Market Trends and Technical Analysis

Are there flaws in using past market trends to predict future market performance? Fisher Investments Canada discusses.

One way investors may try to boost the value of their portfolio is to analyse trends within security price movements or trade activity. This thinking goes that if you can find a trend or indicator from the past, you may be able to use those patterns to trade securities profitably in the future. Trend analysis and technical analysis are a couple of popular forms of this practice.

In short, technical analysis is simply the process of using factors such as past trade activity or price movements to attempt to predict future price movements. At first glance, this process may seem somewhat logical, but remember that past performance is not indicative of future results. In other words, trying to derive today’s market movement based solely on yesterday’s or last month’s price changes is not a sound investment strategy. For long-term investors, using technical analysis alone to determine your investments could even detract from your ability to meet your long-term investing goals.

What is Trend Analysis?

Trend analysis is a form of technical analysis which uses past price movements to predict market trends which you can then invest in accordingly. Trend analysis implies that what has happened in the past will allow you to predict what will happen in the future. Analysts and investors using trend analysis often refer to previous price movements of a certain stock or category in relation to a statistic, such as trade volume or stock valuation measurement.

The Folly of Trend and Technical Market Analysis

Some use trend analysis to try and identify market trends, such as the beginning of bull (rising) markets and bear (falling) markets. We believe trend analysis on its own may not take into account the variety of complex factors influencing markets and may not be the best method to invest for the long term. Like many other technical indicators, trend analysis is entirely backward-looking and seeks to claim that some pattern of recent price movement will indicate the future direction of prices. Past performance does not indicate future results, meaning yesterday’s movements don’t predict today’s or tomorrow’s. They have very little impact as to how a company's stock will perform over the longer term.

Fisher Investments believes that bull and bear markets can be successfully navigated through in-depth research and analysis on key market fundamentals. Fisher Investments uses historical data to assess the probabilities of potential outcomes in key economic and political events. However, each situation is different and complex, with many potential influencers that could alter a given outcome. Trend analysis may neglect the complexity of market movements. Though a pattern may have existed at some point in the past, that doesn’t mean it happen in the future.

Even if a consistently predictive indicator is discovered, it would quickly become useless as markets are mostly efficient. Once people discovered a pattern or trend, we believe it would soon be priced into the market, thereby reducing its predictive power. This follows the efficient-market hypothesis, which states that asset prices reflect all publicly available information. The hypothesis follows the simple premise that profit-seeking investors act on every bit of news, rumour and speculation that is widely available, and any obvious opportunities vanish almost immediately because they are reflected in stock prices. Therefore, we believe if a magic predictive indicator were found, the market would start to price it in.

Investing for the Long Term

One other significant problem of using market trend analysis without any fundamental backing is that it is typically reflective of a myopic mindset. Simply trying to time the market by looking at past performance measurements pays little attention to your long-term investing goals. Investors who are focused on the long-term should be more concerned with capturing the long-term growth necessary to reach their goals. By focusing on market trends and short-term developments, investors run the risk of losing sight of their overarching goals and may actually reduce their long-term returns if their technical analysis proves faulty. If you are investing for the long-term, a more disciplined investment strategy may give you a better opportunity to achieve your investing goals.

Contact Us Today

Identifying market trends is an extremely difficult exercise, and many individual investors lack the insight and research necessary to perform in-depth market analysis. Fisher Investments Canada may be able to help you get started on your way to reaching your long-term investing goals.  

For learn more, call and speak with one of our experienced professionals today or download one of our educational investing guides today.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.