Hello, and welcome to The Download. I'm your host, Dave Richardson, and it's (S)Tuesdays. Yes! Everyone loves (S)Tuesdays, especially Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management. Stu, how are you doing today?

Great, Dave. How are you doing?

I'm good. I know you're excited because we're going to be talking about charts and lines, and moving averages, and all kinds of fancy stuff, because you love to get technical. That's what we're talking about; technical analysis or charting, and how we can use different tools, looking at the chart of individual investments or markets to identify trends, to identify tops, bottoms, entry points into an investment, exit points. We won't get into that much detail today, but we will talk about why they work and then how somebody like Stu uses them to manage a portfolio and make investment decisions. So Stu, we were chatting a couple of weeks ago, and we were talking about technical analysis. Technical analysis gets out, if you're watching any of the business news networks or reading articles; some of the markets in the recent correction or pullback reach some key, what they call technical levels. These are typically moving averages. Say it's a 50-day moving average; we take a 50-day scan. It's the average of a stock price over those 50 days. We move to the next day. Then we take day two through 51; that's been the moving average. And then, three to 52, and we move on forward. The line is going to go up and down and the stock is going to trade above and below that line. That's the best way we can do it in an audio podcast to describe that. When I show this to my kids, for example, who have a little bit of interest in stocks, they think it's voodoo; they think it's some kind of magic or something that just doesn't seem to make any sense. But when you explain it, Stu, it makes a lot of sense as to why this type of thing is valid or is relevant for you as a professional investor.

Well, yes, it's a great point. It is one of the disciplines. When I started, early in my career, we used the word three-discipline approach to investing, which was: fundamental, quantitative and technical. Even today, Martin Paleczny, who sits on our strategy committee, is a market technician, and we think that there's a lot of interesting information provided by looking at the statistics. You mentioned the moving average, which is close to the top of the list for many people. That notion of a moving average is, if you're looking at a 50-day moving average— that's the average cost that everyone owns that stock at in the last 50 days—, and when stocks are above moving averages, people are making money and they normally feel good about things and they don't think about selling. When they start losing money, they often don't feel as good about things and they start selling, sometimes. Above and below a moving average can be a really important aspect volume. Looking at the amount that traded at certain prices can be a pretty important feature. You can look back in time and say, well, boy, when we got to this price and a ton traded at this price last time, probably those people that were interested in buying the last time the price was here are probably going to be interested in again. We use technical analysis. One of Warren Buffett's great lines is: in the short term, the stock market is a voting machine, and in the long term, it's a weighing machine. So when it comes to long-term analysis, you're focused on earnings growth and dividends. But when you're focused on some of the voting aspects of the stock market, technical analysis can be a big help. It also fits with another one of his lines: buy fear and sell cheer. Technical analysis can help you identify when there's exuberance in the marketplace, when there's too much pessimism in the marketplace; you hear lines like: that stock is overbought or that stock is oversold, or the market is oversold. Technical analysis is, we probably have 10 to 12 things on our dashboard that we're looking at on an ongoing basis. If we were sitting at work, Martin, he sits on our trading desk, but I'd be going back and forth with him through the day just looking for the interesting tidbits that he's picked up in his analysis. But there's a conversation always in the marketplace that's going on. Technical analysis sometimes helps you sift through that conversation and improve your odds about how you might put money to work. I think another good analogy for it is people that keep box scores at baseball games and who like to say, when this hitter sees this pitch, that's got very good odds. We look for those types of things from a technical analysis standpoint. The last point about technical analysis, is it's just a test to the fundamental investor, because when you go to do something in the stock market, the person that you're buying the security from is doing the polar opposite from you. You can say, well, what are they thinking? This is what I'm thinking, what are they thinking? Am I okay with why they may be doing the exact opposite that I am, and vice versa, obviously, when you go to sell something that someone else wants to buy? These measures around exuberance, these measures around changes in the conversation in the marketplace. These are really important indicators for us to look at on a shorter-term basis. We don't really use technical analysis like why I'm buying stocks at new highs. That is a lot of traditional momentum. What we look for is when momentum is changing and when there's these big events that signal the beginning of something or the end of something, and those are really important to us.

It's just another data point, another tool that you can use, and it's giving you a little bit more of a feel for the current sentiment in the market, the current momentum energy in the market, one way or another, sort of what investor mindset is on both sides of the transaction.

100%. At different times, we can look at bullish and bearish sentiment. Each week there's a survey. When bullish sentiment is very high and technical indicators are overbought, that can be a bit of a cautionary time to put new money to work. When the reverse is true, it can be a very good time to put money to work. When we look today, the sentiment, if anything, is a slight positive, because people are negative. When we look at the technical indicators, they're below some moving averages, but we had a lot of activity that might have been climactic last week in terms of volume and the way that stocks technicians love, like down days that close up and things like this. We're always watchful for that to try to improve the odds of how we put money to work inside the funds.

The way I always think about it— and I explain it to people who aren't deeply involved in the market— is I think of, say, a tie that I see at the store and I like. It's on sale. Its regular price is $100 but now it’s on sale for $50. I go, wow, that's a good deal, but for whatever reason, I don't buy it that day. The next time I go into the store to buy it, it's back up to $100. I'm a little bit frustrated. I could have just bought it at $50. Then I go back and I see it at $50 again, and I've almost anchored that $50 point. It's rational that I go in and buy it. The same thing with the stock moving up or down that you get anchored on, or groups of investors get anchored on that one point where they're either going to buy it or sell it. It does make logical sense that people would buy or sell at that point.

As I say, I think what you're bang on, it's like an important part of the dashboard for the daily comings and goings of the marketplace. As for what the stock market will be 10, 15, 20 years down the road, like the heavy lifting of compounding; it's not quite as important to the heavy lifting of compounding, but it can certainly add incremental returns to helping put money to work inside certain stocks or from different assets inside the funds on an ongoing basis.

And then the fundamentals and other things come into play because in my tie analogy, if I come back to buy that tie and say it's a couple of months later, maybe styles have changed and that tie is no longer in style. Even though it came down to the price, there are other factors that are making me decide not to buy it at that price that I'd anchored to. Again, that is the magic. The real magic in what you do; being able to combine all those factors together and make great decisions over time.

Well, I've seen some of your ties, Dave, and they could be characterized as unique, so the technical analysis might be good but I'm not sure about the fundamentals.

It's hard having poor taste. But I have great taste in guests for the podcast, and there's nobody better than Stu Kedwell on (S)Tuesdays. Thanks again. That was a great primer on technical analysis.

Thanks for having me.

Stu's ties aren't that great either. We'll see you next week.