However, of the three disciplines, it never fails that I get the most push back and skeptical questions when it comes to my use of technical analysis (TA). In just the last five years, thanks in large part to hedge funds, TA has made huge strides with regards to its acceptance as an alpha generator and reducer of risk. Yet naysayers and cynics remain, in droves. This despite an increasing number of academic studies showing otherwise, that TA is indeed a beneficial additive to one's investment process.
I used to engage in such debates, going back and forth with professional friends and colleagues about the merit of TA, but I've learned to temper that impulse. That's not to say I don't freely give my reasons for employing TA in my process, but rather I only spend so much time on the discussion before moving on. In this business, some are open to listening and learning new ideas that could possibly help in their efforts to beat benchmarks and put up numbers, whereas others are much more set in their ways and view the investing world more narrowly, as they choose to see it. And that's completely fine with me! Different strokes for different folks, that's what makes markets, and all those other cliches and sayings....
On several occasions, I've written here about how price tends to lead the news. Unlike TA in general, I believe this tendency is more commonly accepted by investment folks, with any debate likely coming down to the length of lead time. Do prices discount the news by 6-9 months -- a frequently cited period -- or is it just days, hours, or minutes? I'm not about to settle that issue, but I will show some examples.
One of my favorites is the Egyptian ETF (EGPT) in 2011.
Another example is well-documented in academic circles and it involves price action around earnings surprises.
Source: Aswath Damodaran
A more obvious conclusion to be drawn from the chart is much less alpha is to be gained after the earnings announcement than before. Referring to just the most positive decile, an almost 8% excess return is produced prior to the earnings announcement with about 2% of excess return resulting after the fact. Granted, 2% alpha in about 50-60 days is nothing to dismiss, no argument there, but my larger point is by far the bulk of excess returns are attained pre-announcement of the news.
Yes, wouldn't it be nice if we could see the future and thus capture these massive pre-announcement excess return spreads. Sure, but as I've been discussing, apart from owning a crystal ball, price may be the next best thing when it comes to offering some hints about what lies ahead.