Anonymous writes in the comment section: "Those fundies who make fun of TA shouldn't try to use it to predict ST market direction. Dow futes off 100."
I'll go to my grave with fundamentals clinched in one wrinkled cold claw and TA clinched in the other! I believe that they are both critical. Why? I do not believe in efficient market theory. IMV, the market has proven a very poor discounting mechanism--it did not understand and did not discount CDO crap appropriately. So much of efficient market theory (I'm sure that Russell will correct me) is based on rational behavior of market participants. There have been studies that show that human beings do not make rational decisions. That makes sense doesn't it? If they did, there would never be asset bubbles nor would we have market panics.
The interplay between TA and FA though is pretty straightforward. The stock price incontrovertibly reflects what the market currently thinks about the value of a security. The market encapsulates the current understanding of the fundamentals and the hopes or fears facing the stock. The risk/opportunity resides in the delta between the technicals/fundamentals as the market currently understands them and the "true value".
It almost becomes a philosophical discussion--admittedly I'm ill-equipped to state it appropriately. It's the difference between relative reality and objective reality. I was struck by something that I read about a hedge fund manager. Recently (maybe Marketwatch?)...I wished I had written it down to give proper attribution. The HF manager said that he bought when there was uncertainty and sold when the uncertainty went away. That's where he saw opportunity. I suppose this is where "sell the news" originates.
To argue TA v. FA as an "either/or" is not productive. Recognizing the attributes and failings of each--and exploiting the attributes while reasonably protecting against the failings is important. Both are tools in the tool kit--and when fundamentals and technicals line up you are bound to reduce risk in your trade/investment decisions.
I'll go to my grave with fundamentals clinched in one wrinkled cold claw and TA clinched in the other! I believe that they are both critical. Why? I do not believe in efficient market theory. IMV, the market has proven a very poor discounting mechanism--it did not understand and did not discount CDO crap appropriately. So much of efficient market theory (I'm sure that Russell will correct me) is based on rational behavior of market participants. There have been studies that show that human beings do not make rational decisions. That makes sense doesn't it? If they did, there would never be asset bubbles nor would we have market panics.
The interplay between TA and FA though is pretty straightforward. The stock price incontrovertibly reflects what the market currently thinks about the value of a security. The market encapsulates the current understanding of the fundamentals and the hopes or fears facing the stock. The risk/opportunity resides in the delta between the technicals/fundamentals as the market currently understands them and the "true value".
It almost becomes a philosophical discussion--admittedly I'm ill-equipped to state it appropriately. It's the difference between relative reality and objective reality. I was struck by something that I read about a hedge fund manager. Recently (maybe Marketwatch?)...I wished I had written it down to give proper attribution. The HF manager said that he bought when there was uncertainty and sold when the uncertainty went away. That's where he saw opportunity. I suppose this is where "sell the news" originates.
To argue TA v. FA as an "either/or" is not productive. Recognizing the attributes and failings of each--and exploiting the attributes while reasonably protecting against the failings is important. Both are tools in the tool kit--and when fundamentals and technicals line up you are bound to reduce risk in your trade/investment decisions.
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5 comments:
Gold chart says move coming.
Called it.
Yes, I'm mulling over re-entering EGO--that I'm dithering over it will mean that it will move without me! Financials leading the market lower is not a good thing. I think that this ludicrous, "don't fight the Fed" mantra of the bulls is starting to ring hollow.
I'll restate again--these holes are so big, the Fed is just pouring hole in abyss rather than floating any boats.
I do not believe the market is random, nor do I believe it is efficient. But that does not mean that TA (as it is generally described) works either. There have been a few TA-like approaches that seem to have a very small edge, but they usually cannot do well enough to compensate for trading costs. Good sources of TA will generally lose because of the "piling on effect." Everyone piles on until they don't work any more.
Most pricing systems of any sort do not work. Fundamental analysis has been shown to work, but has the Achilles heel of being very volatile in its returns. Its volatility is probably why it works. The large institutions cannot use it because they lose all their clients after 2 bad quarters.
Regarding trading costs--many of the older studies are outdated in their conclusions with respect to results post commission. The commission structure was exponentially higher then than it is now. I can trade 1,000 shares of RIMM for $8 for a buy and $8 for a sell--a total of $16. A trade (buy or sell) of $126K carried a commission far greater.
TA is not a pricing system per se.
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