In Defense of “Chart Strength”

August 30, 2011

We’ve found another delusional-technical analysis hater. Jeff Nielson writes:

However, readers are right to be skeptical about the “chart strength” that gold has demonstrated. As I continually remind people, “technical analysis” is the least significant aspect of market analysis. This will naturally enrage the “T/A jockeys”, who like to pretend that technical analysis is all-powerful — simply because it is fast and easy, and requires no genuine comprehension, other than the ability to spot patterns in pictures.

This complete reliance upon charts rather than fundamentals is more than merely simplistic, it is dangerous. This is due to the fact that all technical analysis is based upon a long list of assumptions — all of which must be true, or all statistical validity of such analysis instantly evaporates. Thus, the appropriate way to demonstrate the “unsinkable” status of gold is through fundamentals-based analysis rather than statistical hocus pocus. It is here that gold shines even brighter.

Clearly, Mr. Nielson has a very limited/incorrect view of technical analysis. I challenge anyone to read this, this, and this and still conclude that relative strength is not effective over time. There may be many technical (and fundamental) investment methodologies that can not be statistically demonstrated to work over time, but there is no need to throw the baby out with the bath water.

1 Comment | Relative Strength Research | Permalink
Posted by Andy Hyer

Forecasting Follies

August 30, 2011

Bill Gross has a tremendous long-term track record in the fixed income markets. Even legends, however, can have feet of clay. A recent Wall Street Journal article discusses how Mr. Gross wrongly forecast that Treasury yields would surge when quantitative easing ended. Instead, the economy slowed and Treasury prices surged.

Forecasting is a mug’s game. Even skilled, experienced forecasters can get things completely wrong. This is why we use a trend following approach driven by relative strength. There are no slam dunks in financial markets—nothing is easy. Your best bet is often just to go with the trend, until it ends.

As a result, several of our global tactical asset allocation portfolios have fixed income exposure, even though philosophically (or mathematically) we are not any more comfortable with bonds here than Mr. Gross. In fact, Mr. Gross may prove to be right down the road—but it’s also possible that we will see a Japan-like scenario where bonds hold their value for a long time. We’re not about to guess (i.e. forecast). When fixed income is highly rated on our relative strength models we’ll own it, and happily sell it if the rank weakens.

As the old saying goes, “The tree that bends to the wind does not break.”

Disclosure: Dorsey, Wright Money Management has positions in TIP, WIP, AGG, IEF, and BSV in various global tactical allocation accounts.

Leave a Comment » | Markets, Tactical Asset Alloc, Thought Process | Permalink
Posted by Mike Moody

What’s Hot…and Not

August 30, 2011

How different investments have done over the past 12 months, 6 months, and month.

1PowerShares DB Gold, 2iShares MSCI Emerging Markets ETF, 3iShares DJ U.S. Real Estate Index, 4iShares S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11iShares Barclays 20+ Year Treasury Bond

Leave a Comment » | Markets | Permalink
Posted by Andy Hyer

Podcast #17 Different is Good

August 30, 2011

Podcast #17 Different is Good

Mike Moody, Harold Parker, and Andy Hyer

“If you want to have better performance than the crowd, you must do things differently from the crowd.” — Sir John Templeton

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Posted by Andy Hyer