Asset Allocators Have Turned Technical Analysis Experts

Someone made a good point yesterday regarding technical analysis and market timing among the asset allocators.  These are the buy and hold folks (like me on my long term holdings) who all of a sudden know and practice technical analysis.  They start with something simple like the 200 day simple moving average and then graduate to SMA crossovers and then when those two seem shaky, it's the EMA that's the REAL holy grail.  This new found love for TA just so happened to flourish when the market tanked.  Up until that point, most buy and hold guys despised technical analysis.

What doesn't help one bit is that the 200 day SMA did provide a great exit signal this time around. Imagine if you gave your kid $5,000 to invest.  The kid picked a bunch of bio techs that went to the moon and doubled the money to $10,000. You know how that kid would feel? He's a better stock picker than Cramer (well, he probably is, but that's not the point). So he continues to take wild risks thinking that he knows the next greatest thing. There's a high probability that he will lose in the end. Hopefully, the experience humbled him.

This has been the basis for my studies posted over the last couple of days.  I feel the need to debunk a lot of the crap floating around and get people to understand and test for themselves.  Don't shoot the messenger, but these extremely simple strategies have been known for decades and have been proven random by the system builders many times over. To think that all of a sudden they work is fooling yourself.

Back when the VIX was at 10 in 2006, long term holders began to pile into risk.  There was supporting evidence that emerging markets, small caps and even a diversified individual stock portfolio was the key to outperforming.  Now the crowd discussion has turned to commodities, gold, bonds and even currencies.  It will be interesting to see if this is also cyclical.  The VIX will some day hover in the low teens, risk will be forgotten, TA will be a way to "surely underperform", high risk asset classes will be all the rage.  We can only wait and see.

In the meantime, I sincerely hope those that are newly crowned technical analysis experts do take the time to study and understand how system building works and how to test trading systems for randomness.  This doesn't mean reading other people's studies! This means doing your own homework and understanding the risk you're taking.

I lost a lot of money in my early days of system building thinking that I knew what I was doing and found the grail. It's easy to get the comptuer to lie to you or fool you with data. Please exercise caution!