(Bloomberg) — To give an idea of how difficult 2022 has been for patient investors, consider this: Buying and Holding Stocks as a Strategy Compared to Every Chart-Based Trading Model in Bloomberg’s Technical-Analysis Library in worse.
If you paid attention to the Directional Movement Indicator, bought on fear and sold on greed, or took signals from an exponential moving average, you did better than do nothing, back-testing data shows. Buy-and-hold is down more than 10%, losing to 22 TA systems, 12 of which gave positive returns.
Demand for any such gains has increased as the 2022 stock market volatility. Wild intraday reversals are piling up as traders struggle to get a handle on interest rates and the economy’s future trajectory, with the war in Ukraine beginning to rally in commodities and the Federal Reserve’s calculations on monetary policy complicated. it occurs.
Before getting too tempted by the charts, realize that any methodology that kept someone out of the market this year — or helped them miss the big down days — is likely to ride the S&P 500 index to the downside. Was destined to perform well in comparison. It’s not hard to beat the market in free fall, and equities have fallen several days higher than in 2022.
“Here’s a chicken-and-egg question: is technical analysis working because it’s good, or is the market doing something that technical analysis is picking up on?” Lawrence Creatura, fund manager at PRSPCTV Capital LLC, said. “That’s an unanswered question.”
This year’s volatility has lent itself to a more strategic currency, with chart levels such as the moving average appearing to display an unusual vibe amid the war in Europe and the Fed’s heightened enthusiasm. Technical analysis can prove itself to be forethought – or it can just be a self-fulfilling force, as hordes of traders pile on for lack of anything else in it.
Read: Nasdaq swings double as chaos-craving traders leap into action
To be sure, investors almost never use these charting tools in isolation without considering the fundamental picture. And rarely is a technical study responsible for all investment decisions.
Still, the reward for surviving a few bad days is more visible than ever. In the absence of the worst of five sessions, the S&P 500’s 12% loss this year dropped to 1%.
“You have to accept where you are and what tools to use,” said 79-year-old Larry Williams, creator of the Williams %R Indicator. The protection is designed to capture changes in speed. A long-short strategy based on the technology is up 13% since the end of December.
“In a trending market, you don’t have any highs and lows to hold, you just go in one direction,” and that’s what happened in 2021, he said. This year, “we have not been in a directional market. We’re in a lot of agony – big up swings and low swings. So in that case, technical analysis, maybe even Williams %R will prevail.”
Bloomberg’s back-testing model buys the S&P 500 when an indicator signals a “buy” and holds it until a “sell” occurs. At that point, the index is sold and a short position is established and held until the buyout is triggered.
Strategy following DMI signals is up 11% this year. The gains came as the S&P 500 started January with a string of lower lows that triggered sell orders. The trade has since continued as the index failed to post a higher high which is strong enough to be a flash buy.
The Exponential Moving Average indicator has gained 5%. Of the five trading signals produced by the model, two were buys, and neither made money. Only one of the recommendations to sell did not work.
With the encouraging technical analysis in this year’s reporting card, Williams, who has been trading since 1962, cautions against taking a winning lap.
“I don’t expect anything to work out all the time, especially in this business where there’s a lot of randomness,” he said. “I’ve always said that you can’t just rely on technical stuff. You have to look at a combination of things, including the fundamentals.”