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Practice English Speaking&Listening with: ? How to Time the Market (w/ Milton Berg)

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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 some of our shows,

including the one that you just watched,

are available on Real Vision free?

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that is distributed via cable networks, Apple, YouTube,

and most importantly, the biggest finance website.

This aggregation means that Real Vision free

is one of the biggest finance channels in the world.

In fact, it gets in front of 50 million active traders

and investors.

And you know what?

You can sponsor our shows on Real Vision

free if you want to put your company on the map,

email us at sponsorship@realvision.com.

The Description of ? How to Time the Market (w/ Milton Berg)