Technical Analysis - Hang Gliding / Burton Malkiel's Opinion

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When I finished the blogs on fundamental analysis, I posted a blog with Professor Burton Malkiel's comments on this investment strategy from his excellent book, A Random Walk Down Wall Street.  We are about to start exploring the technical form of analysis, which  I referred to as "hang gliding" in an earlier blog.  To mix things up, this time I will start with his comments and then move on to books by proponents of this form of investing.

Although he describes it accurately, he does not have much respect for the technical form of investing.  This is how he described it: 

Technical analysis is essentially the making and interpreting of stock charts.  Thus its practitioners, a small but abnormally devoted cult, are called chartists.  They study the past - both the movements of common stock prices and the volume of trading - for a clue to the direction of future change.....Charts, of course, tell only what the other players have been doing in the past.  The chartist's hope, however, is that a careful study of what the other players are doing will shed light on what the crowd is likely to do in the future.

Malkiel referenced results of some research into technical investment rules.  He reported the following:

One set of tests, perhaps the simplest of all, compares the price change for a stock in a given period with the price change in a subsequent period.  For example, technical lore has it that if the price of a stock rose yesterday, it is more likely to rise today.  It turns out that the correlation of past price movements with present and future price movements is slightly positive but very close to zero.  Last week's price change bears little relationship to the price change this week, and so forth.  Whatever slight dependencies have been found between stock price movements in different time periods are extremely small and economically insignificant.  Although there is some short-term momentum in the stock market, as will be described more fully in Chapter Ten, any investor who pays transaction costs cannot benefit from it.

As I said, Professor Malkiel does not hold technical analysis in high regard.  Nevertheless, we will learn about technical investing in subsequent blogs and will return to A Random Walk Down Wall Street for more of Professor Malkiel's discussion of this strategy.

 The material from A Random Walk Down Wall Street by Burton G. Malkiel, copyright 1999, 1996, 1990, 1985, 1981, 1975, 1973 by W.W. Norton & Company, Inc is used with permission of W.W. Norton & Company, Inc.

Comments are always welcome.