“The greatest value of a picture is when it forces us to notice what we never expected to see.” -John Tukey
I recently attended the Bloomberg Buy-side Forum in New York where I appeared on a panel on the future of the Buy-side Analyst. We discussed a variety of related topics, including the impact of data and technology on making investment decisions. I explained that while we have certainly found ways to leverage computing power to manipulate data, we are embarrassingly behind the curve in terms of data visualization.
I remember attending a data visualization conference a couple years ago and was surprised to see absolutely zero examples of financial data from any of the exhibitors. Also, zero financial professionals in attendance besides my three fellow panelists on a “Data Visualization in Finance” panel. Who was represented? Academics. Energy firms. Government agencies.
Traditional Charts Aren't Going Anywhere
Data visualization tools aren't necessarily meant to replace existing methods. The traditional two-dimensional charts that I use today aren't too different from the charts my predecessor technical analysts used fifty years ago (although thankfully I don't have to update them by hand!). There's a reason why we continue to look at price charts- they do a great job of illuminating behavioral biases and simplifying the process of managing risk for a position.
Data visualization tools are valuable if they help you answer a question more efficiently. That is, they should help you figure out which charts you should be looking at in the first place!
I thought a great way to illustrate this would be to review my recent blog posts and find places where I could have made better use of visualization.
I recently wrote about home bias, which is our tendency to invest in companies that are geographically closer to us. I used a number of charts to illustrate the strength of global markets relative to the United States in 2017, including this one:
I could have used something like Relative Rotation Graphs to better illustrate the transition from US leadership in 2016 to US laggardship in 2017. For example, here are the major international equity ETFs relative to the SPY as of year-end 2016:
You'll notice most of the global markets are in the lower left quadrant called “Lagging.”
Now let's look at the same picture this week:
See how most of those markets have now rotated to the upper right “Leading” quadrant? Powerful visual to illustrate the rotation to non-US equities.
I often run a screen for stocks and ETFs making significant price moves, which is a good way to answer the question “which charts should I look at today?” This helped me to hone in recently on short-term opportunities in energy and real estate ETFs.
While traditional screening tools certainly have a place in the toolkit, especially with a large universe like stocks, something like the MarketCarpet tool can be very helpful in visually scanning for significant events.
For example, this MarketCarpet looks at the one-month change in RSI for major sectors and asset classes:
This makes it very easy to focus on the strength in the financial sector (upper left corner) over the last month, as well as the weakness in the Swiss Market Index (bottom right quadrant). Charts below.
Regardless of your time frame or your investment approach, there is most likely a place for more powerful data visualization tools in your process. I've found the biggest hurdle to using these tools is just the challenge of breaking out of one's comfort zone. As author Karen Salmansohn once said, “The best things in life are often waiting for you at the exit ramp of your comfort zone.”
David Keller, CMT
David Keller, CMT is passionate about viewing the markets through the lenses of behavioral psychology and technical analysis. He is a Past President of the Market Technicians Association and currently serves as a Subject Matter Expert for Behavioral Finance. David was formerly a Managing Director of Research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York. You can follow his thinking at marketmisbehavior.com.
Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.