Technical analysis basically boils down to predicting the future by studying the past. It’s based on the assumption that most human activity is predictable and the past will likely be repeated.monsitj/iStockPhoto / Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors. For more from Globe Advisor, visit our homepage.
Bryden Teich has a secret investment weapon most of his clients probably don’t know about or fully understand – technical analysis.
Like most investment advisors, the partner and portfolio manager at Toronto-based Avenue Investment Management uses the more common fundamental analysis to determine when to buy, sell or hold an investment. It’s a method of identifying a stock’s intrinsic value through a range of economic factors and metrics based on a company’s financial statements.
Fundamental analysis works well most of the time for value investors such as Warren Buffett, but there are times when it just doesn’t add up. That’s when Mr. Teich turns to charts that, to those not familiar with technical analysis, might seem like rainbows of meandering lines and strange symbols.
“We definitely use technical investing as part of our process. It’s a nice complement to traditional fundamental investing,” he says, adding there has always been a stigma around it in the investment world.
“People in the traditional investment industry kind of look down on it because it’s like, ‘I’m an intellectual fundamental investor, why would I care about technicals?’”
The dark art of technical analysis
Technical analysis boils down to predicting the future by studying the past. It’s based on the assumption that most human activity is predictable and the past will likely be repeated.
Technical analysts evaluate securities through statistics generated mostly by market prices and volume over different periods. There are several technical methods and tools to predict market trends, thanks, in part, to the evolution of computer-assisted techniques.
Most major investment firms employ technical analysis to some degree as a way of verifying fundamental conclusions or hedging when standard valuation metrics aren’t giving an accurate read.
“The most important thing in investing is to not lose your principal and protect the downside. You can’t use emotion or instinct to do that. You need a rules-based way to apply it. That’s where technicals come in for us,” Mr. Teich says.
He says he probably uses it more as a risk-management tool on a day-to-day basis than most investment advisors. “If a stock is going down, there’s a certain level we will draw on the chart to pick our stop level. If you break through that level, we’re out no matter what.”
Technical analysts for hire
Jon Vialoux is a technical analyst to the core. He’s the associate portfolio manager at Toronto-based CastleMoore Inc., a firm that employs a team of technical analysts to provide their point of view to investors and investment firms who utilize more traditional methods of investment analysis.
“It can be a huge alpha generator for your portfolio, staying ahead of drawdowns and continu[ing] to build on that wealth you’ve accumulated through the past cyclical upturn,” says Mr. Vialoux, who is also founder of technical analysis website EquityClock.com and the son of Don Vialoux, a pioneer of technical analysis from the early days of computers.
The younger Mr. Vialoux says technical analysis can enhance returns in retirement portfolios over long periods of time by avoiding market pitfalls.
“The average performance of the S&P 500 or any broad market benchmark is 8 to 10 per cent on an annualized basis. If you exclude recessions, which can often lead to a 20-plus per cent drawdown in any given year, it can probably double your average annual take,” he says.
Follow the moving average
An example of one technical tool the team at CastleMoore uses is the moving average, which tracks the average price of a security over a specified period.
The moving average is used to spot trends by flattening out large fluctuations and establishing support levels on the lower end and resistance levels on the high end. The skill for the analyst lies in the ability to choose time periods and other criteria to get the most accurate read.
“We often encourage people to focus on moving averages and use those to determine whether to be in or out of the market. That can often allow you to stay ahead and avoid the downturns which can be detrimental to portfolio performance over time,” Mr. Vialoux says.
Early warning system for fundamental flaws
Technical analysis can enhance a broader portfolio by acting as an early warning system ahead of the fundamental indicators, Mr. Vialoux says. “You can see the degradation in fundamental patterns occur many years before price reflects it.”
He considers today’s record-breaking equity market levels an ideal example of how technical and fundamental analyses diverge. While the fundamentals indicate a strong economy and strong corporate earnings that can sustain current price levels, he says the technicals have been indicating weakness in both.
According to technical analysis, the backdrop “has been deteriorating for a couple of years, so it’s pointing toward a path to a recession,” he says.
Mr. Vialoux says technical analysis should not be used in isolation as a replacement for fundamental analysis, and admits technical indicators can break down when unforeseeable events occur, such as the pandemic of 2020.
“You can certainly trade on technicals alone, but there is always going to be that variance or margin of error that you are following a signal that is not legitimate or is influenced by an unsustainable event,” he says.
For more from Globe Advisor, visit our homepage.