Pu Roti / 321 Phil Roth has officially been involved with the financial markets since 1967 but his interest in the market precedes this date by several years. At the age of 12, Mr. Roth went to work for the local baker scraping floors and cleaning pans. After a couple of months of employment, the baker informed Mr, Roth that he was wasting his money and announced that he was putting him on a $5.00 per week allowance and convinced him to invest the balance of his earings in a mutual fund. Not only was his employer helping to ensure Mr. Roth’s financial future, he was determined to provide him with the necessary tools to make wise financial decisions. These tools were derived from technical analysis. As odd as it may sound, his first introduction to technical analysis came from a German immigrant baker. Mr. Roth’s employer avidly traded both stocks and commodities exclusively using techni- cal analysis. Having an interest in the markets was never an option in this particular bakery. Em- ployees were assumed to have an interest in the markets or soon would have by simple indoctrina- tion. Excluding his employer, there were five other bakers, all German immigrants. Each and every one of them were interested in the financial markets and all conversation revolved solely around this subject. The radio remained on throughout the day broadcasting the market action, albeit infre- quently. At 5:00 p.m. the World Telegram Sun Newspaper would arrive with that day’s closing stock prices. Flour was brushed away from the bench, and charts stained with doughnut jelly were spread out in preparation for their daily updates. This was 1956, the pre-computer era when stocks were kept by hand and the markets closed at 3:30 p.m. Mr. Roth continued to work in the bakery throughout high school learning all of the nuances of investing via technical analysis. Guided by his market savvy mentors, Mr. Roth accumulated a respectable nest egg during his five years of labor in the bakery. He envisioned being a proprietor of a bakery. When he was seventeen, a bakery in his neighborhood surfaced for sale. He came “extremely close” to buying the bakery and skipping college but the circumstances of the time persuaded him otherwise. This was the Vietnam era, a time in which you had to “plan your life around the draft.” Had he pur- chased the bakery and then been drafted, he could have lost his business. With the risks outweighing the benefits, he made the decision to attend college and gradu- ated with a BA in Economics. He continued his education by enrolling in graduate school. Tired of borrowing money, he discontinued his graduate study and began mailing out a “zillion” resumes to Wall Street firms. He heard from exactly one firm, Merrill Lynch. He entered their research train- ing program in 1967 accepting a salary that was barely enough to live on. ‘There were several stages within the training program. Trainees initially began their expe- rience at the wire desk providing information to clients. The next step was the correspondence unit. Responsibilities at this level included providing research information upon request. The final post was the position of portfolio analyst, not to be confused with the portfolio analysts of today. At this post, the trainee would analyze the portfolios of clients who had cash balances sitting in their accounts. They would make stock or bond recommendations based on a “menu” or formula con- structed by Merrill Lynch. The time spent in the training program averaged a year or so after which time the trainee had the opportunity to choose between technical analysis, fundamental analysis, or portfolio management. As fate would have it, the first opening for Mr, Roth appeared in the techni- cal analysis department. He confesses that had he to do all over again he would have chosen to spend some time as a fundamental analyst.322 / TECHNICALLY SPEAKING Mr. Roth’s first job in the technical analysis department was as an assistant to the “official tape watcher.” His boss started out as a floor clerk on the New York Stock Exchange in 1928. Starting with no money, he made $100,000 as a 17 year old in 1928 when manipulators ran Radio Corporation, known today as RCA, from $50.00 a share to over $500.00. In those days, stocks could be traded without margin as long as they were bought and sold within the same day. He later lost it all in the Crash of 1929. As you can imagine, he learned a great deal from his employer. Mr. Roth’s very first duty as an assistant was changing the paper tape on the ticker machine. When one roll was reaching the end, he had to be standing in place, ready to feed the new tape in before the old tape ran out. This was no easy feat. His finicky boss wouldn’t allow the ticker to be tured off because that would result in some lost trades. There was the occasional mishap which necessitated turning off the ticker tape. This sent his boss over the edge because he missed a few prints. Once overcoming the hurdles of changing the tape, the job became terrific. From Merrill Lynch, Mr. Roth moved to Loeb Rhodes and later to E.F. Hutton. In 1988, EF. Hutton was acquired by Shearson Lehman, He is currently chief technical analyst and Senior Vice President at Dean Witter Reynolds, Inc. Mr. Roth takes a top down approach to market analy- sis determining first the health of the overall market from a longterm perspective and then gradu- ally works his way down to the shorter term. His indicators are organized within four categories which correspond with the various trends in the market. They are the secular, cyclical, medium term, and shortterm. Referring to himself as an “indicator junkie,” he has more than 150 indicators in his repertoire but does not track all of them on a daily basis. I would like to point out that during the interview we were speaking off-the-cuff but each time we completed a category, he reviewed his list of indicators to make certain he wasn’t omitting something of great importance. I thought this showed a high degree of conscientiousness. When Mr. Roth first began developing indicators, computers and portable calculators were non-existent. Charts were kept by hand. Creating an indicator thirty years ago was a very labor intensive process. Other than by hand, the only means of performing mathematical computations was with an electrically operated calculator called the “Addressograph Multigraph.” Speed was not its strong point. Calculations literally took one second per decimal point. Collecting historical data necessitated spending long hours at the library looking through back issues of Barron's and the Wall Street Journal. \ronically, as tedious and arduous as these tasks were, it was this intensive esearch surrounding the creation of an indicator which made technical analysis more intrigcing and interesting for Mr. Roth. Despite the barriers and handicaps, Mr. Roth speaks fondly of this time recalling the tremendous amount of satisfaction derived from seeing his efforts rewarded with the discovery of an indicator that was highly useful. Today, he still finds time to create new indica- tors.Put Rotn / 323 Does your analysis take the form of a top down or bottoms up approach? Ido both. With a top down approach my market indicators will answer questions like, “Do stocks make sense at all relative to other forms of investment?” Are bonds more attractive? Is gold more attractive, etcetera? So you follow those markets as well? Yes, and there is an important reason for that. I will throw that out up front. When you are analyz- ing the supply and demand picture for equities, changes in valuation of equity alternatives will affect the supply and demand for stocks. In other words, all other things being equal, if bonds go up in price, it means they are less attractive relative to stocks. If bonds went down in price, they would be cheaper and therefore relatively more attractive compared to equities. 1 am looking at the com- modity markets, the bond markets, and the currency markets. These tell me in general whether equities are attractive or not. My macro indicators point me toward sectors of the equity market that might make sense. If interest rates are falling, I might want to buy interest rate sensitive stocks. If commodity prices are rising, I might want to buy commodity type stocks. The macro indicators will also point me specifically toward industry groups. If I think the market looks quite vulnerable, and I am looking for a defensive haven, I might want to be buying higher yielding electric utility stocks. The macro indicators point me not to specific stocks but to groups and sectors and tells me whether or not the equity market makes sense at all. Then I look at as many chart patterns as I can, as often as I can. I am expecting to get the same message on individual stocks. If my macro indica- tors say oil stocks are attractive then I am expecting to see good looking charts in the energy area. Now when those two things diverge it tells me I have to rethink things. Often the stock charts will change before the macro indicators because stocks are a leading economic indicator and commodi- ties are a coincident economic indicator. Oil stocks are probably going to change direction before oil prices do. I continually have to look at the chart patterns to see if the macro message is still correct or if it is changing. When you say macro indicators what are you referring to? When I use the word macro indicator I mean “market indicators.” I use more than 150 different indicators for different time periods: shortterm, medium term, longterm and what I call the secular trend. I don’t follow 150 indicators every day because some indicators are longer term indicators and they don’t change very often. I use the word “macro” when I am looking at the market as a whole. When I talk about micro indicators I am talking about looking at a myriad of individual stocks to try and come up with the same kind of judgment about the market that you would get by looking at market indicators. Do you look at your macro indicators individually or in a model? T don’t have a black box. In other words, I don’t turn bullish on the market if 80 of them happen to