The Technical Analysis vs. Fundamental Analysis Meme
The recent news of Citigroup axing their technical analysis group has got people rehashing the age old fundies vs. technicals debate. The obvious question that Citigroup’s action raises is “are they saying that TA is worthless?” As Brian Shiau says:
This move appears to completely discredit technical analysis, a form of analyzing stocks by studying the stock’s charts. Traders implementing technical analysis don’t need to know anything about the company’s news–instead, these traders look for patterns in the stock’s past price movement. These patterns are titled by what they look like, kind of like constellations. With names like “Gravestone Dojo” (sic) and “White Umbrella,” it’s no surprise that many investors don’t take technical analysis very seriously. Yet others live by it. Check out Trade Mike’s blog for instance.
Since I don’t work at Citi I certainly don’t know the answer to that question. I suspect that, as others have said (see links below), some (many?) of their analysts use TA to some extent. Citi has had that group for about 25 years and given how popular TA has become and all the software tools that are available these days I can see how it would be tough to justify paying a group of people to just do TA.
My position on the TA vs. FA debate has always been that there’s a place for both. I think it makes a whole lot of sense to combine the two. But the more long-term focused a person is the more he should focus on fundamantals. Conversely in the very short term fundies are not very useful as timing tools but technicals are great for that. That’s why I rely on technicals for my short-term trading. For my longer term accounts, I (usually) combine both types of analysis.
I don’t know if this debate will ever be settled. While the FA guys love to use the example of Warren Buffet to prove their point we can certainly find plenty of fundies who’ve gone belly-up. Likewise, while many a TA-based trader has washed out, how do the fundies explain the incredible success of the trend followers who trade on nothing but price?
Others who have chimed in on this topic:
- Brian Shiau — Technical analysis–you’re fired! Is there any value to this controversial stock picking method?
- Byrne’s Marketview — Citigroup and Common Sense
- The Big Picture — Citibank Axes Technicians
- JALOTI — TA vs. FA
- MaoXian — Yamada Completes Measured Move Out the Door
- Misbehaving Markets — Citigroup Axes Technicians
This post has 3 comments
February 21st, 2005
I would say it signals a move away from using “technicians” to interpret historical data towards using statisticians or programmers.
Louise Yamada is from an era when technicians prepared charts by hand and simply having reams of historical data was an advantage by itself. Computer charter now enables traders to do their own technical analysis. Even 5 years ago computers were programs were not available to draw and keep trendlines as prices progressed.
Now it is more useful to have people who can write computer algorithms and calculate statistical significance for patterns and indicators.
February 21st, 2005
I’ve got 2 things to whine about:
(1) You can’t use Warren Buffet to prop up fundamental analysis. WB buys on a substantial discount to a company’s value. Efficient market hypothesis, as practiced by fundies, says that this can’t be done as all info on a company is priced into the stock.
(2) regarding the previous comment: + 5 years ago, softwares were available to extend trendlines as price progress. I’ve been doing it with Tradestation.
February 22nd, 2005
Perhaps it is simply a supply and demand issue over at Citi. If there is little client demand for TA a cut of the department is not totally shocking. While I am more of a fundie, I think ignoring the charts provides for less than thorough analysis. Big firms are no stranger to peculiar decisions and this is one of them, demand notwithstanding. I would be surprised if the cost of the entire department was more than 2% of the entire research budget. Barry Ritholtz made me chuckle when he wrote that Yamada will probably go somewhere else and make a brilliant call.
Is there anyone out there who thinks Citi is done with TA forever? Citi will be back at some point but who can say when.
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