Why Technical Analysis is a Disaster

At my Mad Hedge Lake Tahoe Conference, I heard an amazing piece of information from a guest speaker.

Fidelity recently conducted a study to identify their best-performing clients.

They neatly fell into two groups: people who forgot they had an account at Fidelity, and dead people.

It all underlines the futility of trading the markets without true professional guidance, something many aspire to but few actually accomplish.

Of the many hundreds of online newsletters and trade mentoring services, I only know of three which actually make money for clients.

Those would be mine and two others, and I’m not talking about who the other two are.

It is an industry filled with professional marketers, charlatans, and conmen.

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

We are now transitioning 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.)

The big lesson learned this summer was the utter uselessness of technical analyses. Usually, these guys are right only 50% of the time. This year, they missed the boat entirely.

When the S&P 500 (SPY) was meandering in a narrow range, and the Volatility Index (VIX) hugged the $12 neighborhood, they said this would continue for the rest of the year.

It didn’t.

The biggest losers?

Algorithms, which used the decisive break of the (SPY) $245 level in August to go heavily short.

If you did, you lost your shirt. The market just shed a couple more points, reversed, and then 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 and a stand-alone basis?

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. 

Leave it for the kids.

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 buzz kill, but that is my take on technical analysis.

I have a much better solution than forgetting you have a trading account, or dying.

Take Cunard’s round-the-world cruise (click here).

I have been sailing with Cunard since the 1970s when the original Queen Elizabeth was still afloat.

I’ve lost count of how many Transatlantic voyages I have taken across the pond.

For a mere $19,999 you can spend 122 days circumnavigating the globe with Cunard from Southampton, England in their cheapest inside cabin.

That includes all the food you can eat for four months.

On the way, you can visit such exotic destinations as Bora Bora, The Seychelles, Reunion, and Moorea.

Not a bad deal.

By the time you get home, you will probably earn enough in your investment account to pay for the entire trip.

Hope you enjoyed your cruise.




John in Owner's Suite

Correction? What Correction?