MILTON BERG: On a daily
basis and a weekly basis, the movements of the
market are random. However, there are particular
times when the market movement is very far from random. When the market
generates data that tells you the market's close
to a top or has topped, or the market is close to
a bottom and has bottomed. In their mind, this is a cuckoo. This is nuts. This is impossible. We were taught
this can't be done. So you need to
have a discipline, you need to have a view, and
you need to rely on your data. If you don't rely on your
data, you're just lost. GRANT WILLIAMS: I'm
about to sit down for a conversation with a man
who is a very quiet Wall Street legend. He's worked for some of
the titans of the industry. He's worked for
Michael Steinhardt. He's worked with
Stan Druckenmiller, with George Soros. And the work he does is
absolutely fascinating. This is going to captivate
and entertain a lot of people. There's going to be some
questions afterwards. So join me now. We're going to sit down
and talk with Milton Berg. Well, Milton, welcome. Thank you so much
for doing this. I have been looking forward to
it for a very, very long time. MILTON BERG: Well,
thanks for inviting me. And I'm going to learn
more about Real Vision. I skimmed some of the
videos this morning, and I feel bad I
wasn't on earlier. GRANT WILLIAMS: Well, I'm glad
you finally got this to happen. So just before we
get into what you do, which is so
fascinating, I just want to give people a quick
sense of your background. Because you've been in the
markets a long, long time. So if you can just give
us a quick potted history, that'd be fantastic. MILTON BERG: OK. Well, my background
was never in finance. I got degrees in Talmudic
law in the 1970s. But I didn't feel I'd
make a living out of that, make a profession out of it. So I started studying
markets on my own. I was exposed to
markets as a child. My uncles used to trade in the
'60s and somewhat in the '70s. And then I decided
to study the markets. I received a CFA, one of the
earliest ones, number 6881. Now there are hundreds
and hundreds of thousands, so one of the earliest CFAs. So I studied pure Graham and
Dodd fundamental analysis. I thought that's
what you have to know to do well in the business. I studied accounting and
financial statement analysis, and Graham and Dodd. But as soon as I got my first
job, I realized two things. First I realized that
I'm competing with all these other fundamentalists. I have no edge. There are thousands of analysts
who follow Graham and Dodd. So that's one thing I realized. Secondly I realized that, on
average, the typical analyst just has average performance. And a lot of the
analysis doesn't really contribute to their earning
money in the market. So I was exposed
initially to Ned Davis. Was then working at JC Bradford,
so first technical analyst I was actually exposed to. And I was fascinated
because I saw there was more to the market
than what I perceived Graham and Dodd was teaching me. And from then on,
what I did was really is I spent more than 30
years analyzing markets, until I learned to focus on
market tops and market bottoms. So my background was I
started at Talmudic law. I started as an analyst
for low grade credits for a mutual fund organization. Then I started managing
money for a mutual funds organization. I worked at Oppenheimer
Money Management, managing three mutual
funds in the 1980s. Actually in '87, I managed the
three top funds in the country. At that time already, I
already had the discipline of trying to call
tops and bottoms. We got to 80% cash before
the crash in October, raised the cash in September. Then I worked as a
partner at Steinhardt. I took off for a few years,
moved to Israel with my family. I then went to work for
George Soros with Stanley Druckenmiller. I worked with Stanley at
Duquesne, always did research. In the last six years, I've
been doing the same research I've done all the
years for other firms, doing it for myself and
marketing new research, selling the research to clients. So currently, my clients
really are the titans of the hedge fund industry. The type of work I
do is very atypical. People look at it, and
they don't understand it. They don't
necessarily accept it. But the clients
who've been-- people dealing with it for
years understand that it's much value added. GRANT WILLIAMS: Well,
let's get into that because it is different. It is something that people
won't be familiar with. So just talk about how
you built this framework and how you began
to kind of assemble the pieces of the jigsaw. MILTON BERG: OK. Well, one thing I realized
in studying Graham and Dodd-- Benjamin Graham was actually
a technical analyst. GRANT WILLIAMS: Right. See, already people
are going to be going-- MILTON BERG: Well,
people who know Graham know the end of his-- yeah, he
said we give up all research. And the rest can
look at the numbers. People who know Graham and
Warren Buffett will tell you, in the last five years of
Benjamin Graham's career, he would no longer do rigorous
analysis of balance sheets. He'd just look at numbers, P/E
ratios, price to book value, what the price of
the stock is relative to its last
five-year high, which is really technical analysis. Later in life, everyone
knows he became a technician. But prior to that, even reading
Graham and Dodd's security works from the
1920s and the 1960s, he suggests that
the only reason he needs a value analyst
is, of course, experience shows him that it works. He actually spoke in Congress. He was testifying in
Congress in the 1960s with a question of
market manipulation. They asked him, why is it a
stock that's trading for $20, and you believe it's
worth $60, why doesn't it ever trade at $60? Why does it remain
at $20 forever? In other words, the question
is, if the stock could be trading-- be
undervalued today, why can't it be
undervalued forever? Why? Why must the stock ever
reach intrinsic value? And then really, Benjamin
Graham's whole theory was the theory of
intrinsic value. He said, I have no
answer to this question. It's a mystery. All I know from
experience is that if you buy a cheap stock, eventually
it will trade at fair value. That's his answer. It's a mystery. Once we're dealing
in mysteries, I figure there must be many more
mysteries strictly valued. So there are far many things we
look at that create the market movements other than the value. And I think intrinsic value
is just a technical indicator. In Graham's thought,
the more a stock is trading below its intrinsic
value, the more likely it is you'll make money because
it's going to trade back towards its intrinsic value. But there's no inherent
reason for a stock to trade at intrinsic value. Because of course, it's
a very valid question. If a stock could be
overvalued today, why can't it be
overvalued forever? If a stock can be
undervalued today, why can't it be
undervalued forever? GRANT WILLIAMS:
Yes, exactly right. So taking that into
account, how do you then start to build
your own framework using that and applying
it to tops and bottoms? MILTON BERG: So what
I try to do is say, is the market actually
a random movement, which we were taught in the schools? Actually, the CFA program
goes with random movements, modern portfolio theory. Or is a market not
necessarily random? Is there some edge you can have? Of course, Benjamin
Graham did not believe the market's
random because there wouldn't be an undervalued stock
if the market would be random. It would be efficient. Everything would be
traded at intrinsic value. But the reality is I found that
the market generally is random. On a day-to-day basis, you
have the talking heads on TV and you have the analysts giving
research reports every day, trying to analyze the
reason for today's move, the reasons for tomorrow's
move, maybe the reason for the next week's
move, most likely explaining the reason
for last week's moves. But I found that on a daily
basis, on a weekly basis, movements of the
market are random. However, there are particular
times when the market movement is very far from random. When the market
generates data that tells you the market's close
to a top or has topped, or the market is close to
a bottom and has a bottom. So what we call that is
turning point analysis. Turning points at
turning points, the data generated by the
market is no longer random. In fact, if you take a bell
curve, for example, and it lets you track something
simple as five-day volume. You look at the average five-day
volume, ascent of the curve. You look at the extremes. You'll find that the
extremes of five-day volume are associated with
turning points. Now intuitively, it
makes a lot of sense because you know
at a market low, everyone's selling their stocks. It's at high volume. But people haven't looked at
that as a technical indicator. We say, we're not
going to be one of those who panic and
create the five-day volume. We're going to wait for
five-day volume, greatest in one year, greatest in two
years, greatest in six months. We track these kinds of things. And that tells you that an
impending turn in the market we see. That's just one indicator, an
increase in five-day volume as an example. GRANT WILLIAMS: So let's
just jump back in time to '87 because that
was a call you famously got right to the day. It's extraordinary, reading the
story of your work around '87. So take us back there and talk
about in the days leading up to that. And perhaps the month before
September, what did you see, and how did you go about
making use of that? MILTON BERG: Well, we saw a
spike in volume on August 11 of 1987, a big spike
in the five-day volume that we look at. The market actually peaked
a couple of weeks later, less than 2% above that level. So that was the first
indication that something was going to change. And the logic of it is
that if people are-- why would the volume increase
after the market's up 30% of the previous 12 months? Why all of a sudden
are people jumping in and volume increasing? There's got to be
a reason for it. And the reason is
because people are now comfortable about the market,
and they're speculating. If the market went up 30%
for the last 12 months, let it go up 30% for
the next 12 months. So the volume is not
just an indicator which is suggesting
a turn of the market. It's telling you something. It's telling you that something
in the nation's market has changed. There are more
speculative dollars coming into this market. That took place on
August 11, 1987. I wrote many reports saying
the top is not yet in. September 4, '87, the Fed
raised rates for the first time, and that was all
that was lacking from indicators that I look at. Again, to my opinion, raising
rates is a technical indicator. They raised rates
one-quarter of a point, and that caused the crash. So it's not as if
that one-quarter point had a fundamental
effect on the economy. A present corporation
borrowing money. It had no effect at all
on the economy at all. It had some effect
possibly on psychology. Wherever it was, that combined
with other things we saw in '87 suggested that the market
was very vulnerable. Of course, valuations were
the highest in history. Paul Montgomery, who
did a lot of work on bond yield,
stock yield ratios, found that the ratio of stock
dividend yields to bond yields were also the
highest in history. So it wasn't strictly
the price of stocks were the highest in history,
but actually the ratio, the preference for stock
yields over bond yields was the highest in history. GRANT WILLIAMS: When
you think about '87, we had a very different
market back then. We had a very different
set of inputs. And one big part of
the Federal Reserve had a much lesser
impact on markets. When you look at these technical
indicators that go back so far, how do you adjust for today
and the oversized impact of the Federal Reserve? MILTON BERG: I'm laughing
when you say so far. We have indicators
going back to the 1900s. I've tracked 30,000
indicators on a daily basis. So '87 is modern history,
as far as I'm concerned. GRANT WILLIAMS: Yeah. No, absolutely. MILTON BERG: But yes,
the story is this. And this is also
Benjamin Graham. Benjamin Graham has been
misquoted, very much misquoted. They say that Benjamin Graham
says that on the short term, the stock market is
a voting machine. But in the long term, the stock
market is a weighing machine. Benjamin Graham never said that. And it's very
illogical to say that. Let me give you an example. At the 2000 top, there are
many, many long term companies not involved in
the internet that were very, very undervalued. Now, if stocks are fairly
valued over the long term because the market's
a weighing machine, why would a stock ever be
undervalued if a stock has a 30-year history of earnings? It's long term. If, in the long term, markets
are a weighing machine, let General Motors
always be weighed, let General Electric
always be weighed. It doesn't work that way. Benjamin actually said
that the market is not a weighing machine. It is strictly a voting machine. Because he says--
and it's in the book, Graham and Dodd analysis. He says because although
possibly fundamental factors affect stock prices, and
possibly monetary factors affect stock prices, and
probably psychological factors affect stock prices,
the reality was, in order for the
stock price to change, you need a buyer and a seller. So no matter what
you're going to say about fundamental
analysis, the actuality is that the given change
of a price of a stock is based on voting, based
on a buyer willing to buy at a certain price, and
a seller willing to sell at a certain price. So this is very important. Once you realize that the
stock market is a voting machine rather than
a selling machine, you also realize that
most turns in the market-- nearly I'd say all
turns on the market-- are sentiment based and
psychologically based, rather than fundamentally based. If the Federal Reserve
makes an announcement-- we're going to raise rates
by 400 basis points-- and the market's definitely
going to collapse if they ever raise rates -- basis points. It's not because of any effect
fundamentally on the economy at all at that time. Because it takes time. If they say they're going to
raise rates in six months, the market will collapse today. There was no fundamental
change in any company at all. It's just that
psychologically, people understood that in the
future, it'd be very poor, and it'll sell now. It's a vote. And someone might
argue, oh, there had been so much inflation
when Volcker raised rates. In fact, the markets went up. And he made rates far more
than 400 basis points. But he didn't do it overnight. But the reality was his raising
rates cut inflation, gave greater value to stocks,
and psychologically, the vote was going to
do better in the future. We're going to buy the stock. GRANT WILLIAMS: But
it is very difficult to quantify human behavior. I mean, markets are essentially
the collective representation of human psychology. That's it. There's nothing more than
that, really, to your point. MILTON BERG: Exactly. GRANT WILLIAMS: So how
do you go about building some kind of framework that
captures the uncatchable? MILTON BERG: Yes. Well, let's look at
the bottom in December. If you don't mind, I'm going
to look at some of my notes if I have it available. Let's look at the bottom
in December of this year. Federal has just raised rates. It speeded down 20%. Russell is down 27% in just
a matter of less than three months, I believe. The peak in the
DOW was in October. The bottom was December. The Russell peaked in August. The market's down nearly 30%. Now, we called the
bottom to the day. We were 100% short
on December 24. By the end of the day,
the market was up 4%. We were up 3/4 of 1%. We covered a short and
went long on that day. Why? What is it? You're asking a
very valid question. It is difficult
for a psychiatrist to evaluate pyschology. How could a market analyst
evaluate psychology? So just the example
I gave earlier when you see a big increase
in five-day volume, it's just a number increase
in five-day volume. But it's telling you
something psychologically. People who were unwilling
to sell a week ago are willing to sell today. Or in order to induce
the buyers to come in, price had to come down to
compensate for the fact that people weren't
willing to buy. So let's look at December. From December 19 till December
24, the day of the low, we saw a five-day volume
surge, highest five-day volume in two years. We saw what we call a
10-day reverse thrust, which is the opposite of an
advanced decline line surge. The number of stocks
down relative to stocks up was also at a great extreme. And that's just a number. It's a data point. But why would all
of a sudden people be willing to sell so,
so many stocks to cause a 10-day advanced decline line? Although we look at it
as data, we look at it-- it's actually psychology. It's actually measured. It's capitulation. We saw the number of
new highs and new lows. On both a one-year
basis, two-year basis, and three-year basis,
we're also at extremes. We looked at the five-day
rate of change of the S&P 500, and so on and so forth. And these are the
kinds of things that you look at at the bottom. So to us, it's just data. We calculated the
30,000 indicators. But it's my view-- and I got
this from Paul Montgomery-- that all market turns
are sentiment-based. There's no such thing
as a market turn that's fundamentally based. It's all sentiment-based. GRANT WILLIAMS: It is
interesting because what we seem to have
had in recent years are very sharp bottoms
and very sharp tops. We don't seem to have these
rounding top and rounding bottom patterns that you've
had throughout history. Is that something that we need
to be prepared to continue, or do you think we will
see like a rounding top? MILTON BERG: OK. Bottoms and stocks are
always V bottoms, always. Tops and commodities are
always V tops, always. My question is, why? Why do stock bottoms
generally V and stock-- It's also psychology. In the stock market, fear is a
far greater emotion than greed, far greater emotion. When people are fearful,
all of a sudden, they look at their 401(k)s, they
look at their broker statement, they look at the fact that they
have these loans to pay off. Where is the cash
going to come from? So they panic at the lows. In commodities, which trade
at the commodities market, it's really a zero-sum game. For every long, there's a short. So the exposure
to the short side is far more dangerous than
exposure to the long side. If you're long a market,
you could lose your capital. If you're short
a market, there's multiples of the market. Since commodities
are a zero-sum game-- the futures market, which is for
every long, there's a short-- the panic takes place when
the market is rallying. Because every long
had to have a short. So that also proves
that it's psychology that turns the markets. In commodities, the psychology
takes place at the top. The great dramatic
shift in psychology takes place at the
top, where everyone's fearful of losing money,
covering the shorts. And then ultimately,
the market turns down. In the stock market, it's
the other way around. Now I don't necessarily agree
that the nature of markets has changed. I still see generally
in the stock market on its immediate term basis,
long term basis, and short term basis, I still see V bottoms. But the one change is
you're seeing tests. For example, the low in 2000-- you got a first low
in July of 2002-- the market gained more than 20%. It made a new low
in October of 2002. It gained 24%. It made a slightly higher
low in March of 2003. Each of those bottoms
were V bottoms. But there was a series
of three V bottoms. So you take a broader picture. You'll say, hey, it
was a rounding bottom. I don't look at it
that way because we don't take a broader picture. In my opinion, if you
traded the market right, you got long in July 2002. You get out in August, made 20%. You get short. You have long in October 2002. You made another
20%, sold up 24%. You went short. So I look at it as
three separate markets, each one showing a V bottom. But the typical analyst,
they will say, wow. If you bought in
July 2002, and you held through the
rounding bottom, you did very, very well. You did very well, but basically
did what the market did. You did what the S&P did. You're lucky to have gotten
long if you were short. And you basically did
what the market did. But if you recognize that every
turning point in the market has indicated, suggested
that turning point, you will have attempted
to do far better than the whole of the market. Now that we brought
this up, let me just take it one step further. And this is really where
people doubt what we do, and people don't understand
what we do and what we do it. If you invested $1 in the
Dow Jones Industrial Average in 1900, January 1,
1900, and you held-- not looking at
dividends, just held. Your $1 would have grown. You can guess if you like. GRANT WILLIAMS: Not-- well-- MILTON BERG: OK. GRANT WILLIAMS: I thought
you'll take a spin at that one. MILTON BERG: Well, it
grew to $658, which is an amazing, amazing return. 658 times your money. GRANT WILLIAMS: That's to today? MILTON BERG: That's to today. This is actually til June
30, but close enough, right? $658, which is these long
term investors, like the Nobel Foundation, who's been
around for over 100 years, they could say, well, let
me take a long term view in stocks. $1 to $658 over a century,
or a little over a century, that's amazing. I'll be able to give all
my Nobel Peace Prizes out, whether deserve it or not. However, let's say somebody
only traded 73 times over that 120-year
period, 73 times. But he happened to buy stocks
at the exact day of the bottom, and he happened to short stocks
at the exact day of the top. Now I'm not going
to ask you to guess. That dollar would not
be worth $600, or $800, or thousands of dollars. It'd be worth $392 trillion. It's funny. That's a 30.19%
return over 119 years. Now I'm not arguing
that anyone can do that. But I'm arguing
since you can see how compounding market, bull
market and bear markets, makes you so much money,
why not attempt to do it? GRANT WILLIAMS:
Sure, absolutely. MILTON BERG: Why not
attempt to do it? And like everything
else in this world, there are many people
who may attempt to do it, and maybe it'll be one, or two,
or a dozen successful people successful at it. But people really
don't attempt to do it. I don't anyone who has a
hedge fund whose goal is to be 100% long
during bull markets and 100% short
during bear markets. They don't do it. The clients wouldn't
think it's going to work. GRANT WILLIAMS: Well
then, I think that's it. It's the client side. MILTON BERG: Well, it's
actually the consulting side. It's the psychology side. It's the business school side. I just met, about two months
ago, believe it or not, with a-- I'm not going to mention names,
but a managing director of one of the largest money management
companies in the world. They're looking to
start hedge funds that can have high capacity,
high capacity meaning at least a billion dollars. Now of course, if you're
going to trade long the S&P and short the
S&P, that's easily you have a high capacity. I imagine it's 10 to
20 billion capacity. And I met with
this fellow, and I said I have a strategy for you. I have a strategy for you,
and this is the strategy. We will attempt to go long
at the top of bull markets, attempt to go short at
the top of bull markets, attempt to go long at the
bottom of bull markets. I said we're not going to
catch every top or bottom. And actually, we're not even
going to look at bull markets. We're going to
look for 15% moves. We don't need it
at every 30% move. So I said, if you count
every 15% move since 1900, you'd have $6 quintillion,
which is 18 zeros after the 6. GRANT WILLIAMS: Nice. MILTON BERG: But the
point being we're not going to have that return. But we think we'll have returns
far greater than the market. Optimistically, it's a
simple transparent program. But in order for you
to do the program, you have to have an edge. Your edge has to be, be able
to call tops and bottoms. We spent years and years
analyzing tops and bottoms and trying to call edges. So this is what we do. This is what we offer
to our clients-- the ability to recognize
tops, recognize bottoms, and understand that the
movement in between is random. So while people are watching
television each day, should I buy stock? Should I lose? They read all the
balance reports. The reality is, if
you caught the bottom, you can usually sit tight
for quite a number of months before worrying about a top. And if you caught the
top, you could usually sit quite a number of months
until you worry about a bottom. Now I was talking about
the cycle you called, the one you saw in December. We have 27 bicycles beginning
on January 4, 27 distinct bicycles, all based
on the fact that we've modeled every bottom
since 1900, and we've modeled every top since 1900. We modeled not only the 38
major bull and bear markets, we've matched at every
move of 7% or greater. So we've modeled every
move of 7% or greater. And I have to admit that we
can't catch every 7% move. We can't even catch
every 15% move. But if you only catch
every other bear market, you'll still way, way, way, way
outperform the typical hedge fund and the typical investor. So let's look at what
happened this year and how we implement our work. January 4, just a
number of trading days. I think it's not even 10
trading days off a low. It was seven because it has
Christmas and New Year's. January 4 was seven
trading days off the low. The S&P 500 was
up 3% on the day. And this took place
seven days off a low. Now the background is when
we're tracking tops and bottoms, it's very simple. How do we do it? If the market makes a
bottom, we count one day off the bottom, no new low. Two days off the
bottom, no new low. Three days off the
bottom, we have-- we publish a report
called "Boundaries of Technical Analysis" in the
Market Technicians Journal. You see a low, and
you count the data as to what takes place during
the first four to seven days after a low, which
is generally the key. So we looked at the low. On the day of the low,
you saw an extreme of net new highs over total
issues was less than 18. It was minus 18.20%. That's a cutoff. That's an extreme. Seven days later, the S&P was up
more than 1% on higher volume. And we look at every
time in history, you saw this type of
a low, always so low, and the seventh
day after the low, the S&P was up just 1%
greater in higher volume. That only took
place twice before. But the median gain 12
months later was 35.24%. Now people ask, it only
happened twice before. But that's exactly the point. We're trying to
find aberrations. We have to try to find evidence
that this time is different. If it happened
1,000 times before, then you're just
a random analyst. If it happened twice before,
and each of those times, the market rallied
significantly, this is something significant. Just the opposite of what
people think intuitively. People want thousands
of examples. Well, in 1,000 examples,
you get randomness. If you want to get just a few
examples of extremes-- and this is very simple. Over a low base the
number of highs and lows, and at day seven, up 1% or
greater on higher volume. Beautiful, simple. And we are ready
long on January 4. That was the first bicycle. They say we had 20
something bicycles. Another example,
January 8, very simple. This is not my own bicycle. I learned this signal from Ned
Davis Research and Ned Davis. I think -- may have also
contributed to this signal. There are many
indices you can use. We use the New York
Stock Exchange 10 day advance-decline. It was greater than 1.921. Very simple indicator. I think actually the chart is-- it goes back to the 1969 thing. He also uses this indicator. You look at the 10 days
advance over decline. If it's greater than
1.921, you buy the market. Now historically, the median
gain within the next 12 months is 22.01%. We've gained 15.60%
through yesterday's close. So the point being is,
this is very simple, but it's not a random event. You don't see the 10-day
advance-decline line at 1.921 on a random basis. In fact, you generally see
it within 10 days or 15 days off a major low. In this case, it came actually
nine days after the low. We're counting 10 days
advance-decline line, including a negative day,
which was 10 days ago. And you're still at a 1.921. So what do we do? We don't just say,
well, it looks to us that there is a high probability
the market's going to go up. No. We tell our client, if you're
not long yet, get long. But what if it doesn't
work this time? What if doesn't work this time? You'll get out. Of course, historically, we
have a list of the drawdowns. And generally, the
drawdown's less than 3%. So if you're going to
market climb 3%, get out. Lose 3%. But take the risk. Follow the data. Follow the indicator,
and get it to the market. GRANT WILLIAMS:
But this is trust. I mean, this comes down to
trusting the data, right? Because if you can get people to
trust it and get them to trust it for a long enough
period of time, they'll see that
over time, it works. MILTON BERG: This
is getting people to trust that markets are
not random at turning points and that it's possible
to time the market. That it's possible to get in
close to a bull market low and to get out close
to a bear market high. People do not believe
it's possible. They just don't. I mean, I see it all the time. They don't think it's possible. I'm saying it to you,
and you are smiling. Hey, this sounds crazy. GRANT WILLIAMS: No,
it's fascinating to me. MILTON BERG: When
I speak to someone who's never seen this before,
in their mind, this is cuckoo. This is nuts. This is impossible. We were taught
this can't be done. GRANT WILLIAMS: Well,
that's exactly it. We're taught it can't be
done, so people don't try it. That's exactly right. MILTON BERG: We're taught
that it can't be done. That's exactly why
we don't try for it. Last January 8, [INAUDIBLE]
not all 27 indicators. I'll go through some of them. But yeah, on January 9,
the next day, at the low, the five-day volume was
the greatest in two years. But we cut it off at 60 months. At the low, which was
probably 12 days before, you had a high five-day volume. And on this day, the
10-day advancing volume over the declining volume
is greater than 70%. This is our own indicator. Rather than losing advancing
issues over declining issues, advancing volume
over declining volume is greater than 70%, just
those two indicators. This took place six times prior. The median gain over the
next 12 months is 23.40%. And the worst drawdown
was only 5.6%. So again, you guys
won't trust it. And the second worst
draw down was 2.7%. What person ignores the 5.6? I'll get out if
it declines 2.6%. GRANT WILLIAMS: 2.7, sure. MILTON BERG: It declined
minus 0.09% the next day. That was it. The market continued higher. It's up 15.13% since then. I can go through many
of these indicators. The point I want to
make is that although we try to pinpoint the low, we
also feel that close to the low, the information
is not yet random. Once you get two or three
months out of the low, generally information
is randomly worse. Although we did get a
new buy signal yesterday. Although, we're short--
which is kind of funny. But we got a buy signal. The buy signal that
we got yesterday is based on five week
advance decline line. Now, five week is a
very blunt instrument. You're looking at
five weeks of data. So it has very huge draw
downs of as much as 11%. Although, in each time
we saw this indicator, the market was up significantly
over the next 12 months. But it's not indicated where
I tell a client buy, buy, buy, based on this. I say the client should
have bought in January. He'd be holding and
sitting pretty right now. GRANT WILLIAMS: So
how do you do that? Because you have
so many indicators, how do you prioritize them? How many do you need to kick in? Because I'm sure you have
conflicting signals happening all time, how do you
see through the fog? I mean, this may be the secret. MILTON BERG: You're
asking the best question. There are no
conflicting signals. Generally, there are
no conflicting signals. GRANT WILLIAMS: Interesting. MILTON BERG: Because what we do
is we count days of a bottom. If you're counting days of
a bottom, by definition, you're not going to
get a top indicator. GRANT WILLIAMS: You're
over-selling it the same day, sure. MILTON BERG: We're
all looking for-- we modeled the hundreds
of bottoms since 1900. We're counting 1 day, 2 days, 3
days, 10 days, 12 days, 15 days off a low. You're not going to get a sell
signal if you're counting data from low-- if you're going to
get a buy signal. Same thing with the top. The top is a little bit broader,
as you mentioned earlier. But also, say the market
is up 5%, 6%, 8%, 10%. If such and such has
taken place at this level, I don't want to say there
are no conflicting signals, but conflicting signals
are very, very rare. Now, how do we combine it? Well, we spent 30 years
creating these models. We have a huge
computer database, and our computers
combine the models. We combine it based on rarities. So any given day, if there
are six rare indicators, the computer combines
it and see in the past whether these six rarities
made any change in the market. So it's really nice. It's somewhat computerized. Of course, I have
to pull the trigger. It's not a systematic
type of trade. But it's serious work. First, I have to believe
that it's doable. Now, why do I
believe it's doable? Almost everything I've done
I've learned from people. First of all, I
mentioned Ned Davis. My first exposure to
technical analysis. There's a great
market technician named G. Stanley Bursch. He was around for
maybe 40 years. And he taught me that
the key to a market is what took place at the bottom
and what took place at the top. Unlike everybody else who's
trying to find information on a daily basis. That's what I learned from him. But I also learned,
again, any technician who was successful in calling
some tops and some bottoms, taught me that it's possible. And Marty Zweig was a fellow
I tracked over the years. And of course my favorite
technical analysis of all time-- who's
no longer with us and was a good friend of
mine-- was Paul Montgomery. And Paul Montgomery-- a
little bit about his history. He was a major researcher. He's the one who developed
the hemline analysis, if you remember that one
back in the 60s and 70s. And he used to use
newspaper headline cover-- magazine cover-- Time
Magazine, and that was all Paul Montgomery. But what he discovered-- and I'll tell you how he
discovered it in a moment-- is what's called
cycle turning points. That sounds very strange. We're talking about data. What's a cycle turning point? What is it? Well, he had many of those. And I'd say he sort of
mentored me in how to use them, and I sort of developed
it a little bit further. But once you've established
that all market turning points are psychologically based rather
than fundamentally based-- or sentiment based rather
than fundamentally based. In other words, it's not the
rational part of your brain that's getting you to
sell it to the lows. It's not the rational
part of your brain that's getting you to buy the
high tech stocks in the year 2000 paying 160,000
times earnings that we may well never have. It's not the rational
part of your brain, it's the emotional
part of your brain. Now, Paul was a
manic depressive, which is very, very
helpful in analyzing markets cause the markets
can be also manic depressive. And he found out that
when he gets depressed, at the same time,
markets are bottoming. And when he gets exuberant,
it's the same time that markets are topping. So he realizes there's something
affecting him and affecting the markets at the same time. GRANT WILLIAMS:
Yeah, it makes sense. I mean, it really
does make sense. MILTON BERG: In
other words, what's affecting him is
affecting the markets. So I'm going to give
you one of his cycles. This is our favorite
cycle, and that is called the eclipse cycle. Now, I don't know if you
know much about eclipses, and I don't try to study too
much about the solar system or about eclipses. But you know that the
electromagnetic and gravitational
forces on the world are far greater
during eclipses than-- for example, the
earthquakes in California we just had took place
on the July 2nd eclipse. Because when there's
an eclipse, you have the sun and the moon
in the same direction, pulling at the tides,
pulling at the Earth. And that causes a
physical change. But eclipses also cause
an emotional change. It causes a shift in
people's psychology, in people's sentiment. So we monitor eclipses and
the full moon and the new moon adjacent to the eclipses. So every eclipse gives
an eclipse cycle, two cycles before and
two seconds afterwards. Because the eclipses,
the sun and the moon, affects psychology. Now, this sounds-- what's
this guy talking about? Well, let's look at what
happened the last year. The Russell 2000, in 2018,
peaked on a cycle date. The S&P 500, on
September 21st, peaked on a W Gibb cycle day, which
is not quite an eclipse cycle date. December 24 was one
of our cycle dates based on the adjacency
to an eclipse. July 2nd, which so far is the
latest high in the market-- when bonds peak now-- which
I think is a major peak-- is on an eclipse date. Bitcoin is having
major, major cycle-- and I'll show you
the charts later on. Bitcoin had major cycle
turns on these cycle dates. Why is it the more a commodity--
the more a capital market is affected by psychology,
the more it's likely to cycle? So gold is always a prime
cycle because there's no intrinsic value to gold. But most of the gold mined--
unlike any other commodity in the world, nearly
all gold that's ever been mined in the history
of the world is above ground. GRANT WILLIAMS:
Still here, yeah. MILTON BERG: It's still there. GRANT WILLIAMS: Yeah. MILTON BERG: So it's
very hard to say there are fundamental factors
affecting the price of gold. It can't be mining. People will say it's
Federal Reserve, that's not really true. Gold is strictly a
psychological commodity. So gold has traded
very well in the cycle. I'll show you the
charts later on. GRANT WILLIAMS: This
is fascinating to me because a friend of
mine, Mark Yusko, gave a presentation
back in May that I saw. And he was trying-- they
were trying to kick him off the stage, and
he was rattling through the rest of the
stuff he had to talk about. And he very quickly threw
in a study of full moons and new moons and
the returns that you would've made if you'd have
invested around that basis. And when he brought it up
the room, kind of, snickered. MILTON BERG: Yeah. GRANT WILLIAMS: Which I
find fascinating because we know that the moon
has an effect on us. We know that. We know it-- MILTON BERG: There's a caveat. This is very important. And I'll tell you
why they snickered. They're right in snickering. Because if you'd
stop me right here, you'd have to snicker as well. The moons themselves do not
affect markets at all times. Every eclipse doesn't
affect markets at all times. It's only when there's a
combination of factors. People are already
over-exuberant about a market or very depressed
about a market. That is when the moon
affects the turn. GRANT WILLIAMS: It's
that last-- yeah, yeah. MILTON BERG: You need a
combination of factors. So we never ever trade a cycle
based on the moon itself. So, for example, with bonds
making multi-year highs on July 2nd, with people shifting
money out of equity funds and into bond funds,
all these separate-- That told us that it's
possible that July 2nd would be a top for the bond market. We ran 75% short the
long bond on July 2nd. And our stop is, if it
ever gets above that level it's topped out. Now, we're making money. So the snickering is because
there's a moon every month, but markets don't
turn every month. So how can you argue that
the moon's turn markets? But if you understand that
the way the moon works is it shifts the sentiment
from depressive to manic, or from
manic to depressive, you wait for signs of the mania. For example, a five day volume. December 24th was a cycle,
and it turned the market, but associated with that was
the highest intraday put call ratio in history. GRANT WILLIAMS: Right. MILTON BERG: So the
moon affected me, but I already was
affected by the market. So that's very important
to keep in mind. I'm not a lunar guy. I'm a data guy, but I
accept that the moon-- I accept the things I've
learned from my mentors-- that the moon does
affect markets, if you know how to analyze it. GRANT WILLIAMS: So why
do you think it is? Because you said
to me that people don't understand what you
do and a lot of people struggle to believe it. And you have these
perception problems. What is it about us-- bringing
it back to psychology. Why do we find it so
difficult to accept stuff like this that's very
heavily backed by the data-- that just to some people
seems a bit quirky? Why do we as humans
struggle to accept it? MILTON BERG: Well, firstly
we're taught that we live in a very rational world. GRANT WILLIAMS: Right. MILTON BERG: We're taught that
the Federal Reserve lowers rates, markets go up. In fact, it was once
a technical indicator. Federal Reserve lowers
rates twice, three times, the market's rally. Because that was
the case until 2000. Then, in 2000, you
have a bear market, Federal Reserve lowers
rates all the way down. 2007, 2008 bear market--
the Federal Reserve lowered rates before
the market peaked. They lowered rates in
September while the market peaked in October. But people want
it to be rational. People are much more comfortable
living in a rational world. And I'll tell you
something else I've discovered about this business. I'm not going to
mention any names. But some of the greatest,
greatest money managers have some mental quirks. They're either on the
autistic spectrum-- and there's a reason for that. Because when you're on
the autistic spectrum, you don't follow
conventional wisdom. You're able to see things
a little bit differently. So the people who snicker, or
the people can't accept it, are very rational people. They can't get
their mind to focus on something other than
something they've been taught. But people who have some
personality quirks-- you know, many of
the great money managers are known to have-- GRANT WILLIAMS: Absolutely. Yeah, absolutely. MILTON BERG: Part of that
disability gives them the ability to look
at things a little bit differently and do things
a little bit differently. GRANT WILLIAMS: Fascinating. But some of the guys you work
for, some of the big name hedge fund managers
you work for, are very famous for talking
about ignoring tops and bottoms and sitting in the
belly of the trend. And, you know, if I missed
the first 10% and the last 10% I'm OK with that. MILTON BERG: Yeah. GRANT WILLIAMS: When
you look at that, how does your work jive
with that sentiment of trying to capture the trend
as opposed to the turning points. MILTON BERG: OK, I'm not sure
which of these money managers you're talking about. I will tell you-- I don't like to
mention names, but I'll tell you George Soros is an
excellent breakout trader. He buys breakouts and
he shorts breakdowns. But he's very disciplined. GRANT WILLIAMS: Yeah. MILTON BERG: He's
very disciplined. So he could write many, many
books about fundamental factors in markets. But you watch him
on a trading desk, and you'll see that is buying
is not based on the fundamentals alone but based on
fundamentals combined with action of the commodity
or stock or currency you're looking at. I would say buying a
breakout, the reality is you're not
getting the bottom. You're not getting the low. Let's say you have gold
that bottomed at 1,000 and it churned and it's
breaking out at 1,300, you're buying the breakout. You can argue you're taking
the belly of the move. GRANT WILLIAMS: Sure, sure. MILTON BERG: But the
reality is, what's making that trade-- what's
giving you the confidence to make that trade is that
pinpoint breakout-- that move from $1,301.00 to $1,302.00. GRANT WILLIAMS: Right. MILTON BERG: So we're trying
to do it at the exact turns. These people are
doing it at breakouts. But they're still following the
same platform of discipline. GRANT WILLIAMS:
Confirmation, yeah, yeah. MILTON BERG: No one is out there
saying, the market's up 15%, we're in the belly of
the move, let's buy. None of the successful
managers are doing that. These are the losers
that are doing that. These are the people
who are giving me the data that suggests
the market's at the top. Those are the ones
that are doing it. But I've worked with some of the
greatest investors and traders on Wall Street, and
they all have an edge. And they're all
non-conventional. And there are some people who
are so-called trend followers. But even trend following
has a discipline. It's not just markets There is
a discipline to trend following. So you need to
have a discipline, and you need to have a view. And you need to
rely on your data. If you don't rely on your
data you're just lost. GRANT WILLIAMS: So when you
look across the landscape now do you see anything that's
got your radar twitching? Do you see any imminent tops
or bottoms in any asset classes that have you-- MILTON BERG: I'm glad you
phrased the question the way you phrased the question. Because I never see
an imminent top, I never see an imminent bottom. I only see probabilities. I never see a top or a bottom. When you make one mistake,
you miss the bottom-- I was 175% short
into December 24th. I missed that one
bottom and I decided I have no evidence of a low. I'm 174% along with
the S&P up 22%. That's crazy. So I look at probabilities. I went long and I
say, based on history there's a strong probability
that the low is in. But since I look
at probabilities rather than assuming that
the market has turned, it gives me the
flexibility to get out. Because if I get
out, I know it's a 99% probability that there's
a 1% chance I was wrong. So the way you phrased
the question was what am I looking for at this point. That's the question. Well, this is how I look
at the current market. We had a major, major low
based on the data in December-- major low, really major. I say the highest intraday-- GRANT WILLIAMS: Yeah,
people forget how-- MILTON BERG: It was the
highest intraday put-call-- GRANT WILLIAMS:
--intense it was. MILTON BERG: --ratio
in history, the number of lows relative to highs. He had a record, on a five day
basis, of net downside volume to upside volume. We had many, many, many extremes
which told you most likely we're headed for a new bull-- I called it a new bull market
rather than a bear market rally. However-- and I have 27
buy signals since then, which suggests on a median
basis the market should reach-- I have the number right
here, if you don't mind-- $3,276.43. On a mean basis, $3,320.65. Based on the mean of
those 27 indicators, looking at the history. However, there are
things bothering me. The one that's bothering me is
that the market is acting as if it's in a bear market rally. Now, what does that mean? S&P is at a new high. NASDAQ is at a new high. The Russell peaked in 2018. The New York Stock
Exchange Index peaked in January of 2018. Worldwide markets, believe
it or not, most of them peaked in 2000 or 2007, with
adjustments for the US dollar. But even on a short term basis,
with the S&P at new highs and the NASDAQ at
new highs, there are too many lagging indicators. That's not a reason
for me to go short. GRANT WILLIAMS: No. MILTON BERG: But there are
other factors involved. I know that there's a time
bomb that grows every day. I don't know if time bomb
is the right word to use. But there's something going
on underlying our economy-- as a fundamental basis-- that's going to cause-- ultimately cause
a major collapse. And that is the
debt outstanding. If you look at all
government debt-- state, city, local. It's about 176% of the GDP. If you look at an
off-balance sheet, pensions and loan guarantees-- we're approaching 350% of GDP. Now, that can't continue. Another thing I bear in mind,
which is very important, is that this great bull market
we had beginning in 1982 until today, great
bull market took place in conjunction with a
great bull market in bonds. 10-year treasury yields
are down from 15.75% to-- the low in the cycle
was less than 2%. GRANT WILLIAMS: Yeah. MILTON BERG: This has
goosed markets worldwide. On top of that, you have
the quantitative easing and all this other stuff. So we had a great bull
market that began in 1982, and in a sense may
have occurred only because of monetary easing--
maybe only occurred because of interest rates coming down. Maybe the only reason companies
were able to grow to the extent that they had was because
rates were coming down. They were able to
borrow free money. They certainly did. So I'm afraid that one day
that's going to backfire. We're going to get
a turn of the cycle. Now, this is fundamental
talk, but my data-- so I say, any time I
see evidence of a top, I'm going to assume that this
is it, until I'm proven wrong. So we just went from-- on the year, we
have two portfolios. One is up about 26%. One is up 28%. And we were long most of the
year-- couple of short trades which failed. We got out quickly. We went short on July 2nd. We went short the S&P.
We went short the NASDAQ. Why? A, it's a major
Montgomery cycle date. B, we have a list of
more than 100 indicators that we match to
previous market peaks. And of all these
hundred only two are inconsistent with
levels seen at market peaks. P/E ratios, invest
intelligent sentiment, the number of new highs,
the number of new lows-- I may have the-- I don't have my list on
me right at this moment. But the reality is, everything
is consistent except for one thing. Except bonds, 30 year bonds
are at a six month basis and on a 12 month basis of doing
far better than they've ever done at a final market peak. So what I say to myself,
that's only one indicator, it's the bond. Secondly, hey, maybe this time
since the whole bull market may have been
generated by the fact that bonds are doing so well-- maybe the hook at the
final peak in this market will be the bonds
are still doing well. And bonds are making the top
coincident with the market top. So bonds have done very
well the last 6 to 12 months into July 2nd. We went short the bond
market for that reason because the cycle may suggest
a turn in the bond market. Sentiment is totally,
totally suggesting that the bond market's
going to turn. Because worldwide,
everyone's by US bonds. It's the only place
to get yield, only place to make real money. Now, this thing
about stocks as well. So we shorted bonds,
we shorted stocks, and for all I know this is it. However, I have 20 something
indicators telling me it's going higher. GRANT WILLIAMS: Right. MILTON BERG: So
I short July 2nd, we have a stop slightly
above the highs of July 2nd. If we're stopped out, we
go back long stocks again. I'll retain my bond short
because bonds have far more than cycle work involved. Bonds really, really are
giving off signals of a top. But again, if I'm wrong
I'll get out quickly. Very important is flexibility. You must remain flexible. You must know that everything
works on probability. There's no such thing
as 100% being correct. So stocks and bonds
are risky markets. Stocks are very risky markets. You recognize you're
taking risk and you recognize that you will
not always be right. You also recognize that you
have to know when you're wrong. And we have-- since we're
pinpointing turning points, it's so much easier
to have a stop. Someone who buys because,
oh, the economy looks great, I'm gonna buy stocks-- how
does he know when to get out? GRANT WILLIAMS: Yeah. MILTON BERG: Times
are gonna look great by the time
the market peaks too. But if you say I'm
buying because we believe that July 2nd was a top, or
I'm buying because I believe December 24th was a low-- if it makes a low below
December 24th you're out. GRANT WILLIAMS: You're out. Yeah, sure. MILTON BERG: If it makes a
high above July 2nd I'm out. So that's one of the
benefits of our discipline. GRANT WILLIAMS: So
let me ask you-- because this fascinates me. This idea of emotion
and sentiment, it's ultimately confidence. You know, greed and fear are
the extremes of confidence essentially. What do you think is more
important, confidence in economy, confidence
in the markets, or-- to me, what's become
perhaps the most important is confidence in
the Federal Reserve and confidence in what the
central banks are doing having this under control. How do you measure that
and how do you adapt to it? MILTON BERG: I agree
it's confidence, but you always have to
remember there's one more step. There's confidence and action. GRANT WILLIAMS: Right. MILTON BERG: Many
people may be confident that the economy is
going to do well. But that's not going
to allow them to buy a speculative stock on margin. See, people are either confident
or they're not confident. It's when the confidence
translates into actions that a top is imminent
or a bottom is imminent. If people are so confident that
the market is going much lower, they sell all their stocks and
then that turn is imminent. So confidence is one thing. We don't measure confidence. We don't measure
sentiment per se. We measure how sentiment
reflects in the actions. And wait until you
see the actions in the data of the market. So now you're asking the
question, the Federal Reserve, is it the economy
or is it the market? The reality is, to
me it doesn't matter. I don't care if people
are going crazy buying stocks because the
Federal Reserve is easing. I don't care if people are
going crazy selling stocks because the economy is tanking. Remember that at the
low, Warren Buffett said that the
economy's off a cliff, his companies are
all off a cliff. That was in February of
2009, a month before the low. I don't care if
people are selling because the economy is poor. I don't care why they're
buying or selling. I want it to show up in my data. So if I see investors
intelligence, for example, now in the danger
zone of 57% bulls-- which historically
is a danger zone-- that's not enough of a
reason for me to sell stocks. GRANT WILLIAMS: OK. MILTON BERG: But if that's going
to be reflected in five day volume, as an example--
this is one easy example. So that's going to reflect in
a put-call ratio with high call buying. If that's going to be reflected
in high volume and stocks moving to the upside-- which is a narrow leadership-- that will possibly give
me a high probability to trade to go short. It's very important
to know that what economists mock about
the stock market is one of the greatest things
about trading the market. One of the things they say
is, well, the stock market has cooled 18 of the
last 5 recessions. That's true because the
stock market is not perfect. But we're not
trading recessions, we're trading the stock market. So if I could trade 15 of those
18 tops without a recession I'm happy. So what the
economists are saying makes no sense to stock traders. They' don't realize they're
speaking to investors. They're not speaking
to economists. Economists want to
predict the economy. They care that the stock market
predicted only five recessions. But to someone who is
trading, all I care is if the market's
going to be up or down. That's number one. But secondly, when I
see that things aren't-- I want to know the things
that aren't perfect. I don't want to ever get
caught in to the idea that I could be perfect or
that markets are perfect. That's when you're
going to make a mistake. So I like the fact that
even though the economy is a very good indicator
for the stock-- even though the stock market's
a very great indicator for the economy, I'm glad
to know that's not perfect. That shouldn't be perfect. If anything should
be perfect, it should be the stock market
correlation with the economy. And that's not. So it's always important
to keep in mind, in this business
nothing is perfect. It's all probability. We're not perfect. I've been in the business
for quite a number of years and I realized-- you know,
my background wasn't finance. So I wasn't taught by professors
or by the academics how markets are supposed to work. So I had to learn
that on my own. And fortunately I think I did a
fairly good job for my clients. And I hope to
continue doing that. GRANT WILLIAMS: Milton,
that's the perfect place to wrap it up. We've talked longer
than we said we were. And I can sit here
all day because I find this stuff fascinating. But again, thank you so
much for agreeing to do this and coming to spend
the time with me. MILTON BERG: I
really enjoyed it. GRANT WILLIAMS: I've enjoyed
every second, thank you. MILTON BERG: I
really enjoyed it. Thank you so much. GRANT WILLIAMS: Well, I promised
you a fascinating conversation. Milton is, as I said, a very
quiet Wall Street legend. He's a fascinating guy. And the work he does
is truly extraordinary. And it splits opinion. A lot of people say this
is all bunkum and hooey. And a lot of people
are fascinated by the work Milton does. But one thing's for certain,
there's a rigor to it and a discipline to it. And his performance
speaks volumes. So I hope you enjoyed that
conversation as much as I did. And I hope I can tempt
Milton to come back again. It's taken me a long time
to get him to sit down with me for the first time. Hopefully, the gap between
this and the next time won't be so long. - Did you know that
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