Strategy Comparison: Technical Analysis Vs Buy-And-Hold

Reports out earlier last week highlight how severe that this recession is going to be. The US GDP declined at a 6.2% annual pace in October through December of last year. The decline was the most since 1982. The following comments were posted in the news release on Bloomberg, shortly after the news broke.

• “U.S. GDP was previously estimated to have declined by 3.8 percent last quarter. The 2.4 percentage-point revision was almost five times as large as the average adjustment, the Commerce Department said. The median forecast of 74 economists surveyed by Bloomberg News was for a 5.4 percent decline.”
• The world’s largest economy shrank at a 0.5 percent annual rate from July through September. The back-to-back contraction is the first since 1991.
• Consumer spending dropped at a 4.3 percent annual rate last quarter, the most since 1980, after falling at a 3.8 percent pace the previous three months. That marks the first time purchases have dropped by more than 3 percent in consecutive quarters since record-keeping began in 1947.

• Business purchases of new equipment plunged at a 29 percent pace, the most since 1958.

What’s really disconcerting about the negative data that continues to come out, is that there is not any let up in the pace of the declines. The data continues to get worse, which implies that we have not yet bottomed.

Consequently, the stock market took a cue from the bad data and made new lows (see below. Click on image to enlarge). The chart below is the weekly chart of the Dow Jones Industrial Average (^DJI).

The chart above is a clear example of why technical analysis is far superior to modern portfolio theory, fundamental analysis, managed money and all buy and hold strategies. If you were a technical analyst, then you had at least 50 weeks or decision points to get out and stop the bleeding. Fundamentally, the news has gotten worse and worse each week. Why would you stay in the markets?

Wall St rhetoric will suggest that Technical Analysis is “hocus-pocus” and that the best strategy is buy and hold. How did that work out last year?

The losses suffered by investors from 2007 to today may take 20 years to recoup; some may never be recouped. The profits the fund companies and money managers “stole” from 401k investors are gone. They were divided up and shared with the wirehouses. They’ve gone to pay for the lavish pensions, salaries and perks of those that ran the companies. Most of them are gone. Sandy Weill, Stan O’Neal, Jimmy Cayne, Dick Fuld, Mozillo. They took your money and ran…reminded me of a great Steve Miller song - enjoy the satire.

If you have money in the market now, then you have about 1/2 as much as you had a year ago. 401k investors and the investment industry has failed miserably at the task of educating investors about the true risks of owning stocks. Markets go up and markets go down. They pulse minute by minute, driven by supply and demand - fear and greed. If you’re still a buy and hold investor, then you need to re-think the basic premise of your strategy. Wall St will tell you not to sell at the bottom.

Get out now, wait for fundamentals to bottom and turn, then think about getting back in. If you’re out of the market - at the very least - you can make a clear un-biased assessment of the markets. That is hard to do when you’re still fully invested or have money in the markets.

The equity culture became so embedded in an entire generation of “newbie” stock /401k investors that they believed that markets would only go up and would never go down. The markets have basically gone straight up since the early 80’s with the exception of 1987 and 2000 tech bubble. Every time the markets have dropped, the Federal Reserve has pumped them back up. It’s not manufacturing and true economic growth that has supported the markets. Instead it’s artificial stimulus and debt. The game is now coming to an end.

Wall St conditioned everyone to “buy the dips”. Bear markets call for investors to “sell the rallies”. Isn’t it about time you gave that some serious thought?

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