July 30th, 2007
It’s been quite a while since I’ve haven’t read so much rubbish as the lead story of this mornings Wall Street Journal front-page entitled “Analysts Debate if Bull Market Has Peaked”. No I don’t know where the market is heading any more than the next blogger, columnist or talking head on CNBC, but what I do object to is the article’s bias tilting towards the view that a significant correction is in the works and its negative characterizations of the art and skill involved in stock charting. If you haven’t seen it, here are some choice lines:
“Whether technical analysis is really useful at making sense of such data is a matter of some dispute on Wall Street. Some investors believe it is impossible to forecast the market’s ups and downs. Academic studies have shown that when most people, professionals and amateurs alike, try to move money in and out of stocks to beat market fluctuations, they tend to wind up with losses.”
“Phil Roth, chief technical market analyst at New York brokerage firm Miller Tabak + Co. spends an hour or two each day updating 100 different charts by hand. He has been plotting his charts, filled with market indicators, on gray and green sheets of graph paper since he entered the business in 1966. He extends each chart’s length by carefully gluing on more graph paper; these days, they unfold like accordions.”
“[Senior Research Analyst at Leuthold Weeden] Andy Engel, tracks more than 180 eclectic data points in heavy ring binders that look like Mr. Roth’s. They watch not only the kinds of market indicators Mr. Roth follows, but, unlike most technical analysts, also broad fundamental and economic measures such as inflation, money supply and corporate profits. They have long been concerned about weakening growth and the risk of higher inflation and interest rates.”
The only correct statement in the article is that at like these, many turn to technical analysts for their insights and opinions. When markets are going up, people tend to look to fundamental explanations like higher earnings, lower interest rates, lower tax rates, exchange rate fluctuations, etc., etc. But when markets are tending lower, they turn to historical precedents (crash of 1929, 1987, 2000) to compare and contrast. They start “reading tea-leaves”, looking at summaries of past markets as represented in charts. If they take comfort in technical analysis to try to determine if markets are topping, why can’t they also rely on them as markets bottom and continue trending higher.
The disdain that technical analysts receive among investors and Wall Street is an even bigger mystery than trying to discern the future direction of the market (which I believe is higher in the long- and mid-term after a brief and not too painful correction in the near term).