Getting Technical

In just a little over a year, Vermilion Capital Management, LLC, in Edina has distinguished itself as one of the few hedge fund management companies in the Twin Cities focusing on technical analysis, a method by which the price charts of individual stocks, industry groups, and markets are analyzed. It’s an unusual investment style for a hedge fund, which is an investment partnership with a limited number of (typically) wealthy investors. But perhaps that’s one of the secrets of the firm’s success.

We talked with David Nicoski, who manages Vermilion’s investment portfolio. Nicoski, previously a principal and senior technical analyst in Piper Jaffray’s technical research department, founded Vermilion in May 2005 with two other Piper alumni: Joseph Jasper, a former director of fixed-income strategy at Piper, is responsible for

Vermilion’s day-to-day operational management, and Shelley Moen, formerly a Piper principal and senior technical analyst, also manages the portfolio.

{Q} How does your style of investing differ from fundamental-based investing, which looks at financial statements, earnings, sales, and management?

{A} We differ in our belief that stock movement is psychological. Take, for example, the stock bubble in March 2000, when the Nasdaq peaked at more than 5,000. When you look back at that, most companies didn’t have fundamentals [such as financial statements], and the market was moving on psychology. What we try to capture in technical analysis is the price movement of stocks, regardless of the fundamentals.

{Q} Do you ever look at fundamentals?

{A} Yes, it’s just not the basis of our decision making. What we try to do from a technical standpoint is capture the price movement in the stock. Some people don’t believe in technical analysis; I tend to think of it as physics.

{Q} What do you mean by that?

{A}Any successful stock, at some point in time, has to break a down trend, or break upward to a new high. Those are the types of things we are trying to capture in the screening process. Every stock that goes up has to meet these [down trend or up trend] criteria, which is why we think of price movements in terms of physics. We’re drawing a down trend and hitting the price highs. 

{Q} What are the most important technical measures that you look at?

{A} Obviously, we look at the trend in terms of the absolute price pattern. We look for the ‘smile’ shapes on the charts. The longer the trend, the more significant a move is either way, up or down. So if you have a long-term up trend and it gets broken, then usually the slide down is painful. The opposite is true when you break a long-term down trend. We also look at [trading] volume [in the stock]. We like volume to confirm the change [in direction]. We want more volume on a breakout to the upside or downside in terms of staying away from something or shorting.

{Q} Do you look at moving averages?

{A} We do look at moving averages [i.e., the average price of a stock over a specific period of time, with new data contributing to the mean as it becomes available]. We use it more as a quantitative aspect of how many stocks are above a 40-week moving average or 50-day moving average just to know the strength of the internal aspect of the market. We like to see stocks that we take a position in [trading above their 200-day moving average, which means there’s upward momentum in the price].