According to a recent academic study, market technicians may have an edge in the financial markets, whereas fundamental analysts could not beat the market. In addition, technicians were able to predict more often the direction of share prices than fundamental analysts. And it’s not just a tiny difference: technical analysis caused an outperformance of 8% compared to the broader market during a nine months’ time-span, during which the fundamental stock picks underperformed.
Market technicians, which apply technical analysis, focus on price action, chart patterns and indicators. Often they look at the occurrence of a trend in the price development of shares. What the company does to earn its money and how its positioned compared to competitors, are not subjects in which technicians are interested. Fundamental analysts however dig deep into the underlying financials and products of companies. Cash flow, net income, revenues, competitive advantages etc. are very important to this group of analysts. Stunningly, the latter doesn’t offer any real benefits in the investment process according to the study. The study, performed by Avramov and Levy of Hebrew University of Jerusalem and Kaplanksi from the Bar-Ilan University, compared recommendations of both methods on the same assets.
The researchers looked at recommendations on a TV-show, ‘Talking numbers’ by CNBC and Yahoo. Remarkably, the outperformance of technicians was only visible in individual shares. When considering indices, such as S&P 500, sectors or commodities, both groups of analysts were not able to beat the market. The researchers concluded that apart from individual shares, returns on broader assets are unpredictable. This places the so called ‘expert views’ in a somewhat difficult position. We could conclude that it’s a complete waste of time to listen to a large number of features during this show. Maybe CNBC&Yahoo should only invite technicians for individual shares, and remove all other items…
Trading and analysis
The study of Avramov et al. was conducted for a view on investing. A large part of market players are however trading and look for short term opportunities and do not hold for a nine months period. Some traders rely on technical analysis, stating that indicators and Fibonacci-levels give a good indication of market structure and thus see an edge in this method. Others view news as short term market drivers and rely heavily on fundamental figures. But as some say, the method is less important, prudent money management and psychological factors may be the key for success. Nevertheless, a comparative study on the trading methods would be very interesting.
Added value of both disciplines
It may be too harsh to decide that both methods of analysis are a waste of time for a large portion of assets. Since we live in a complex world and many players are trying to grab a piece of the pie in the search of returns, achieving outperformance is a difficult job. Fundamental analysis for private investors could add value to understand the business of the companies in portfolio. Technical analysis may show roughly if the current market is trending upwards or that we’re in a bear market. But one should keep in mind that the market is driven by supply & demand which are driven by expectations of market players. The price is the result of this process. As a result, ‘outsmart’ the market is difficult. There is a lot of money at stake and there are a lot of players! Sometimes it may be wiser to just follow the market and for instance invest in an ETF. Although the game of guessing the market direction may be sheer fun!