A new academic study finds that the stock recommendations made by analysts using technical analysis have outperformed those using fundamental analysts. Over investment horizons ranging from one month to one year, top technicians come out well ahead of leading analysts.
In fact, according to the academic study that reached this conclusion, it’s not even close: While the average buy recommendation from well-known technicians outperforms the broad stock market by 8% over the subsequent nine months, the average stock recommended by leading fundamental analysts underperforms the market.
This groundbreaking study, which just began circulating in academic circles, was conducted by Doron Avramov and Haim Levy, finance professors at the Hebrew University of Jerusalem; and Guy Kaplanksi, a finance professor at Bar-Ilan University. The focus of their study were a thousand pairs of recommendations made between November 2011 and December 2014 on the TV show “Talking Numbers” as it provides an ideal laboratory for comparing the relative worth of the two investment approaches. The first half of each pair was a recommendation from a top technician about a stock in the news; the second half was a recommendation about that same stock from a leading fundamental analyst.
The researchers measured the performance of each recommendation beginning with its closing price on the day the show first aired. That’s a crucial methodological detail, since that means the researchers are excluding the price impact of the recommendations in the first minutes after the show airs.
Consider first the stocks that the technical analysts identified as strong buys. They on average proceeded to outperform the overall stock market by 7.9% over the subsequent nine months, while the stocks they recommended as strong sells underperformed by 8.9%.
That spread of 16.8 percentage points is highly significant from a statistical point of view. As the professors put it in their study, it means that “technicians display rather impressive stock-picking skills.”
Contrast that with the performance of the fundamental analysts. The researchers found that their strong buys proceeded on average to underperform the market over the nine months following recommendation — though not by enough to conclude at the 95% confidence level that these analysts were actually worse than random. Even worse, the stocks that these analysts rated as strong sells did not perform appreciably differently than those they considered strong buys.
It won’t be easy for fundamental analysts to wriggle out from underneath the weight of these results. Since the TV show creates a head-to-head comparison on the same stocks over similar time horizons, the usual escape valves have been closed off.
Still, when it comes to forecasting the direction of individual stocks over the next several months, this new study definitely shows that top technicians deserve our attention more than leading analysts.
While I am sure this will not be the end of the debate it is nice to see actual proof that technical analysis can provide statistically significantly better returns than random. But even as important, fundamental analysis not only underperforms technical analysis but is no better (and maybe worse) than random selection.