Stock Charts Fail Forecast Test in Complete S&P Miss (Update1) 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................
continued......... Cut Losses Each of the eight strategies would have cut losses for investors benchmarked to the S&P 500. The directional movement indicator and the moving average convergence/divergence indicator flashed signals that made money even during the worst financial crisis since the Great Depression. Directional movement is a theory developed by J. Welles Wilder in 1978 that measures how far a security moves from an average price range calculated from second to second. The system is designed to gauge who is more eager to trade a security, buyers or sellers. The so-called DMI generated a gain of 24 percent. The moving average convergence/divergence indicator, which bases trades on the difference between 12- and 26-day moving averages, provided profits of $25,896 from a $100,000 investment. In both strategies, the signals that directed traders to sell and then short the S&P 500 made more money than their buy signals lost. Short sellers typically borrow shares from a brokerage and then sell them on a bet they will be able to repurchase the stock at a lower price. Value Investors Returns also exceeded those of many who follow the principles of value investing, the practice popularized by Warren Buffett, the billionaire chairman of Omaha, Nebraska- based Berkshire Hathaway Inc. He searches for the cheapest companies relative to earnings or assets. Buffett told shareholders at Berkshireâs annual meeting on May 2 that âmanyâ U.S. stocks have fallen to levels where they are cheap relative to their intrinsic value. He said the housing market is the biggest drag on the economy and remains âvery hardâ to forecast. Bill Miller, whose Legg Mason Value Trust beat the S&P 500 for a record 15 straight years through 2005, produced a loss of 72 percent, including dividends, during the bear market. David Dreman was fired this year by Deutsche Bank AGâs asset management unit after his flagship $2.62 billion DWS Dreman High Return Equity Fund lost 65 percent. Both managers piled into stocks such as Freddie Mac and American International Group Inc., misjudging the severity of the financial meltdown. âA Little Misleadingâ âItâs a little misleading to be looking at any indicator in a vacuum,â said MKMâs Stockton. âItâs a matter of knowing which ones to combine and knowing what environment youâre in.â None of the technical indicators produced a bigger return than S&P 500âs 30 percent rally from its 12-year low on March 9. Five sent signals that have resulted in losses of between 1.9 percent and 8.3 percent during the eight-week climb, which added $2.29 trillion to the value of U.S. equities, data compiled by Bloomberg show. The Williams %R indicator, which calculates the difference between a securityâs closing price and its highest price and then compares the result with its average over 14 days, handed traders who heeded its buy and sell signals an $8,286 loss on $100,000 invested at the trough. Only one technical indicator, moving average convergence/divergence, made money for investors during both the bear market and the subsequent rebound. âSome of the indicators might work at given times, but thatâs not where I put my odds,â said PNCâs Stone, a certified market technician who learned to read charts on the trading floor of Salomon Brothers Inc. in the early 1990s. âYou zigged when you should have zagged.â Ranked Performance of Eight Technical Indicators Indicator 10/09/2007 - 3/09/2009 Relative Strength Index -49.0% Williams %R -41.7% Commodity Channel Index -38.7% Parabolic Systems -36.6% Bollinger Bands -31.5% Stochastics -24.1% Directional Movement Indicator +24.0% Moving Average Convergence/Divergence +25.9% S&P 500 -56.8% -------- Indicator 3/09/2009 - 5/01/2009 Commodity Channel Index -8.3% Williams %R -8.3% Bollinger Bands -6.6% Stochastics -3.3% Directional Movement Indicator -1.9% Moving Average Convergence/Divergence +7.8% Parabolic Systems +8.2% Relative Strength Index +21.8% S&P 500 +29.7% -------- Indicator 10/09/2007 - 5/01/2009 Williams %R -43.1% Commodity Channel Index -40.3% Parabolic Systems -34.3% Relative Strength Index -34.1% Bollinger Bands -22.2% Stochastics -21.8% Directional Movement Indicator +9.0% Moving Average Convergence/Divergence +24.6% S&P 500 -43.9% To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net. Last Updated: May 4, 2009 00:32 EDT http://www.bloomberg.com/apps/news?pid=20601087&sid=alwgQy9.K4LI&refer=worldwide#
This is not a comment on technical analysis in particular, but I note that in the overall period 07 until May 09, EVERYONE of the technical indicators individually outperformed the S&P 500!
In any case, John Bollinger manages money and his results would speak for themselves (I don't have any idea what they are). http://www.bollingerbands.com/services/bcm/?type=money&mm=programs