Some publications Fisher Investments UK reviews use equity charts’ lines, patterns and wiggles to predict markets’ direction, an age-old method known as technical analysis. But Fisher Investments UK thinks investors benefit from understanding the shortcomings of technical analysis, as our research shows charts tell little to nothing about equities’ future movements.
This way of evaluating the market dates back to at least the late 1800s, popularised when journalist Charles Henry Dow created Dow Theory. This suggests that if two indexes (e.g., the Dow Jones Industrial Average [DJIA] and Dow Jones Transportation Average [DJTA]) hit new highs together, the market is in an upward trend – and vice versa with new lows.[i] Technical analysis has expanded massively since, and Fisher Investments UK’s reviews of financial news suggest there are myriad indicators today. One we see commonly is the Golden Cross, when the line depicting an equity or index’s 50-day moving average (which reflects the average price level over the 50 days preceding every point) crosses above its 200-day moving average.[ii] We have seen technical analysts suggest this is a bullish buy signal while its inverse, the Death Cross, is a supposed bearish sell signal.[iii] Another headline-grabbing technical indicator is the Hindenburg Omen, which compares the percentage of new equity market 52-week highs and lows to a preset reference percentage to predict the likelihood of a market crash.[iv] Regardless, the central tenet of technical analysis theory, in our review of the approach, posits that investors who spot a chart pattern can use it to buy, sell or hold since the lines indicate where the equity or index price is headed.
However, technical analysis presumes past performance determines future price moves. In our view, this doesn’t hold up since what equities just did doesn’t predict what they will do next. Consider the aforementioned Dow Theory: if it worked in its most literal sense, registering new highs would keep pushing equities ever higher whilst new lows would send markets lower in perpetuity – ultimately becoming a self-fulfilling prophecy. This would cause markets to be in a perpetual bull or bear market (a prolonged, fundamentally driven broad equity market decline of -20% or worse). However, history shows us this has never been the case, as equities aren’t serially correlated.[v] That is, our research finds past price movements don’t influence future moves – equities are just as likely to fall tomorrow as they are to rise, in our view.
Also, Fisher Investments UK’s reviews of history have found markets are efficient and discount widely known information near-simultaneously. But many technical indicators we have reviewed are well-known and widely discussed, sapping their predictive power. If these indicators worked, we think it stands to reason many investors would use them, which then likely eliminates any investing edge such tools conferred, in our view.
Acting on technical analysis can have costly consequences for investors, in our opinion. A key reason: Fisher Investments UK’s reviews of market history suggest technical indicators send many false signals. For instance, when Germany’s DAX index flashed a death cross on 4 September 2015, commentators we follow warned of a coming downturn.[vi] One month on, the index was down following some volatility.[vii] Yet after a late autumn jump, the DAX finished 2015 up 7.0% after September’s death cross formed.[viii] The index was still positive come September 2016 – it wasn’t a signal of coming doom, in our view.[ix] There are other examples of false signals, including ones across the Atlantic. For instance, when the New York Stock Exchange triggered a Hindenburg Omen back in early August 2010, the indicator’s creator predicted a market downturn.[x] Yet this was another false flag, as global markets were in the early stages of an almost 11-year bull market.[xi]
Herein lies the issue for investors, in Fisher Investments UK’s review: following technical analysis can inspire misplaced confidence – and spur action – based on irrelevant, past developments. Whilst it may work sporadically, it can lead to costly portfolio mistakes that can add up and weigh on long-term returns – a setback for investors from their investing goals and objectives.
Disclaimer: This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[i] “Dow Theory Explained: What It Is and How It Works,” Adam Hayes, Investopedia, 31/5/2024. A bull market is a long period of generally rising equity prices.
[ii] “Golden Cross vs. Death Cross: What's the Difference?” Staff, Investopedia, 25/8/2022.
[iii] Ibid.
[iv] “Hindenburg Omen: Definition, Four Main Criteria, and Example,” Akhilesh Ganti, Investopedia, 22/7/2024.
[v] Source: FactSet, as of 7/8/2024. S&P 500 Total Return Index in USD, 3/1/1928 – 31/12/2023. We use America’s S&P 500 here for its long history. Presented in USD. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.
[vi] “When US Markets Open Tuesday, Investors Face 3 Dreaded ‘Death Cross’ Formations,” Richard Suttmeier, The Street, 7/9/2015.
[vii] Source: FactSet, as of 7/8/2024. Germany DAX Total Return Index in EUR, 4/9/2015 – 4/10/2015. Presented in EUR. Currency fluctuations between the euro and the pound may result in higher or lower investment returns.
[viii] Ibid. Germany DAX Total Return Index in EUR, 4/9/2015 – 31/12/2015. Presented in EUR. Currency fluctuations between the euro and the pound may result in higher or lower investment returns.
[ix] Ibid. Germany DAX Total Return Index in EUR, 4/9/2015 – 4/9/2019. Presented in EUR. Currency fluctuations between the euro and the pound may result in higher or lower investment returns.
[x] “'Hindenburg' Omen Creator Warns of Possible 20% Stock Decline,” Hugh Collins, AOL, 26/8/2010.
[xi] Source: FactSet, as of 7/8/2024. MSCI World Index return with net dividends in EUR, 9/3/2009 – 19/2/2020. Presented in EUR. Currency fluctuations between the euro and the pound may result in higher or lower investment returns.