SAC"s DEMARK finally speaks!

Discussion in 'Wall St. News' started by marketsurfer, Jul 18, 2008.

  1. Demark rips on trend following, enjoy!

    It should come as no surprise to find that a man like Tom DeMark, author, market analyst and trading consultant to some of the most famous names in trading might be more than a little busy when it comes to finding time to do a telephone interview. We caught up with Tom DeMark late in the day, and though the markets were closed, is seemed almost as if Tom DeMark's day had just begun. Indeed, we were interuped more than a few times by urgent calls from colleagues and clients - including one famous client in particular who was traveling in Russia at the time and needed to share a few things with Mr. DeMark that could not wait.

    Tom DeMark has been in the trading business for more than 30 years and is known to many as a technically-oriented analyst and trader. This is due no doubt to his popular books on his trademark technical tools and set-ups, books like The New Science of Technical Analysis and New Market Timing Techniques. However in conversation with Tom DeMark, he prefers to consider himself a "hybrid" market timer rather than a technical analyst and insists that, in the end, it is the fundamentals that drive everything.

    In this, Part 1 of our Big Saturday Interview with Tom DeMark, we discussed what makes some of the legendary traders with whom he's worked - traders ranging from George Soros and Michael Steinhardt to Paul Tudor Jones and Steve Cohen - so great, and how the average trader can learn to develop those skills and habits. We also started a conversation about some of DeMark's trading techniques - a conversation that continues in Part 2 - from his unique approach to technical tools to his conviction that bottoms are formed not by "smart buyers" but by the "final dumb seller."

    With that, we hope you enjoy "Dedication and Discipline: Market Timing with Tom DeMark"

    David Penn: Let me just start off at the top by talking about some of the people you've worked with. You've worked with a lot of names - Steve Cohen, John Burbank, Soros funds, Tudor Jones, Steinhardt and so on. Having worked with that caliber of trader - is there anything that you see in those traders that either reminds you or sort of says 'this is why these are the people at the top'?

    DeMark: They're dedicated. They're 100% involved and committed- they've all got the same disposition. They're all calculators. They're good money managers. I'd say if one had to break down the reasons for their trading success--it's probably a 20 to 25 % trading methodology and techniques or systems, whatever they might apply - 25% discipline and 50% money management.

    Penn: Really.

    DeMark: They're all good money managers. They all are. I can't say they're all good traders. They're not. They can manage money well. Some of them can take pretty big - a large series of hits and at the same time make money and they cut their losses short.

    Penn: Interesting.

    DeMark: It really is money management. Surprising. I have worked with the best. Steve (Cohen) is definitely the best trader. He doesn't have that high a success rate. It's his disposition, he was built for trading. You can't describe it. The ability is something innate Similarly, John Burbank is the best long term investor I have seen in my career and he is a global investor. Just as Steve is the best trader John is the best investor.

    They're all the same, they're all steely. They've got a real determination to win. It's in their personality.

    Penn: Right.

    DeMark: They do it the right way, too. A lot of people accuse them of running ahead and having inside information. That isn't true. None of these guys are that way. None of them that I work with. No they've all done it the calculated way. They've all grown with the markets, which is what makes them successful. These guys have all adapted.

    Penn: Yes.

    DeMark: And they've all got something that's unique to each one of them that they specialize in different areas. If they were athletes they'd be the best, if they were in a spelling bee competition they'd be the best. There's a common denominator. They don't have a lot of sympathies - as far as the market's concerned. They're cutthroat. Not in a negative sense. And it's something they're born with. I've seen good systems developers, a lot of them, a number of them, and I've seen them lose money because they don't have the money management skills or the discipline so they can have a system that's 90% and they lose money. It's just how you manage the money that's critical.

    Penn: That leads to a couple of interesting questions. If success in some respect is 50% of the money management, how much of the money management is having a sound approach to money management and having the psychology to stick with it?

    DeMark: Well that's it. Fifty percent is money management and having something that's time-tested. Something that they can live with too. The psychology you're talking about, that discipline factor, is 25%. The other 25% is whatever technique you use. Some are systematic, some aren't. They're all fundamentalist by heart. Some say they're not, some say they're technical. But they've all got a fundamental build.

    Penn: Really? That's interesting.

    DeMark: Yeah. They're all well-educated, too. They really are. I mean, they're all poker players. Steve was a poker player in college; he was one of the best. They're all that way. Paul is, too. I didn't spend that much time with Soros, I was executive vice president at Tudor and I've been with Steve now for 12 or 13 years and I've been very close to John Burbank the #1 fund manager last year in the country according to "Absolute Return Magazine". He grew from $800,000 under management in the year 2000, and is currently just over $6 billion and growing fast. John's company Passport Capital is the biggest success story I am aware of since 2000. Steve has been unmatched when considering the past 20 years perfomance. He's had two down months in 200 months? More than that. Eighteen years he's had two down months. I mean nobody can come close to him. And those months have been less than a percent. (Ed Note: both Steve and John are now investors in Market Studies Tom's company as of last month.

    Penn: Really?

    DeMark: You don't hear many stories about them because they have been inaccessible but I do speak to them throughout the trading day and their insight is certainly outside the box and they have a knack for anticipating market moves. When they travel they bring all their trading needs with them, particularly Steve . He flies a couple of planes and they set up a trading operation for him when he travels.

    Penn: Wow.

    DeMark: This is the man. He was the man. But John Burbank is the global man. He's got a fix on everything globally. This guy is gonna be really well-known. He's the next Soros.

    Penn: Let's change gears a little bit. What's most important when it comes to understanding the market?

    DeMark: There are times to buy and times not to buy and times to sell. And the market timing tools I developed are applied to the strategies of my clients and we use the strategies to give us the opportunities.

    Everything that I use I developed myself. I haven't relied on anything in the public domain. I've been in the business 36 years from law school and grad school - I got my MBA and then went to work for a fund that had about 250 million and we grew to almost 6 billion. And even though everybody in the fund - the principals were all CPAs, MBAs, and lawyers -represented ourselves as being fundamentalists, we did use market timing and we avoided the 1973-74 crash and we grew.

    We were institutional investors while there were guys who were very good on the retail side-people like Larry Williams, you know Larry obviously, right? He has had an influence on many in this industry but his audience has been the retail side of the market.

    Penn: Yes, yes.

    DeMark: He's been a friend for 36 years. He's in the retail end of the business; I've been in the institutional side. I've dipped my toes a couple of times in the retail side and I've written some books and I've given some seminars but I really don't have a presence on the retail side, I don't sell anything.

    The techniques I use are all original. They're mine. They've been time-tested and they're more adapted for institutional traders. I mean retail traders can use them, but the indicators I've developed are anticipatory, they're trend-exhaustion techniques. So we try to identify when a trend is about to exhaust or a trend is about to reverse. With the large fund that I've been aligned with we've had to anticipate tops and bottoms, whereas the retail traders usually trade small accounts, or they could be a CTA but still relatively small if you're under a hundred million. Large investors really couldn't trade the trend.
  2. Penn: An interesting approach

    DeMark: If you buy or sell into a trend and do so in size you'll experience price gaps and slippage and things like that. You're competing with everybody. But into a market bottom and top, you can buy and sell as much as you want.

    Penn: Right. You raise a couple of interesting points with the technicals and the fundamentals but I don't want to leave this point that you just made. Would you be trading this way if you weren't involved with institutions as heavily as you are?

    DeMark: It's the way we've always been trading. I think the marketplace has changed. Markets now, after tops and bottoms are made, you can see the reversals are pretty dramatic. You've just got to anticipate those turning points, even if you break it down even on a one-minute turn. The reversals are very steep and the only way I think you can be successful is anticipating those.

    Whether it's advising a large trader or trading on my own account which sometimes are large positions or were large positions, I'd use the same approach, I think that's the way: if you're going to be successful, you've got to anticipate tops and bottoms. I think that's the trend. I think you'll see more and more people doing that. Back in the '70s I developed a lot of these trading tools. I also traded for myself and I was using techniques that CTAs (Commodity Trading Advisors) are using nowadays, like range expansions breakouts, things like that.

    Penn: Sure.

    DeMark: - adding to the opening price. People weren't doing that back then. You didn't have trends, dramatic movements like you do nowadays. So things have evolved. I think just by the reception we've had on Bloomberg - we've got 35,000 users of my indicators on Bloomberg. And you can see that the whole marketplace has changed. People want to anticipate tops and bottoms. They don't want to participate after the top or bottom.

    That's the nature of the trader nowadays. At one time it was trend-following but now you just can't make money following a trend. There's just too sharp a turn and they haven't necessarily been - one or two days the trend is over with in some cases. So that's why I would not change anything. This is the approach and I'm sure - just like it was back in the '70s when I was doing range-expansion breakouts on my own and wanted some other techniques and those became commonplace and I think now more and more people are going to switch to the trend-anticipation or trend-exhaustion methods. That's where we've been for so long.

    Penn: That's interesting. Coming from a very vanilla, so to speak, technical analyst background, a lot of us had it drummed into our heads that the "trend is your friend", "you trend trade, that's the only way".

    DeMark: And then I added a corollary to it, I said "unless the trend is about to end".

    Penn: Truly.

    DeMark: And I guess I've been known for that for 25 years or so. And it's true. If you're a trend follower you buy 20% to the upside then you wait to the top and then you wait for 20% off the top and then what you've effectively done is captured the move from 20 to 60%, that middle 40%.

    Those moves are so sharp nowadays because traders make one decision and they either get it totally or they get out totally and they just can't do it. That's not the way the markets operate nowadays if you're going to be successful. You've got to anticipate

    I've never been a market technician.

    Penn: Though you are known for your technical methods and indicators …

    DeMark: I'm a hybrid; I believe fundamentals drive the market, I believe there are techniques you can apply to time the market, I'm well-schooled in all the technical approaches

    When I started in the business there were no technical analysts at all. There were trend lines and people all drew them subjectively and each one drew them differently. The way I draw trend lines is totally objective. I have a different approach to trend lines. They wanted to make them objective. Everything I do is very mechanical, very defined, and totally objective.

    Technical analysis is, by nature, subjective. And everything I do on Bloomberg, I've got 30 indicators on Bloomberg and they're adding 30 more, and everyone of the indicators is, remains on the screen permanently whereas, I think a lot of technicians do their analysis with a #2 pencil with an eraser. It's almost like a multiple choice approach - 'if this one doesn't work then that one will' and everything is qualified. Everything is definitive with what I do.

    Penn: I know that some years ago someone described your work as 'original, mechanical, and objective', and that's a lot of what I'm hearing right now.

    DeMark: That's true. In fact I've always said that all chartist is, if you break the word 'chartist' down it's a chart artist. I'd rather consider myself a 'chart technician', a 'chartician' or something. Chartist is a chart artist, that's all it is. I don't want to describe myself as a chart artist. I'm a market timer. That's a description of my work. That's why I think a lot of the institutions like it. I think they all have an appetite for something that's defined and no one can dispute what the conclusions are. If one person uses the indicator the other person will have the same conclusion and you're able to communicate with one another in the same terminology and draw the same conclusions.

    Penn: Right.

    DeMark: That's something that's lacking with technical analysts. There's so many different interpretations; nothing is definitive. I've told people that there are three levels of chart analysis: there's the basic subjective chart analysis where someone looks at a chart and draws his or her conclusions.

    Now if the conclusions are based totally on biases, in my mind, you're going to read something in the paper that's in the back of your mind or you're in a position you've got that bias. There's the second level of analysis in the indicators. Indicators are defined; you can go back historically and you can see what's happened, what indicator readings have been on comparable positions and you can try to crunch from that. Systems are just a short step from indicators. They make definitive rules.

    Most of the work I do is indicator based. But I don't ever exist on the pure chartist level the basic level. The subjective level. That's what I think causes a lot of the problems for technicians, or those that refer to themselves as technicians. They operate on that basic level. There are too many biases and prejudices and too many influences that will sway your opinions. What I want to make certain is that if I interpret something today, it's going to be the same interpretation tomorrow. If you're a subjective technician, you could have totally the opposite deal. The part of the vocabulary for users of my work is all the same and the definition is the same.

    Penn: Right. Do you think that at a certain level fundamentalists are prone to the same level of difficulty, that the initial level for them involves bias and prejudice and it's something that they also need to sort of work their way up from?

    DeMark: Sure. In fact there are two large brokerage houses, one was Morgan Stanley, a fella there was a practitioner of my work. My understanding is that before any analyst at Morgan Stanley made a buy recommendation, he had to review it based upon my work. This other firm is doing the same thing, a large one. They don't want people to know but they have1600 analysts and they want to filter all the recommendations as far as timing, you know what to buy, what to sell, they'll still have the same have the same recommendation to buy or sell, but they will refine it with my market timing indicators.

    Penn: I'd like readers to have a better sense of your indicators and your approach to technical tools, for example, your approach to drawing trendlines.

    DeMark: I gave a presentation about 15years ago and I had about 800 in the audience, just traders. I didn't want to embarrass people but I took a chart and I gave it to 5 people in front and I said "Here's the S&P. How many use trend lines?" everyone had his hands up. I said: "There's a chart. You guys draw a trend line". So I had 5 people drawing trend lines everyone drew them differently.
  3. Right. Totally impossible LOL. Really makes him look like a complete moron after trend following managed futures funds had their best 12 month return period in years.
  4. "They're all well-educated, too. They really are. I mean, they're all poker players"
  5. i see the minnows will be out soon in full force nibbling at a top advisor for the greatest trader who has ever lived SAC and PTJ among others...

    seriously, people who trade peanuts riping on billion $ traders,,,,, you gotta be kidding.


  6. after 80% drawdowns??

  7. And if he was the Dalai Lama himself what does it matter? Facts are facts and BS is BS.
  8. EPrado


    I was gonna say the same thing. I dont think he was "ripping" trend followers like surf said. It just doesnt seem his style. While I agree with some points, he picked a real dumb time to say trend following doesnt work. Trend followers like JWH and Dunn are having huge years and way outperforming other funds. I am not sure SAC's numbers this year but some of JWH's funds are up 32% or so....and some of Dunn's are up 46 %. All in a year when stock traders/pickers are getting mauled.Trend following does work. I guess this guy hasnt been watching Gold...Crude....grains......and just about every other commodity out there this year.

    This thread is just another lame attempt by Surf to rip guys he is jealous of (JWH...Dunn). It must be killing him that JWH and Dunn are having a monster year.

    Hey is your idol Neiderhoffer doing? Oh ..thats right..he blew out again. Probably a good thing as a one trick monkey like him would be getting destroyed selling puts this year. Say what you want about trend followers and their drawdowns...but last time i checked JWH and Dunn didnt lose all their clients money and blow out.....TWICE !!!!!

  9. ask the trend following funds investors who started with them within the last 3-4 years if they are happy with the results--that's where the real answer lays.....
  10. Marketsurfer,

    The guys such as SAC and the like are not even in the same ball park such as Bill Dunn, J.W. Henry, Ed Seykota, Jerry Parker, Richard Dennis, Donchian. How long is SAC in business and then compare that with the track records of ANY of the above mentioned guys. No question, SAC is one of the top hedge fund outlets but letting a guy who has never made a fortune in trading (yes your dude, Tom DeMark) rip apart trend following is simply ludicrous.

    And by the way, where do you see 80% drawdowns. None of the above mentioned guys ever, to my knowledge, experienced 80% drawdowns. Sure, methods can be wrongly applied, especially when being leveraged to the hilt. However, having to listen to a guy who needs to sell his indicators on Bloomberg and other outlets how trendfollowing is dead is very funny. Well, I shall say that I am VERY HAPPY that such people exist because they assist in feeding those who consistantly outperform markets by simply following price trends.

    So, not trying to criticise others with different approaches if it works for them, fine, but I just dont really get what evidence you use to support the argument that trend following is garbage. I think some of the most successful traders of our times were trend followers, happy to challenge me by showing who has outperformed above guys with other methods.

    So, waiting for your names of guys whose performance outshines the one of the guys in my post. By the way, let me challenge you, so we can keep the record straight: You mentioned some investors of funds, which apply trend following methods, who are unhappy with the recent performance. Care to share your sources and which funds you are talking about? Cause I also have a friend of a friend of my grandmas friend who made a bunch...if you know what I mean.

    #10     Jul 19, 2008