Chapter 6: History

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ELECTRONIC DATA SYSTEMS (EDS)

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Figure 6.5 Valuation envelope, fundamental and technical analysis combined, Electronic Data Systems (EDS), (source: Investment Quality Trends, La Jolla, California.)

As we understand it, IQT uses the high and low yields achieved during a strategic base period as benchmarks to project future overvaluation and undervaluation levels based on then-current dividends. For a stock with growing dividends this envelope

Part II: The Basics

resembles a rising megaphone-a cone that widens as time passes. This was an early form of Rational Analysis, a concept we have defined as "the juncture of the sets of technical analysis and fundamental analysis." Indeed, Ms. Weiss was a pioneer. At the time, few newsletters took a rigorous quantitative approach. It must have been a lot of work in the days before computer power was widely available.

The next major development came in 1970 when J. M. Hurst published The Profit Magic of Stock Transaction Timing. Hursfs interest was in cycles, and he used "constant width curvilinear channels" to clarify the cyclic patterns in stocks. His approach was to use multiple hand-drawn envelopes (see Figure 6.6) that related to the various cyclic components of price action. The envelopes nested inside one another, often becoming congruent at major turning points. In the back of his book, he gave some broad hints at how this process might be mechanized (see Figure 6.7) but the examples presented in the text appear to be hand-drawn.

Figure 6.6 These envelopes are hand drawn, (source: The Profit Magic of Stock Transaction Timing by J. M. Hurst, 1970, reprinted by Traders Press, Greenville, S.C.)

Chapter 6: History

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Figure 6.7 Shows cycles used to help draw the envelopes, (source: The Profit Magic of Stock Transaction Timing by J. M. Hurst, 1970, reprinted by Traders Press, Greenville, S.C.)

We suspect that the concepts were beyond the technology then commonly available. In the years since, numerous attempts have been made to systematize Hursf s work, but we are not aware of any successful results.4

The development path of trading bands gets a bit murky here, and credit is hard to assign. In the next phase, interest seems to have broadened, and several analysts appear to have been working on similar ideas at the same time. The main technique employed in this phase was to shift a moving average in a parallel manner up and down to form bands around price (Figure 6.8). The offset was typically a number of points or a percentage of the average. See, for example, Table 6.2. Hurst had clearly favored the use of moving averages in his book, but we think the idea of shifting the averages by some mechanical means came later, perhaps in the early 1970s. The problems of this approach became apparent immediately. First, the width had to be determined empirically on an issue-by-issue basis. Second, even having done that, the widths needed adjustment over time. Thus, while