PhD Tested

Intermarket Analysis

Chapter 5

A Conversation with John Murphy, CNBC Technical Analyst and Lou Mendelsohn, President Market Technologies



CNBC Tech Talk April 22, 1994

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John Murphy:
Welcome to today's edition of Tech Talk. I'm John Murphy. Our guest today is Lou Mendelsohn, president of Market Technologies in Wesley Chapel, Florida.

Lou, you are a proponent of the use of neural networks in financial market analysis. But maybe even more importantly, you're a big proponent of maybe a new approach to market analysis, which you refer to as Synergistic Market Analysis, and that feeds into the neural networks. Why don't you explain to us, what exactly is Synergistic Market Analysis?

Lou Mendelsohn:
This is a method of analysis that I have been working on for the last several years that recognizes the globalization of the world's markets over the last six-to-eight years in which the markets have become very much interdependent and interconnected with one another in a way that has never before been seen. The 1987 crash was probably the first instance of a really global market phenomena that occurred, and Synergistic Market Analysis recognizes this and endeavors to take into consideration these intermarket relationships and fundamental factors that affect target markets. So that rather than looking simply, internally at one market at a time as a single-market approach, we're able to synergistically look at the entire range of markets and their effects on one another.

John Murphy:
And you also do something very unique, which is, you take technical analysis, intermarket analysis, and fundamental analysis and your view is that you can't use even one of those by themselves that they even fit together. And that's part of this whole concept.

Lou Mendelsohn:
That's right. In fact, Synergistic Analysis is really an amalgamation of those three forms of analysis, combining them together in one quantitative framework for analysis.

John Murphy:
And this raises another question though that if you accept this you can look at economic analysis, technical analysis, and intermarket analysis, and we know I apply a lot of intermarket analysis! You start looking at all these markets and how they relate to each other, and you start looking at these markets globally. You're dealing with hundreds of possible intermarket relationships and then you bring economics into it - this makes it very difficult for the average human being to do this.

Lou Mendelsohn:
Very difficult. In fact most traders, while they acknowledge that the markets are globally interrelated, really are doing very little in the way of intermarket analysis to date in their trading activities. The reason that I became involved in artificial intelligence four to five years ago, and neural networks in particular, is simply because of the fact that there is so much data available - quantitative data, even qualitative data. It's nearly impossible for a human being to look at charts, overlay charts on one another, and attempt to make sense out of the relationships between all of this data. There has to be some type of a mathematical tool that can use computing capabilities to do so.

John Murphy:
And even I'm aware as we do our analysis, we look at a lot of comparison charts, we look at bonds versus stocks, for example, and I am aware of the fact that we're only looking at the tip of the iceberg; there are many others going on. But getting back to the technical analysis idea, the idea of single-market analysis over the last hundred years or so, technical analysis had a very inward look; you analyze each market by itself. Your view is that, that concept is almost obsolete.

Lou Mendelsohn:
My view is that it is very much obsolete. It's too limited in scope. It's not taking into consideration these interrelated effects that are occurring in the marketplace. And in fact, I believe that by the end of this century, really what we'll end up with is one world global market and each of the individual markets that people are now focusing on will really just simply be components of that one market, different facets of it. And in order to really be able to look at the relationships and get an early-warning signal in one market, you have to look more broadly at other related markets.

John Murphy:
And that leads us to neural networks. Now how do neural networks feed into this whole philosophy?

Lou Mendelsohn:
Neural networks are a mathematical tool that we use, that is able to look at a large quantity of data going back many years in time, data that encompasses a number of markets and it can find patterns and relationships in that data so as to be able to give insight into a particular target market that someone is trading.

John Murphy:
All that data gets fed into the neural network and then the neural network, with the use of software which you developed, then gives you some guide as to where you would be looking in the market at this point.

And the computer does that for you. Now for the average investor who might be interested in doing this, you can do it with a computer; and I guess that's where you come in. This is beyond the reach of most people as far as developing the software is concerned.

Lou Mendelsohn:
For the most part the average trader is not really going to able to effectively implement a neural network from scratch and be able to apply it to intermarket dynamics in the markets. The expertise that's required is broad-based. It requires obvious knowledge about the financial markets. There's considerable knowledge of computer science and mathematics that's involved. So it really is a team-effort that would be needed to implement this effectively.

John Murphy:
And this is what your firm does. Your firm develops this software. I know you've written many articles on this. In fact, I made a reference to one that you had published in Technical Analysis magazine. Actually that's what caught my attention.  And also, you also mentioned even in the whole area of technical analysis in the sense that we're looking at a much broader application, and synergistic is in your view, this is the wave of the future.

Lou Mendelsohn:
Yes, because the markets are global markets today, and traders have to have a global perspective on trading. They have to be able to implement a global trading strategy in order to have a competitive advantage in the 1990's.

John Murphy:
I tend to agree with you. That's the direction my work is going. Lou, we're going to have to leave it at that. Thanks a lot for coming up.

Lou Mendelsohn:
Thank you very much.

 

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