Money Morning Editor’s Note: Lee Adler has more than 44 years of experience trading and investing, as you’ll see. You’re going to be hearing a lot more from him in the future, because he’s taking our newest free research service, Sure Money, “big time” next week. You’ll have the chance to join him, but for now, he’s going to show you why these four little words just might be the most profitable recommendation you’ve ever had. Here’s Lee…
“Don’t fight the Fed” was a refrain I heard often from the old men in the customers’ gallery at Walston & Co.’s Philadelphia, Penn., office back in the late 1960s. I was a teenager at the time and sat with them after class.
I tried to understand what these mysterious wise men meant as I watched the ticker tape crawl along, showing a trade from New York every few seconds…
“IBM…200s… GM…1000s… PRD…100s… XRX…10,000…”
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The ticker would pause for a few moments, then more trades would come.
Some of these old men were known as “tape readers” or “tape traders.” They saw patterns in the movements of the ticker and bought and sold stocks based on those patterns.
They made money, too, and plenty of it.
“Don’t fight the tape. Don’t fight the Fed. The trend is your friend,” they said. I heard it so often, I couldn’t stop it from constantly playing in my head.
I still can’t, to this day.
Turns out, there’s a good reason why: You can make a ton of money if you move when the Fed does, no matter what they do…
How I Learned to “Trade the Tape”
I thought it was amazing that we could see the trades nearly as they happened – nearly 10 million shares a day! It was exciting for me as a teenager to witness this cutting-edge technology. Often, I saw my own buy or sell order as it crossed the tape a few minutes after I placed it.
In fact, on a table near the customers’ gallery there was a Bunker Ramo Corp. machine where we could type in the ticker symbol of a stock and get a quote with the bid, ask, and latest trade within seconds – amazing at the time.
Once a week, the brokerage office got the Standard & Poor’s Trendline chartbook in the mail. It contained the daily stock charts for all listed New York Stock Exchange and American Stock Exchange common stocks for a one-year period through the previous Friday. The charts showed not only the prices, but the 50-day and 150-day moving averages.
There was a giant Xerox machine in the front of the office where my broker made a copy of the chart of the stock that I was following. I penciled in the bars from the last couple of days and each day for the rest of the week. I used a ruler to draw a few trend lines and what the old traders in the gallery called “support and resistance levels,” or prices where previous price moves had stopped and reversed.
One day, a trader showed me how you’d make a profit almost every time if you just bought when the price came down to the 150-day moving average on the chart.
There were times when it seemingly worked for every stock at the same time, but then there were other times when almost all stocks went right through those moving averages. It would have helped to know which would be which!
The bar charts with moving averages were something new.
The charts fascinated me. I read all the books I could about charting – what they call “technical analysis.”
Unlike “fundamental analysis,” which followed the fortunes of the sales and earnings of the companies, technical analysis analyzed the patterns in the price charts. Supposedly, those patterns held meaning that could be deciphered to know when a stock would move up and when it would move down.
It worked well enough that some traders made money just from knowing how to interpret the charts.
Back at Walston & Co., we had the chart books and we had the NYSE ticker. Below the NYSE ticker tape on the front wall of the office was another ticker showing the change in the Dow Jones Industrial Average, minute to minute. Below that was an electronic news ticker, on which the news of the day flowed by, word by word, line by line.
A paper news ticker that spewed reams of paper throughout the day sat in the corner, and a clerk occasionally cut the scroll of paper on the floor, clipping those cut sections to a clipboard. We could read that to catch up on what happened earlier. The machine was from Dow Jones Newswires, and there was another news ticker from Reuters.
Whenever the Dow Jones Averages started moving on the electronic tickers, the old guys would all murmur to each other, “Was there some news?” I joined them as they crowded around the news machines to see what was driving the market.
Sometimes there was no apparent reason for the move, but one of the old traders would exclaim, “It broke support!” He showed me what he meant from the chartbook. The Dow, or the S&P 500, had broken an old low. Everybody sold their stocks when support broke.
This was the technical side of the market in action. The “technicians,” those who traded on technical analysis, usually did pretty well for themselves; they still do.
But what did those old traders in the customers’ gallery, who had lived through the bull market of the 1920s, the crash of 1929, and the boom years of the 1950s and 1960s, mean by “Don’t fight the Fed”?
Let me show you – it’s the key to making money in the markets…
Dr. Doom, Dr. Death, and the Money Tea Leaves
I found the meaning of the old timers’ “Don’t fight the Fed” mantra a few years later, in the 1970s, as a young stock broker.
Every Thursday, after the stock market closed at 3:30 p.m., we crowded around the news ticker to wait for news on the money supply. When it came across the ticker, we shouted, “M1 up 3 million!” or whatever the change was.
But we didn’t know what to think about that until Henry “Dr. Doom” Kaufman and Albert “Dr. Death” Wojnilower, the chief economists of Salomon Brothers and First Boston, respectively, told us what we should think about it.
You see, their commentary came across the news tickers a few minutes later.
Dr. Doom and Dr. Death were permabears (go figure), and their nicknames, of course, told the story.
The 1970s were a horrible era for stocks, especially bonds. The good doctors’ weekly pronouncements were a regular reminder: “Don’t fight the Fed,” as the Fed was invariably tightening monetary policy to fight inflation.
If money supply was rising too fast, it meant that inflation would rise. In turn, the Fed raised interest rates and, supposedly, that was bad news for stocks.
Back then, we needed those professional “Fed-watchers” to interpret these things for us. The Fed didn’t publish any information on what it was doing, so Fed-watchers like Kaufman and Wojnilower were required to interpret the tea leaves they got from following the money markets.
How times have changed.
Back then, all the price information and market news was available to us, often with minutes-long delays, only if we were sitting in our brokers’ offices. Today, prices and news come to us in real time over our phones, computers, and even our wristwatches.
Back then, we waited on chartbooks weekly, with charts that were already stale when we got them. Today, we have them immediately at hand.
But back the in early days of computerized technical analysis, the Fed was a mysterious entity.
We learned we shouldn’t fight it – we heard the mantra often enough – but nobody except the professional Fed-watchers really understood why that worked. The Fed worked in nearly total obscurity; there was no telegraphing of the next policy move. They didn’t even bother to explain it when they changed it, leaving Fed-watchers had to figure it out.
Today, the Fed showers us with a profuse amount of information instantly available to us on our phones, computers, smartwatches, what have you. The challenge with that is there’s so much information now that it’s often contradictory and difficult to make sense of.
Still, we don’t need Dr. Doom and Dr. Death anymore to tell us what to think.
Thanks to the Fed becoming so open and transparent with data, we know almost as much as the primary dealers like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Deutsche Bank AG (NYSE: DB), which are online with the Fed every minute of every day.
We just need to know which information matters, why it matters, and how it matters. Then we can act accordingly and with confidence when managing our investments and trading.
Yogi Berra famously said, “You can observe a lot by watching.” By observing Fed data carefully enough for long enough, I have learned “the which, the why, and the how” of Fed-watching.
Tomorrow, I’m going to show you how it’s done. You’ll see that, for all the complicated jargon the Federal Reserve and Wall Street use, tracking the Fed is really as simple as obeying a traffic light.
Red light… yellow light… green light. Stop… proceed with caution… full speed ahead.
It’s that simple.
And you’ll have no trouble at all using the old “Don’t fight the Fed” mantra to profit directly (and often) in your own day-to-day investing and trading.
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