Why Technical Analysis Doesn’t Work

Santa Claus came early last year as the long-expected Christmas rally started in the wake of the chaotic midterm elections.

We have rocketed back from negative numbers to a feeble 5.7% return for the Dow Average for 2018. By comparison, the Mad Hedge Fund Trader is up a nosebleed 32.82% during the same period.

If you had taken Cunard’s around-the-world cruise three months ago as I recommended, you would be landing in New York about now, wondering what the big deal was. Indexes are nearly unchanged since you departed with the Dow only 3.00% short of an all-time high.

This truly has been the Teflon market. Nothing will stick to it.

In September when the economic data was great, we braced ourselves for a blowout GDP growth rate of 3.5% or better. The market crashed.

In October, global economic growth turned sickly, shares crashed.

Go figure.

It makes you want to throw up your hands in despair and throw your empty beer can at the TV set. All this work and I’m delivered the perfectly wrong conclusions?

Let me point out a few harsh lessons learned from this most recent meltdown and the rip-your-face-off rally that followed.

Remember all those market gurus claiming stocks would rise every day for the rest of the year? They were wrong.

This is why almost every Trade Alert I shot out for the past seven months has been from the long side but only after cataclysmic market selloffs.

We have just moved from a “Sell in May” to a “Buy in November” posture.

The next six months are ones of historical seasonal market strength. Click here for the misty origins of this trend at “If You Sell in May, What to Do in April?”

Most importantly, last year’s “Sell in May” got you out of the best performing sectors of the year at their highs.

Those include big tech including Facebook (FB), Apple (AAPL), Amazon (AMZN), Google (GOOG), and Microsoft (MSFT), all stocks that I was banging the table about during the first half of 2018.

The other lesson learned last summer was the utter uselessness of technical analyses. Usually, these guys are right only 50% of the time. In 2018, they missed the boat entirely.

When the S&P 500 (SPY) was meandering in a narrow nine-point range, and the Volatility Index (VIX) hugged the $11-$15 neighborhood, they said it would continue for the rest of the year.

It didn’t.

When the market finally broke down in October, cutting through imaginary support levels like a hot knife through butter ($26,000? $25,000? $24,500?), they said the market would plunge to $24,000, and possibly as low as $22,000.

It didn’t do that either.

When the end of October rally started, pitiful technical analysts told you to sell into it.

If you did, you lost your shirt. The market just kept going, and going, and going.

This is why technical analysis is utterly useless as an investment strategy. How many hedge funds use a pure technical strategy? Absolutely none, as it doesn’t make any money.

At best, it is just one of 100 tools you need to trade the market effectively. The shorter the time frame, the more accurate it becomes.

On an intraday basis, technical analysis is actually quite useful. But I doubt few of you engage in this hopeless persuasion. 

This is why I advise portfolio managers and financial advisors to use technical analysis as a means of timing order executions, and nothing more.

Most professionals agree with me.

Technical analysis derives from humans’ preference for looking at pictures instead of engaging in abstract mental processes. A picture is worth 1,000 words, and probably a lot more.

This is why technical analysis appeals to so many young people entering the market for the first time. Buy a book for $5 on Amazon and you can become a Master of the Universe.

Who can resist that?

The problem is that high-frequency traders also bought that same book from Amazon a long time ago and have designed algorithms to frustrate every move of the technical analyst.

Sorry to be the buzzkill but that is my take on Technical analysis.

Hope you enjoyed your cruise.