Wednesday, February 6, 2013

"Head and Shoulders above the Rest? The Performance of Institutional Portfolio Managers who Use Technical Analysis"

We are fans of TA. Use of it (or hallucinogens) can help you see things not apparent to the uninitiated,














 "The very rare black swan formation - note both feet and neck 
are complete and the rare vampire tooth variation is in place. 
This is very bad. Very very bad."...
 From Phil Pearlman:
Last week, I wrote a post titled On the Absence of Formal Technical Analysis Education which attracted some attention from the financial blogosphere.  I strongly criticized universities for not broadly and more formally including technical analysis as a part of their curricula and I was surprised and very pleased by the attention because, as I wrote then,
Its absurd that universities still do not formally teach the study of price behavior (technical analysis) and it seems academic finance is way out of touch with real market participants and real risk management.
Thanks Meb Faber who brought this recent working paper to my attention, which supports this view.
Smith, Faugere & Wang’s study titled Head and Shoulders Above the Rest? The Performance of Institutional Portfolio Managers Who Use Technical Analysis takes a methodological approach that potentially allows for greater external validity.

Instead of identifying specific trading rules and then backtesting their predictive capacity using historical price data, the researchers survey institutional portfolio managers for whether they incorporate technical analysis into their investment process and then compare those who do with those who do not.
The study is important to my argument for a few reasons:
1. Effects – The researchers conclude that;
the net effect of technical analysis on the management of institutional equity-related portfolios has been beneficial, although in an unexpected way.
2. The Methodology – There is most often a tension between how well a particular research design reaches a causal conclusion in the lab and how well that conclusion can be generalized into the real world. Traditionally, research focusing on the efficacy of technical analysis has been high on reaching causal conclusions in the lab while sacrificing its ability to generalize those findings into the real world and the much more complex manner in which investors actually incorporate technical analysis....MORE, including the paper.