INTERVIEW
Team Technical Analysis (Fixed Income)

Saitta! Kepler! Krauss!

by John Sweeney

ILLUSTRATION BY CARL GREEN

Basically, technical analysis provides tools that enable us to express an assumption we have about the market.
-- Alex Saitta		 My first objective is to figure out if there is some sort of trend going on in the marketplace, and if there is, what is it and maybe try to figure out how strong it is.
-- Rob Kepler		 A lot of people on Wall Street still live in the world of academic theory. And you know what? When it comes to mass crowd psychology, ... it all goes out the window.
-- Michael Krauss

When Institutional Investor (II) magazine recently named its All-America Fixed-Income Technical Analysis Team, STOCKS & COMMODITIES Contributing Editor Alex Saitta was in first place. We thought a roundtable interview of the top three would be not only an offbeat interview but insightful for our readers. We put together S&C Interim Editor John Sweeney, Alex Saitta of Salomon Smith Barney, Robert Kepler of Lehman Brothers, and Michael Krauss of Chase Securities for a look at technical analysis in the big leagues. It turned out we'd found a fan of mechanical systems, a momentum player, and a sentiment tracker, so there was a lot to cover.

II first-teamer Alex Saitta is vice president and senior analyst in Salomon Smith Barney's technical research department. He analyzes the US fixed-income market and provides commentary on the equity and commodity markets. Saitta publishes a newsletter, Financial Markets Daily Outlook, which provides market views and trading recommendations. Saitta led Salomon Smith Barney's fixed-income technical analysis team in Institutional Investor votes in 1999 and 2000, and was ranked the top technical analyst on the All-America Fixed-Income Team in 2000.

II second-teamer Rob Kepler is senior vice president in charge of technical analysis for the Lehman Brothers fixed income strategy group. He produces Lehman's Daily Fixed Income/FX Technical Perspective, as well as monthly, weekly, and intraday reports in global fixed income, foreign exchange, and commodities/derivatives. In addition to contributing to Lehman's flagship Global Relative Value report, he applies technical analysis to yield curve, spread product, volatility, and swap markets. Kepler has been named to the Institutional Investor All-America Fixed-Income Research Team for the past two years.

II third-teamer Michael Krauss is managing director and head of global technical strategy at Chase Securities. He specializes in the US Treasury market, swaps, and emerging markets, with his group's effort extending to foreign exchange, global equities, and European bonds. His team's Technical Strategist daily market letters are received by more than 2,500 institutional clients worldwide. Krauss was honored in 1993 with the first-team ranking in the technical market timing category of Institutional Investor's All-America Fixed-Income Research Team poll -- a category that was dropped the following year, only to reappear in 1999, when he finished third. Most recently, Krauss' team took third in the Institutional Investor poll.

STOCKS & COMMODITIES Interim Editor John Sweeney conducted this three-way interview via telephone on September 19, 2000.

You were all picked by Institutional Investor, but with the exception of Alex, we don't know you very well. Rob, would you start off? Just tell me how you got into technical analysis.
Kepler: I started in 1981. I came out of school and I didn't really know much about technical analysis but I found a job with a commodity trading advisor (CTA), which actually was an in-house money manager to a predecessor firm to Lehman -- Shearson Loeb Rhoades. We were an in-house CTA, so we acted like an outside advisor, but we were Shearson employees and we managed two of the firm's public commodity funds. We also acted as retail brokers. We were free to attract our own clients. We built portfolios of diversified commodities and traded them on a discretionary basis using technical trend-following systems.

Who was running that show?
Kepler: Barbara Dixon. And she learned the business from Richard Donchian. Right out of school and I got to spend a lot of time with Dick Donchian! So as you can imagine, most of the methodologies we worked with were along the lines of what he had developed, meaning channel breakout types of systems. We built derivative types of approaches to what his first work was all about. I was in charge of the trading desk and research for that group.

So you just went from there to doing more and more. Are you pretty much a channel breakout man?
Kepler: No. I ended up leaving because Barbara and I went our different ways as far as what we wanted to do with the business. At the time, we didn't really have much technical analysis in our research group, so I moved over to the research area of Shearson and gravitated toward fixed income and foreign exchange, getting away from commodities. Working with the CTA, we actually tracked everything. We looked at and traded about 60 different markets.

That's a lot to track!
Kepler: We had a really big foreign exchange group back then, so I started spending more time with the forex group and their institutional clients. I started to develop a research report to provide directional ideas for foreign exchange. I was involved with a proprietary trading group and we actually did work with some of the channel breakout methods I used to be involved with, but our research stemmed more from a subjective approach. I would introduce basic chart patterns, moving average or trend-oriented analysis, and momentum analysis. And then, when we demerged and Mike Krauss decided to leave Lehman and move on to bigger and better things, they asked me to move up and take on fixed income. We combined fixed-income and foreign exchange technical research.

Mike, how about you? How did you get into all this?
Krauss: Sometimes you're born with certain things, and what was funny is that at an extremely young age, I had a tendency toward being a market technician. When I was seven years old, there was a very long New York City teachers' strike.

I remember that.
Krauss: It was long, probably four months, and we had substitute teachers. I was in first or second grade. We had one teacher for three weeks who was a stock market investor. To help us with math, she devised a stock market contest. She wanted us to talk to family members, pick two or three stocks, and apportion an imaginary $1,000 among them. We were probably too young for this, but I really took it to heart.

So there I was with my father investing in stocks for many years, so he had ideas. Then I called my uncle, who was a big stock market guy, and he recommended three stocks, hot ones of the time: Burroughs, Schlumberger, and Xerox. I really liked the name Burroughs. I think that became Sperry Rand, then Digital. The other kids really were not interested in this exercise, but instinctively, I decided to graph the stock movement each day.

A technical analyst was born!
Krauss: That's right! I bought graph paper, I had my ruler and pencil, and for three weeks I purchased one of the worst newspapers you can use for something like this, The New York Daily News, and I plotted the closing prices. This was not CNBC of the year 2000. This was the dark ages, 1968. That's how I got started.

Years later at the Bronx High School of Science -- that's a specialized public high school with an emphasis in science and math -- I became quite interested in stocks, the financial markets, and the psychology behind them. I read The Wall Street Journal every day. I got more interested in college. I was a finance major at Lehigh University. As a hobby, I started plotting weekly bar charts and daily point and figure charts from Chartcraft books, using the three-box reversal method developed by Abraham Cohen. So there I was in my dorm room, plotting 350 stocks a day! At the same time, my professors were very condescending toward technical analysis. By senior year, though, they were asking me for stock tips.

I interviewed with Lehman Brothers Kuhn Loeb in 1983 for their MBA sales and trading training position. I must have been the first person in the history of that company to bring 350 stock charts into interviews!

Excerpted from an article originally published in the January 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.

Return to January 2001 Contents