The Wisdom of Price & Volume

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm pleased today to welcome a new and special guest, Carter Worth, CEO and founder of Worth Charting LLC. Carter joins us today with over 30 years of technical analysis. Carter, thank you for joining Sprott Radio.

Carter Worth: Thank you so much.

Ed Coyne: Carter, before we dive into the world of trying to understand the markets through technical analysis, I thought it'd be helpful for our listeners to hear a bit about yourself, your background and what got you into this part of the markets.

Carter Worth: To start with finance, I generally have no natural God-given talents to speak of. If I could swing the golf club like Tiger Woods, I would have done that. If I could sing like Mick Jagger of The Rolling Stones, I would have done that. If I could act like Tom Hanks, I would have done that. I grew up in Manhattan, New York City, and the cottage industry here is finance. I looked around, and you have a circumstance where even very mediocre people can make outsized income, so I went to Wall Street. I started as a fundamental analyst.

After about two and a half years of what I called the funnymentals, I started to pursue something else. This was because of one man who showed me a few things he had begun in the fidelity chart room in the 1960s. He's a lawyer by training, but the spot struck me as something I needed to pursue. I put away all my Qs and Ks and dedicated myself to studying price action, which is what technical analysis is. We can go into that a little more if that's helpful or productive.

Ed Coyne: You said something I thought was pretty good, which is funnymentals. There are a lot of charts out there that people will quote and look at, but frankly, they don't mean a whole lot. Let's start at the beginning and talk about the price action, why that's important, some other trends you like to look for, and why those are relevant.

Carter Worth: Perfect. It gets down to this. One either accepts or does not accept the concept that there is wisdom in price. Now, on its face, it's controversial, and it always was, the original technicians. Interestingly, no one believed them. I had to name these patterns to get the layperson or colleague to see. It's not about whether you call it a head and shoulders, cup and handle, or rounding bottom; these patterns repeat.

What is it about when I say there's wisdom in price? Look, the Federal Reserve includes stock prices in its leading indicator index. They know this. What I would characterize as basically this thing that is now embraced is that there's the wisdom of the crowd.

Aristotle was credited as the first person to introduce that concept in his work, Politics, but it's counterintuitive. The ego, the individual, my own, wants to think that: “I was the valedictorian top in my class, maybe at McGill, for instance, then I went to Harvard Business School, and I worked at Goldman Sachs, or wherever, and I can outsmart everyone and figure out the answer." We all have it; that's what a good, healthy ego would be, relying on experts' insight, but it turns out that a group of individuals, a broad group, is almost invariably and always smarter than an individual, even if it's an expert. That is the concept of the wisdom of the crowd.

Let's use some very pedestrian examples to make that point. There have been studies, and you can go on the internet and see some in the early 1900s, where you will be at a county fair, a simple thing, and you would have asked people, "How much does this heifer weigh? The cow?" There's a cow up on a platform. This was 100-plus years ago, and they do this in business school now; you can go online, and there's a recent picture of a cow, and people had to guess how much it weighs.

People's guess is, "Oh, that's a 400-pound cow." "No way, that's a 1200-pound cow." Well, what happens when you take the average guess? It's within about 50/60 pounds every time and an animal that's about 1200 pounds. While the individual guesses are quite inaccurate all over the place, the collective group is very accurate. That's what charts are.

When I make recommendations, and this one can see this as insane or remarkable, or a little bit of both, look, just having done this for 32 years, speaking to almost every single large mutual fund complex there is, the portfolio manager there, every endowment, family office, state pension plans, and the point is, I make a recommendation, I don't know where the company in question does sushi, or sneakers, or soda water, I'm just studying price. It's not unique. There are a lot of other charts out there, but I have been doing it a long time.

This concept has slowly been embraced, and now it's everywhere. The major hedge funds all have quant teams; they study price aggressively, and we all, in our day, use this. We don't turn to food critics anymore. For a restaurant review, we looked at the group review to see how many people had gone there. This concept is proven now, and the chart is a pictorial representation of price.

Maybe I'll stop there, but the key elements are studying not only price but volume and the level of turnover. Unusual volume is the tell. If a stock trades a million shares a day, a million shares the next day, and one day it's only 10:30 or 11, it's already traded 800,000, and then at noon, it's already traded 3 million, and then by the close it traded 4.5, how could there be a fourfold increase in volume? Maybe there was an upgrade on Wall Street, but there wasn't. Maybe there's an article in The New York Times or Wall Street Journal Barron's, but there wasn't. It's all about the volume.

The existentialists Camus and Sartre would argue that existence precedes essence, and in markets, volume precedes price. It's not studying companies. It's studying price action.

Ed Coyne: Do you ever care about the “why”?

Carter Worth: Never. I'm not in the “why” business. I'm in the “what” business. The S&P 500 has 500 stocks, and the average is covered by 20 analysts. That's 10,000 ratings. Do you know how many are sell-rated? 5%. It's never changed. How can that be? Because Wall Street has this hold, which is a euphemism for sell. If you look at any, you'll see half the analysts have a price target of 12 months; hence, that's below the current price.

If you think the stocks will be down in the next 12 months, why would you have it as a hold? They don't want to offend the IR department and won't get invited to the junket and the golf trip. It's all a bit of a game. If no one says sell, that's why they call it the sell side after all, they all want you to buy, buy, buy, and a lot of it's not very serious. I was a part of that, and that's why I got away from it.

Ed Coyne: One thing you often hear in the world of technical analysis is the word breakout. What does that mean when someone's looking at a chart, and it breaks out?

Carter Worth: In the stock market, current market, or commodity market, it's typically a stock security that's been toying with the prospect of moving above well-defined intermediate highs and 52-week highs. It's been range-bound but strong, but it can't seem to get out of the range it's been in, and then a stock, currency, or money will often be related, more of that, breakout, start to move up and out of that range. That is a very robust factor or moment in terms of committing capital. There are false breakouts, of course, but over time, breakouts are very efficacious in terms of entry points.

Ed Coyne: As it relates to charts, what are some of your favorite charts or your favorite moves within a chart? What things stand out to you, and what do you get excited about when you look at them?

Carter Worth: Inflection points are what we're looking for. You're looking for several inflection points, but a great one is a breakout. Consider it in the mind's eye, something that's been range-bound and lackluster without any character meandering that then comes to life and moves up and out of the range. That is one.

Another is characterized as a bearish to bullish reversal. A stock that's been in an established downtrend, weak and unrelenting, starts to stop going down, base and bottom, cure and heal, and then start to come to life.

That's more what value investing is: finding something quite distressed that's not going on a business and making the turn. Those are two very interesting inflection points.

Ed Coyne: I'm sure you all see this when talking with your clients or subscribers: different people make different decisions based on the same chart you're looking at.

Carter Worth: Yes.

Ed Coyne: I'm not just talking about long versus short, just general decisions. Please walk us through that a little bit because it must be fun for you to watch that crash unfold.

Carter Worth: Just as you can pull up any stock such as Royal Bank Canada, Caterpillar Tractor, or Dollarama, you'll find, "Wow, this firm has it as a sell rating; this firm has it as a buy rating. There's always a difference of opinion, whether one comes at it from a fundamental point of view, a technical point of view, or a quantitative point of view, but more often than not, there's a clustering of opinion in terms of technicals, the understanding price action of what something is likely to do.

While there may be divergent or outlier views from time to time, good technique and methodology typically end up in the same place.

Ed Coyne: What about a sector or industry? Are there any particular areas you tend to focus on more than others? Are you looking at purely price across the universe?

Carter Worth: Everything. The idea is to try to be right about one stock and then another stock and then to make inferences about groupings. If we notice that several home builders are acting, Well, then we can make a judgment about home builders as a group, or one could then make a judgment about home builders and autos individually and say, well, we can make a judgment about a bigger group, which is consumer discretionary or a bigger group still, the market. The market is just a group of individual constituents. The idea is to be right about the parts and study the whole.

Ed Coyne: Are there any current sectors, industries, or themes that are glaring? You can't open the paper or turn on the TV without hearing the word AI, but what else is getting your attention based on price action, trends and so forth?

Carter Worth: Sure. Well, that's certainly one of them—the move's very steep and uncorrected nature in technology and communication stocks. We are now in the process of correcting the very steep, uncorrected six-month advance that we've seen since the October low. S&P advanced 28%, the QQQ 32%, and the semiconductor index almost 60%. When you get an outside move like that, the normal sequencing calls for some giveback, whether you call it a drop, a decline, a dip, a correction, or a sell selloff.

In the study of sequences, when you're in a good and established uptrend, you have countertrend moves, which are selloffs, just as when you're in a downtrend, you have countertrend moves, which are rallies. The most interesting thing here from my seat is, again, to be continually and to add to short exposure or underweight, this very extended loved area of the market, which is technology and all things related. Then gold, of course, is fantastic, and gold miners are also on the long side.

Ed Coyne: Gold is fantastic. You're one of a few people I hear say that these days, and this is what we do. I mean, anyone who's listening to Sprott knows that we are a precious metals and critical material firm, but is it fantastic because of the price moves we've seen recently? Please walk us through that a little bit. Why do you say that?

Carter Worth: Gold is a perfect example of what makes a breakout. Gold was range-bound for almost four years, just doing absolutely nothing, and we broke out of that range just six, eight weeks ago. You could picture it in the mind's eye. Gold bullion was where it was just two weeks ago, as far back as 2020. During COVID, gold reached a high of $2,075 an ounce in August 2020. Then, until March of 2024, it was at the same level.

Then we broke out big and went from $2,075 to $2,400. It's a textbook example, a prototypical example, something range-bound that continues to try to get out of that range, and then it does break out. It's a bit esoteric, but there's something known as a measured move to try to project how high anything will go having broken out from a range, and a measured move calls for about $2,550, so we're just sticking with that price objective published in the beginning of the year.

Ed Coyne: Well, that brings up another question: sustainability of those moves, that measured move. There's a lot of things like that. Copper right now is being talked about a lot, and uranium is being talked about a lot. It had a big move, and now it seems to have settled in a bit, potentially for another higher move; who knows? When you look at things like that, a pure commodity, a pure metal where it doesn't have as much price action per se because it's not a traditional business in the S&P that has a ton of analysts, does that mean anything, or is it purely, again, going back to simply just price?

Carter Worth: It's just back to every day there's a high, and there's a low, there's a close, you have the trading range on the day, so the pattern, again, is the same. For instance, gold: there's a bit of worry here that it's dipped or not doing well. Gold went from $1,800 an ounce. The lows were in October of 2023, up $625 an ounce.

I would characterize it as having advanced to that extent; gold is entitled to pull back. You're talking about a 35% move, $1,800 an ounce in October of 2023, to $2,400 an ounce in April of 2024, and now it's pulled back 5%. It's nothing. It's healthy because the steeper and further you go without a correction, the more exhausted you get. Think about any endeavor in the gym; if you push it too hard, which allows you to take a break, you rest, and then you can go again.

If you don't ever take a break, you have a coronary. In the library, if you keep studying, you burn your eyes out, but if you walk around the block and get some coffee, you can go back and study again. It's the dips; the counter-trends allow something in an uptrend to reassert itself and continue higher.

Ed Coyne: How about the lens? How wide of a lens will you look at? Will you look at it over the last two to three years? Will you ever look at things over decades and see long-term trends? What do you like to focus on?

Carter Worth: All timeframes. For instance, we know that gold is nowhere near its all-time high adjusted for inflation, that high in 1980. Gold would have to go up 50% from here to return to its inflation-adjusted, or in real terms, high of 1980. Silver would have to go up sixfold to do that, and silver, of course, is nowhere near its high at the Hunt brother's peak when they cornered the market and then doubled top in 2011. I think they're excellent here, and I look at all timeframes.

Ed Coyne: Well, 32 years of experience in doing this in some way, shape or form, could you share a couple of “aha” moments or highlights that you've seen where a chart that you almost want to mat it and frame it and put it on your wall and say, this was a unique moment in time. Do you have any of those, like the movie The Big Shot? Any experiences like that in the 32 years that you can look back on and be like, how did not everybody see this?

Carter Worth: For me, two that stand out. One would be the sell-off in the financial crisis in 2008 and 2009, starting in the autumn of '08; we know the market actually bottoms in March of '09, but if you look at the structural low, the structural low for the market was actually in November of '08. The peak in the VIX was in October of '08, not in the '09 low. The number of stocks making new 52-week lows at the '09 low was contracting because many stocks had already started turning.

We look for divergences like that to judge that this is ending, even though there might be an afterthought incremental low if the market structure improves before the market. For instance, you'll see that at the top of the Dot Com peak on March 24, 2000. Many individual stocks had already turned down. An aggregation will always be slow. The way to study an index is not the index but the parts.

The parts compose the whole, so a weak form of analysis is studying indexes. The strong form is studying the constituents. That is a concept. We've used that, and I learned from my teacher and mentor to try to be there for big inflection points. Again, I would always try to use examples, such as if you walked into the doctor and just had him look at you from across the room. "Yes, I mean, he seems--" But he doesn't know, do you have gout or high blood pressure or diabetes?

You have to get under the hood; this is elemental. Index work is a weak form. The way to study an index and come to a judgment is to study its parts. The parts compose the whole, and the whole comprises the parts.

Ed Coyne: Carter, this has been fascinating. Every once in a while, I get on some of these podcasts and learn a lot more than I thought I would learn. This has been great.

Carter Worth: Thank you so much.

Ed Coyne: For our listeners who would like to follow you and potentially subscribe to you, how can someone track you down and find you?

Carter Worth: We have an institutional business, which, as discussed, is a traditional Wall Street firm, no different from any other sell-side firm. Then, we have a subscription service for individuals, worthcharting.com, which we would certainly invite you to look at.

Ed Coyne: Carter, again, thank you for making the time today to speak with us. I've learned a lot. I hope a lot of our listeners will walk away with this as well and start looking at the markets a little differently than they have in the past. Thanks again for spending some time with us today on Sprott Radio.

Carter Worth: Well, thank you so much for having me.

Ed Coyne: Once again, my name's Ed Coyne, and you're listening to Sprott Radio.