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A Question of Timing: Technical Vs. Fundamental Analysis

Learn when technical analysis usually soars in popularity

by Bob Stokes
Updated: March 19, 2019

Broadly speaking, technical analysis focuses on the internals of the market -- such as volume, new highs vs. new lows, momentum, trendlines, chart patterns, etc.

On the other hand, fundamental analysis is about factors outside of the market. These include corporate earnings, interest rates, government policy, world events and so on.

So, which camp has the best approach to determine the next move for stocks?

Well, interestingly, three finance professors offer an answer. The results of their study published three-and-a-half years ago, yet remain relevant (Marketwatch, September 2015):

The focus of their study were a thousand pairs of recommendations made between November 2011 and December 2014 on the TV show "Talking Numbers" ... The first half of each pair was a recommendation from a top technician about a stock in the news; the second half was a recommendation about that same stock from a leading fundamental analyst.

This chart shows the results:

DoTechniciansTalkBetterNumbers

In the nine months following each recommendation, the stocks technical analysts identified as strong buys on average outperformed the broad stock market by 7.9%. The stocks they mentioned as strong sells underperformed by 8.9%.

By contrast, the strong buy recommendations from fundamental analysts underperformed the overall market during the same timeframe. Moreover, the fundamental analysts' strong sell recommendations performed closely to their strong buys.

Technical analysts were the clear winners.

Even so, technical analysis is largely ignored in the financial press these days.

The just-published March Elliott Wave Theorist explains why:

The reason for the present dearth of interest in technical analysis--that is, analyzing market conditions as opposed to events and conditions outside the market--is historic financial optimism. When investors feel optimistic, they believe in external, mechanical causes of stock market movements. When they are pessimistic, they search for internal, organic causes.

For evidence, you don't have to think any further back than the 2007-2009 financial crisis, when headlines like "How Did Economists Get It So Wrong?" appeared in spades (NY Times, Sept. 2009).

Elliott wave analysis is a form of technical analysis. Our Elliott wave experts are now telling subscribers when they expect a shift from historic financial optimism to the start of a historic pessimism -- again.

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