Stock Charts Fail Forecast Test in Complete S&P Miss (Update1)
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By Michael Tsang and Eric Martin
May 4 (Bloomberg) -- John Bollinger, inventor of the âBollinger bandsâ system of predicting stock movements with price charts, says technical analysis works.
âI donât know what people are saying when they say somehow indicators have broken down,â Bollinger, president of Bollinger Capital Management, said in a telephone interview from Manhattan Beach, California. âItâs like somehow saying streetlights donât work anymore. As long as people obey them, streetlights work.â
Ever since the Standard & Poorâs 500 Index peaked in October 2007, six of eight strategies -- which are supposed to make money whether stocks rise or fall -- failed, according to data compiled by Bloomberg. As the bear market erased $11 trillion from the value of U.S. equities, buy and sell signals from those six technical indicators produced losses of as much as 49 percent, the data show.
âTechnical analysis on its own as a discipline does not work,â said Diane Garnick, the New York-based investment strategist at Invesco Ltd., which oversees $348 billion. Using it in isolation is âthe fastest way to lose money,â she said.
Of the eight strategies, stochastics, Bollinger bands, relative strength, commodity channels, parabolic systems and the Williams %R indicator generated buy and sell signals that resulted in losses between the S&P 500âs peak of 1,565.15 on Oct. 9, 2007, and its March 9 trough, the data show. They did worse as the index then rallied 30 percent.
No Help
The models failed to protect investors last year, when the S&P 500 had its biggest decline since 1937, as price swings reached a record, according to William Stone, chief investment strategist at PNC Financial Services Group Inc.âs wealth management unit, which oversees $96 billion in Philadelphia.
The S&P 500 gained 1.3 percent last week. Futures on the index added 0.4 percent as of 1:25 p.m. in Tokyo.
Bollinger bands are designed to alert investors when a security rises too high or falls too low by comparing its price to the average level over the past 20 days. If the stock gains or drops enough from the average -- two standard deviations -- a turnaround may be at hand, Bollingerâs system says. Moves of two standard deviations are defined as occurring 5 percent of the time or less in a statistical model.
Financial Stocks
When used to determine when to buy or bet against S&P 500 financial stocks, the technique produced a gain through mid- September of $28,588 on a $100,000 investment, when banks retreated 37 percent, data compiled by Bloomberg show.
Profits evaporated in less than a month and turned into a loss of $64,388 as the strategy failed to trigger any sell signals during the rest of the bear market, when banks and brokerages plummeted 72 percent.
John Bollinger says that methodology is too simple and his bands should be used in conjunction with data on trading volume to create âset-upsâ and âconfirmationsâ for investment decisions. His fund, which aims to profit in any environment, made money sometimes during the bear market. He declined to comment on specific returns.
Stochastics predicts a securityâs movement based on how close its price is to the highest or lowest levels. Stochastics would have left anyone who started with $100,000 at the October 2007 peak with $75,881 by March 9, a 24 percent loss, according to data compiled by Bloomberg.
False Buys
The trades were undone by the buy signals, which on eight occasions suggested that the S&P 500 had fallen too far, too fast, based on data compiled by Bloomberg that exclude trading costs and unexpected price fluctuations at the moment of the trade. Stochastics told traders to buy on Oct. 6 last year, three weeks after Lehman Brothers Holdings Inc.âs bankruptcy. The S&P 500 lost 14 percent in the following month.
Burton Malkiel, whose 1973 investment text âA Random Walk Down Wall Streetâ argued that price movements arenât predictable, says chart-based investing worsens returns.
âPeople who think they are going to make excess profits with technical analysis are kidding themselves,â Malkiel said in a telephone interview from Princeton, New Jersey. âMost of the people who say this is pretty good have some ax to grind.â
Traders shouldnât use charts without other technical data, and choosing the most appropriate ones can both mitigate losses and produce gains, said Katie Townshend Stockton, chief market technician at Greenwich, Connecticut-based MKM Partners LLC.
to be continued................
Share | Email | Print | A A A
By Michael Tsang and Eric Martin
May 4 (Bloomberg) -- John Bollinger, inventor of the âBollinger bandsâ system of predicting stock movements with price charts, says technical analysis works.
âI donât know what people are saying when they say somehow indicators have broken down,â Bollinger, president of Bollinger Capital Management, said in a telephone interview from Manhattan Beach, California. âItâs like somehow saying streetlights donât work anymore. As long as people obey them, streetlights work.â
Ever since the Standard & Poorâs 500 Index peaked in October 2007, six of eight strategies -- which are supposed to make money whether stocks rise or fall -- failed, according to data compiled by Bloomberg. As the bear market erased $11 trillion from the value of U.S. equities, buy and sell signals from those six technical indicators produced losses of as much as 49 percent, the data show.
âTechnical analysis on its own as a discipline does not work,â said Diane Garnick, the New York-based investment strategist at Invesco Ltd., which oversees $348 billion. Using it in isolation is âthe fastest way to lose money,â she said.
Of the eight strategies, stochastics, Bollinger bands, relative strength, commodity channels, parabolic systems and the Williams %R indicator generated buy and sell signals that resulted in losses between the S&P 500âs peak of 1,565.15 on Oct. 9, 2007, and its March 9 trough, the data show. They did worse as the index then rallied 30 percent.
No Help
The models failed to protect investors last year, when the S&P 500 had its biggest decline since 1937, as price swings reached a record, according to William Stone, chief investment strategist at PNC Financial Services Group Inc.âs wealth management unit, which oversees $96 billion in Philadelphia.
The S&P 500 gained 1.3 percent last week. Futures on the index added 0.4 percent as of 1:25 p.m. in Tokyo.
Bollinger bands are designed to alert investors when a security rises too high or falls too low by comparing its price to the average level over the past 20 days. If the stock gains or drops enough from the average -- two standard deviations -- a turnaround may be at hand, Bollingerâs system says. Moves of two standard deviations are defined as occurring 5 percent of the time or less in a statistical model.
Financial Stocks
When used to determine when to buy or bet against S&P 500 financial stocks, the technique produced a gain through mid- September of $28,588 on a $100,000 investment, when banks retreated 37 percent, data compiled by Bloomberg show.
Profits evaporated in less than a month and turned into a loss of $64,388 as the strategy failed to trigger any sell signals during the rest of the bear market, when banks and brokerages plummeted 72 percent.
John Bollinger says that methodology is too simple and his bands should be used in conjunction with data on trading volume to create âset-upsâ and âconfirmationsâ for investment decisions. His fund, which aims to profit in any environment, made money sometimes during the bear market. He declined to comment on specific returns.
Stochastics predicts a securityâs movement based on how close its price is to the highest or lowest levels. Stochastics would have left anyone who started with $100,000 at the October 2007 peak with $75,881 by March 9, a 24 percent loss, according to data compiled by Bloomberg.
False Buys
The trades were undone by the buy signals, which on eight occasions suggested that the S&P 500 had fallen too far, too fast, based on data compiled by Bloomberg that exclude trading costs and unexpected price fluctuations at the moment of the trade. Stochastics told traders to buy on Oct. 6 last year, three weeks after Lehman Brothers Holdings Inc.âs bankruptcy. The S&P 500 lost 14 percent in the following month.
Burton Malkiel, whose 1973 investment text âA Random Walk Down Wall Streetâ argued that price movements arenât predictable, says chart-based investing worsens returns.
âPeople who think they are going to make excess profits with technical analysis are kidding themselves,â Malkiel said in a telephone interview from Princeton, New Jersey. âMost of the people who say this is pretty good have some ax to grind.â
Traders shouldnât use charts without other technical data, and choosing the most appropriate ones can both mitigate losses and produce gains, said Katie Townshend Stockton, chief market technician at Greenwich, Connecticut-based MKM Partners LLC.
to be continued................