LOUISE YAMADA: Went down three days later.

KATIE STOCKTON: And those are the things that they'll never forget, and you have some converts on your hands.

LOUISE YAMADA: It's incredible. Exactly.

KATIE STOCKTON: How do you see, I guess, the integration between technical and fundamental analysis? Do you use it yourself?

LOUISE YAMADA: No, I think that-- well, if you have to have somebody who's a good fundamental analyst. But I think, if you have-- a fundamental tells you what and the technical tells you when. So I think they do go together, except at tops, because, as Alan said in his little interview, you learn at a market top, even though the fundamentals are still good, that the stock and the company part ways.

KATIE STOCKTON: That's a really interesting point, and it's something I talk about a lot in my work, where you need to look at stocks as securities that sometimes do get disjointed and away from their fundamental trend. And that's indeed what we're trying to find out over the course of especially of those short to intermediate-term frames. With our work, we're trying to understand when the gap needs to be filled by something that maybe isn't fundamental.

So I believe-- it sounds like you do, as well-- that the long-term trends are indeed based on fundamentals and macro trends, and we always need to have an understanding of that and long-term trends.

LOUISE YAMADA: And that the market's a discounting mechanism--

KATIE STOCKTON: That's right.

LOUISE YAMADA: --so that you see it in price before you actually have the fundamentals catch up to the distribution.

KATIE STOCKTON: Especially in the relative strength ratios. When those ratios move, it's one of the few things that I feel like can give us a nice leading indication of those base breakouts in absolute terms.

LOUISE YAMADA: Exactly.

KATIE STOCKTON: So I think it's such an invaluable tool that both of us use.

LOUISE YAMADA: The relative strength, from a sector perspective, we follow specifically monthly, but obviously, I look at an intra-month. But it was in 2007 that we had this nonconfirmation of the relative strength in the financial sector. So financials went to a new high, but the relative strength put in a lower high. And it was finally broke in 2007. Broke that six year support.

And I remember the media saying, oh, well, we've had financial crises before-- we had '98, we had '90. And look back on the chart, '98 was about this big and 1990 you could barely see. And here we were talking about a six-year top in the relative strength, and we said--

KATIE STOCKTON: And of course, that foreshadowed things to come.

LOUISE YAMADA: --we don't know what's out there, but this isn't telling us something good.

KATIE STOCKTON: That's right. And that's a period during which, in m that technicians became known to do better in that type of environment, where even if they might not have cut the top, but maybe after--

LOUISE YAMADA: Yes, exactly.

KATIE STOCKTON: --that first breakdown, they were quicker to be sensitive to that move, not being as married to their views, to listen to the market action.

LOUISE YAMADA: Yeah.

KATIE STOCKTON: And I think, in that sense, it makes sense to start top-down, look at the major indices, look at the sectors, and then look at everything that they're comprised of for that sense of market breadth. Tell me which tools that you used to use that you don't use anymore. Is there any change in your methodology over the years?

LOUISE YAMADA: Well, I wouldn't say as much a change in the methodology as much it is a realization that some things aren't working the way they used to. Volume is one. Volume was the weapon of the bull, was always the long-term call on volume. We haven't had volume registering new highs in 10 years or more.

KATIE STOCKTON: That's true, just a long-term down trend.

LOUISE YAMADA: Exactly.

KATIE STOCKTON: And really I agree with you. When you see a rally, it no longer needs the support of volume. And even breakouts and breakdowns, [? you ?] used to almost see volume increase during those, and that was an enhancement of what you were seeing. It just doesn't seem as important anymore.

LOUISE YAMADA: Well, I don't know it's not as important or whether it's a factor of the fact that we have half as many stocks now as we had in the '90s on the New York Stock Exchange, and that for over a decade, you really haven't had splits, which is why you have these stocks at $2,000 a share. They used to split so that the average person could continue to own them.

KATIE STOCKTON: The landscape has definitely changed, hasn't it? We have ETFs, and derivatives, and algorithmic trading at different phenomenons. Have you found that these-- whether it's artificial intelligence or anything-- high frequency trading, any of these trends in the industry, do you feel like they've affected the charts at all?

LOUISE YAMADA: Affecting the charts is a good question. It certainly has affected the clients who call and say--

KATIE STOCKTON: That's a good point.

LOUISE YAMADA: --I can't get any liquidity. I can't get any liquidity from my trades. I wonder if it affects the charts. Well, certainly in terms of the volume, it does. Everybody is so sanguine about this advance-decline line being at new highs. Well, remember, we didn't get the four to six months divergence in 2015 either.

KATIE STOCKTON: Right.

LOUISE YAMADA: Although that was just barely shy of a bear market, it wasn't there.

KATIE STOCKTON: That's right. Sometimes you don't get that nonconfirmation. I would agree with that.

LOUISE YAMADA: That's correct. So it's still a question of the weight of the evidence. Some indicators speak to sometimes, and sometimes they don't.

KATIE STOCKTON: Right. I've noticed that with the-- I think with some of the quantitative price action out there, or quantitatively driven price action, that support and resistance levels sometimes-- you see a little bit more skittishness around them. You have to be very sensitive to it, but especially in something like the S&P Futures, that are very actively followed, in terms of the levels. You see a little flurry of activity right around a specific level, ie the 200-day moving average, something like that.

LOUISE YAMADA: Yes.

KATIE STOCKTON: Because you sense that these levels are programmed. And because of that, things-- orders are kicking in around these levels.

LOUISE YAMADA: That's a very good point.

KATIE STOCKTON: So I think, if anything, it might enhance the importance of these levels, but also make it such that they need to be treated as cushions instead of precise levels. Because think about all the market players that are involved around there. That's something that I feel like I've noticed, albeit an intangible really. And then, of course, the volume.

LOUISE YAMADA: Well, no, you're absolutely right because even the S&P nudged up to a new high. The NASDAQ nudged up to a new high, and now we've just failed.

KATIE STOCKTON: That's exactly right. And I think there's information in that. Usually I always wait for breakouts to be confirmed not only in price, but in time. And that helps prevent those kind of whipsaws that we get so often in this tape. It's really been volatile. I call it a time compression, where I feel like all of a sudden, moves that used to take six months seemed to take six weeks now. So we have to almost be more sensitive than we want to be to the noise out there.

LOUISE YAMADA: So true.

KATIE STOCKTON: And who do you primarily talk to? Who are the people, over the years in your career-- do you talk to portfolio managers, and--

LOUISE YAMADA: Yes.

KATIE STOCKTON: --do you have feedback from them, in regards to industry trends?

LOUISE YAMADA: Probably not as much now as we did back then, because I've cut back to a once a month publication schedule. So people get it and read it. If they have a question, they'll call. But basically, it is what it is and it gives them an alternative. We may believe this, but if such and such happens, that would negate what we are looking at from a technical perspective.

KATIE STOCKTON: To keep it simple, I think that's a good thing--

LOUISE YAMADA: Exactly.

KATIE STOCKTON: --and balanced and professional. So Louise, from Smith Barney, you started off on your own. And I'd love to hear more about that, just having gone through it myself.

LOUISE YAMADA: Yes. We were retired out. It wasn't a firing. But Ralph Acampora had been let go from them from major brokerage houses, and the other technical analysts, in many cases, were being let go. And I wonder if it didn't have something to do in 2000 with the differential between the fundamental view and the technical view. Because we were not constrained in our opinions, so that when we [? saw all ?] these tops, we were allowed to go out and say, sell these stocks, even though the fundamental analysts--

KATIE STOCKTON: So conflicting in-house views.

LOUISE YAMADA: --were saying buy. Exactly. And I think that they perhaps had more lawsuits than they would have liked. And when they came to me and said, what were you looking at, you would show them, and they understood. But I suspect that they wanted to get rid of the conflict of interest.

KATIE STOCKTON: Interesting.

LOUISE YAMADA: Yeah, that's my theory.

KATIE STOCKTON: It's nice that you say they understood what you were looking at, because I found that, at times, trying to explain the discipline to folks that don't do it is difficult, especially to regulators.

LOUISE YAMADA: Yeah, exactly. I think Ralph said he fought to get the market technician certification--

KATIE STOCKTON: The CMT certification.

LOUISE YAMADA: --equal to the financial analyst certification.

KATIE STOCKTON: He did so much to forward that--

LOUISE YAMADA: He did so much to get that through.

KATIE STOCKTON: --and it helped me directly, so I really value his efforts.

LOUISE YAMADA: And I think what he essentially won on was that earnings can be adjusted, but the chart can't.

KATIE STOCKTON: That's exactly right.

LOUISE YAMADA: Which is he said in that last interview. So yeah, so we had a couple of months to pack up and get organized. And the clients very much wanted us to go into dependent, otherwise I probably wouldn't have done it. And with the new MFID rules, it's really closed the door to a lot of the foreign clients that we had.

KATIE STOCKTON: There's definitely been a change in how they treat research.

LOUISE YAMADA: Yeah, because they can't pay out of commissions anymore, which means it comes out of the bottom line.

KATIE STOCKTON: The P&L.

LOUISE YAMADA: Right. So it has limited, to a certain degree, the reach.

KATIE STOCKTON: And they do say that it can be a challenge for independent research providers like ourselves.

LOUISE YAMADA: Exactly.

KATIE STOCKTON: I found it to be both good and bad in what I do-- good in that a subscription model lends itself better to