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Technical Analysis Fails as Money-Making Strategy for Stocks, Birinyi Says
Analysts who use patterns in price and volume charts to forecast gains or losses in the stock market fail to make investors money, according to a study of technical analysis by Birinyi Associates Inc.
The advance-decline line, which represents the number of daily gains minus declines, is an example of technical analysis that fails to forecast market moves, according to a report yesterday by the Westport, Connecticut-based firm.
“Most indicators are descriptive, not indicative,” a group of researchers led by Laszlo Birinyi, the firm’s founder, wrote in the report e-mailed to clients yesterday. “They tell us what is going on, but seldom predict future moves.” They added that “‘experts’ tell us historical trends, antecedents and other characteristics which too often are the convention, the theoretical, the last instance or the logical.”
The cumulative difference between advancing and declining stocks hasn’t shown consistent trends, reaching a peak at the end of some multiyear bull markets and in others during the middle or earlier, Birinyi data from 1966 to 2002 show. That means investors aren’t able to determine how much longer rallies will continue based on the net number of rising shares among New York Stock Exchange-listed companies.
Missing the Rally
The measure peaked in November 1998 during the bull market that began two months before. It was 17 months before the Standard & Poor’s 500 Index topped out and the bull market ended, according to Bloomberg data. Investors who bet that a peak in the advance-decline line meant the bull market would end missed out on a 34 percent rally.
Despite inconsistencies in predictive value, technical analysis should instead be a tool that’s part of a broader strategy for managing holdings, said Birinyi, a research and money-management firm that oversees about $300 million.
“Technical approaches can and should be a useful adjunct to every investor’s -- amateur and professional -- arsenal, if and only if used properly and with understanding,” Birinyi wrote. “Technicals detail and hopefully illuminate, but do not predict.”
To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.
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