The Revenge of the Chart Watchers
Comment of the Day

December 19 2018

Commentary by Eoin Treacy

The Revenge of the Chart Watchers

This article by Richard Teitelbaum for Institutional Investor may be of interest to subscribers. Here is a section:

What prompts investors to chuck Graham and Dodd for a bucket of sheep entrails? More than a couple of factors, including the proliferation of easy-to-use charting functions on Thomson Reuters and Bloomberg terminals, Yahoo Finance, and Google charts.

Most obvious is the burgeoning success of passive investing. In 2007 index funds accounted for 15 percent of ETF and mutual fund assets, according to the Investment Company Institute. In 2017 that number was 35 percent.  

As recently as last year, fewer than one in ten active large-capitalization U.S. stock managers had beaten the S&P 500 during the previous 15 years. 

Accordingly, active money managers today are on a somewhat desperate quest for new ideas, trading strategies, or tactics — anything to narrow the gap between their own performance and that of the big indexers. It is, after all, a struggle for their own survival. 

“Wall Street is neither fundamental nor technical,” say MIT’s Lo. “They are opportunistic.”

Indeed, the problems bedeviling fundamental research feed into the rising popularity of technical analysis. “One reason people gravitate toward technical is they get frustrated with fundamentals,” says Stovall. “Price is never readjusted. Earnings are often readjusted. GDPs are often readjusted.”

Eoin Treacy's view

Part of being a chartist is being contrarian. The reason price action appeals to many of us is precisely because it is not well understood by the masses. Therefore, when I read articles like this, extolling the benefits of technical analysis and trend following, I can’t help but feel cautious rather than vindicated.

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