For treasurers and fund managers everywhere, the fifth edition of Forecasting Financial Markets should be an absolute dream. It bristles with experience and ideas, although you need to be something of a mathematical genius to appreciate the wealth of diagrams, loops, structures and statistics. It also deals with the author’s latest research into cycles and the effect of cyclical patterns and rhythms on economic, financial and market behaviour.

There could have been more of the author’s recollections and brief accounts of relevant events, though. For example, the Battle of Watling Street over the gilt edge rally of l979 when representatives of City institutions literally fought to get into the Bank of England’s issuing office prior to a 10am deadline to cover massive short positions: “For a while the civilised atmosphere of the City of London degenerated into the physical behaviour of a crowd. Many missed the deadline and demand for bonds exceeded the supply and prices soared. The rally extended over eight weeks, day after day, and prices went up almost without pause as if fundamentals didn’t matter.”

What skills are essential for successful wealth creation in financial markets? The author, Tony Plummer, a director of Helmsman Economics and a former director of Hambros Bank, describes them as the ability to understand market behaviour in logical terms, the ability to know the effects on the markets in emotional terms and the ability to decide what to do in objective terms.

Rare breed
All three skills are explored in detail, but we are warned that truly great traders are very rare. The point is, can they help to make regular and large profits? Can this book really help investors to understand better the dynamics of financial markets? Could there be an emotional gateway to penetrate between the generation of a buy or sell signal? And how important is technical analysis?

The case in its favour is the claim that it is possible to forecast the future performance of a particular market by reference to the actual and historical performance of that market. With technical analysis, it should be apparent, the author argues, that the obvious role for successful investment is to keep a close watch on what other investors are saying and doing and then, when the vast majority are saying and doing the same thing, do the reverse.

What makes this book fascinating are the author’s views on the pervasive influence of crowd psychology; once people start to group together, behaviour within the context of the group becomes non-random. As such it is likely to be intrinsically predictable. But does a wonderful, organised and predictable world emerge from the apparent chaos and yield extraordinary insights and conclusions?

Bond markets receive special attention, being highly liquid. Buyers and sellers can be massed in large numbers within a relatively narrow range of prices and information is transmitted quickly. What’s more, they are very responsive to a range of economic, political and social influences. To be successful in trading and investment, the author recommends you need to be able to ensure that the “vicious circle” of anxiety and inappropriate action does not get a hold. A key part of the process is the use of objective entry and exit routes.

Technical analysis should be objective because decisions are based on evidence directly available from the markets. Little or no account is, therefore, taken of the subjective interpretation of economic and social trends.

Indeed, there is strong evidence that the attempt by investors to anticipate the future means that market prices start to turn before actual fundamentals. For example, there is convincing evidence that major lows in US equity markets precede major lows in the US economy by between four and six months. In these c ircumstances there is little point in analysing fundamentals. However, there comes a point in a bull or bear trend when market fundamentals enter a strong feedback relationship with each other.

Technical analysis is a main preoccupation of the author. Can it help when falling equity prices impact on confidence to the extent that consumption and investment start to contract, economic activity slows, unemployment rises, spending power falls and confidence in equity prices declines?

The decision to make an investment or disinvestment may have been arrived at rationally, but once a final exposure exists, so does the potential for stress and fear.

Forecasting Financial Markets, by Tony Plummer, is published by Kogan Page (£29.95).