Back in what my 23-year old son might call the “olden days” of the investment business, using technical analysis to help guide your exposure to the markets and/or assist with the buy and sell decisions in your portfolio was fairly advanced stuff.
You see, back in the early-1980’s, you had to actually do some work in order to determine where the support and resistance zones were and/or if the current trend was still intact.
At that time, the concept of program-trading wasn’t even born yet because computers that didn’t require a separate room with raised floors, miles of wires, and a strict temperature control were just coming on the scene. As such, if you wanted to look at support and resistance zones, you didn’t click-and-drag/draw, no; you had to get out the ruler and a very sharp pencil. And the calculation of a moving average required the use of a calculator, a legal pad, and a skilled hand to accurately punch in the numbers.
However, things are much different today – obviously (not the least of which is the fact that I’m now 52 instead of 22!). These days, everyone can check in on and test moving averages (simple, weighted, exponential, and/or volume weighted – your choice), trendlines, support zones, Gann lines, Bollinger Bands, channels, envelopes, Average True Range, MACD, Advanced GET, On-balance Volume, stochastics, money flow, RSI, and so on – all with the click of a mouse.
In addition, today’s market is driven by “the quants” and those big, fancy computer programs. Despite that fact that history is littered with “hiccups” such as the Crash of ’87 and more recently, the minor problems caused by a little thing called CDS (and all the derivatives thereof), traders continue to turn to sophisticated tools in the hope that the latest super-duper, secret algorithm can help them mine Wall Street’s gold.
Is there a point to this meandering walk down memory lane, you ask? In a word, yes. We believe it is vital for investors to understand that the game being played at the corner of Broad and Wall, as well as at computers, tablets, and smart phones around the world, is relatively new and that not all the players fully understand the tools at their disposal.
This concept not only applies to those individuals trying to manage their portfolios and 401(k)’s on their own, but also to financial professionals taking responsibility for OPM (other people’s money).
I recently read an article written by NAAIM (National Association of Active Investment Managers) President, Ian Naismith that I found fascinating – and prompted me to pen (oops, these days we use keyboards) this missive.
At the recent Inside ETF conference in Hollywood, Florida Naismith gave a talk about, not surprisingly, active investment management. He began by asking for a show of hands from the audience of 400+ financial advisors of those that use technical analysis and/or active management in their practices. Naismith said that “at least 75% raised their hands.”
When the head of NAAIM asked for a show of hands of those who had used technical analysis for at least three years (which would take us back to BEFORE the Credit Crisis bear market began), Naismith wrote, “about half of those hands lowered.”
As you might suspect, Naismith continued to ask for a show of hands of those using charts and/or active management, ratcheting up the length of time the advisors had employed their systems/technique with each round. Naismith said that by the time he got to 10-year mark, only a handful of hands were left!
Naismith’s conclusion was simple. Of the more than 400 financial professionals (those claiming responsibility for managing the public’s money) in this one room in Florida, the number of pro’s using technical analysis in their practice has grown from less than 2% 10 years ago to over 75% today. Wow!
Mr. Naismith’s point was that the NAAIM organisation which he currently heads (and I am a paying member of) is in a sweet spot at the present time as one of the keys to NAAIM is they assist their members with the development and implementation of their craft. And with 75% of the people in the room having suddenly jumped on the active management bandwagon, NAAIM ought to indeed prosper going forward.
However, another key point that Naismith offered in the recent NAAIM newsletter was, “I’m assuming that most of the 400+ advisors in that room really do not have a healthy depth or breadth of knowledge in technical analysis.”
While this is really great news for the NAAIM organisation, my key point this morning is it may not be so good for the public!
Keep in mind that this is the same crowd that was fully, completely, and 100% sold (I’m guessing I’ll hear from the Department of Redundancy Department on that one) on the concept of buy-and-hold, and that “investing for the long term” was the ONLY way to go if you had half a brain. This is the same crowd that has written endlessly about the evils of “market timing” (now termed “active investment management”) and that no one in their right mind should even attempt such a foolish endeavour.
My guess is that it was the second bear market slamming clients’ accounts within a 10 year period that may have gotten the attention of the buy-and-hope crowd. My guess is that losses in client accounts of more than 40% may have caused them to stop drinking the Kool-Aid being provided free of charge from the mutual fund industry. My guess is that the ability to run a test of a 50-day moving average on just about any market-software program probably shined a light on the alternative to just blindly putting their clients’ money into funds and leaving it there forever. And my guess is that these very same financial professionals that went on and on about buy-and-hold during the secular bull market are now embracing “absolute return” and “active management” – this despite the fact that very few of them actually have any experience with the task at hand.
I’m going to further opine that given the lack of experience the financial advisor industry (an industry that not only wants to sell you insurance, do your taxes, plan your estate, assist you with your budget, broker your home loan, AND manage your money) has with actively managing money, this just might be a problem for a lot of investors in the future.
Sure, the average advisor has likely run a mountain of backtests on stock market management and timing signals. But unless you’ve been in this game a long time, you probably don’t know about the concept of curve fitting and the fact that the markets change over time – which can render your nearly perfect system useless when such a change occurs.
Don’t forget that we’ve now got at least one ETF that is based on a “market timing” strategy (RBS’s Trendpilot ETN). And while this sounds like a good idea, the “system” this particular ETF is employing, which involves buying or selling the S&P 500 after the S&P 500 Total Return Index has crossed it 200-day moving average (and has stayed there for five days) doesn’t work very well when you take it back more than 10 years. The problem is that the marketing materials only show the period when this particular approach worked well.
As we wrote in A Trend-Following ETF? Not So Much, RBS is guilty of cherry picking the timeframe for showing off their system. And to the inexperienced investor or financial advisor, this probably seems like a pretty good thing to have in your portfolio.
But when the system was tested over a long period of time (back to January 1954) – a period that included both secular bulls and bears – the RBS system actually underperformed the market when fee’s were included! However, if you didn’t understand that ALL systems have flaws and that markets can change, you might think you’ve found the Holy Grail.
I’d like to offer one final thought this morning: Managing the market is a tough game and don’t let anyone tell you otherwise (recall that the average Hedge Fund lost more than 20% in 2008). If it were easy, we wouldn’t ever see market crashes and everyone would be rich. So, while the financial advisor community may now be jumping on the bandwagon of actively managing money and using technical analysis, you might want to see how long your advisor has actually been employing this approach before writing that check.