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PPHM Masters of Deception: Everything you know about stock charts is a lie: Moving averages

http://www.marketintelligencecenter.com/articles/403906

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There is no investment advice more important or more certain than this: investors who buy stock in strong companies and hold for the long run do better than those who jump into and out of stocks. I have nothing against charts per se, but I see the theory of technical trading as an inducement to overtrading, and hence a strategy that will, over time, bleed money away from investors while enriching only those in that thoroughly unnecessary profession, transaction-fee based stockbrokers. In the past, I have used charts to demonstrate the incorrect assumptions of chartists, but as I now believe that such examples will probably never prove compelling, I am trying a different tack: a simple appeal to reason.

"There is no way to predict the price of stocks and bonds over the next few days and weeks." So begins Trendspotting in Asset Markets, a paper written by The Royal Swedish Academy of Sciences explaining, in broad terms, the findings of the research for which Eugene Fama, Lars Peter Hansen and Robert Shiller were awarded the Nobel Prize in economic sciences. Taken together, the work of these laureates has important implications for investors, but for now, let's focus on implications of the opening sentence, for they are exceptionally weighty.

According to our laureates, in a healthy market, prices are not predictable, and according the work of Fama, in particular, the market reacts immediately to all useful information, and in the absence of useful information, prices fluctuate randomly. When Fama says random, he means random, not "complicated" or "chaotic," which is an important distinction since hidden signals can be identified in complicated and/or chaotic systems but not in randomness. If one accepts Fama’s work, the inescapable conclusion is this: because price fluctuations are not based on useful information, no record of such fluctuations (i.e., a chart) contains useful information, nor can such a record be used to generate useful information.

As a side note, Fama, Hansen and Shiller concede that the real world value of the company that a stock represents will eventually be reflected in its price. Determining that value is called fundamental analysis, and it is what investors should be doing instead of marking charts with points of imagined significance.

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