Technical analysis is in the midst of a post-financial-crisis boomlet. Tyler Wood, marketing director at Market Technicians Association, says there has been a 30 percent jump in new members in the past two years, pushing its rolls to 4,500 as of mid-October.
Interest in DeMark’s and other analysts’ charts has been boosted by the fact that since 2008, markets have become correlated, meaning that macro events such as the European debt crisis can slam shares of weak and strong companies alike. Traders are looking for an advantage, and DeMark’s system, which seeks to identify the point at which an up or down market is “exhausted,” offers one, Burbank says. “Any edge you can get in putting on your position and taking it off is paramount.”
Jason Perl, an adviser to investment funds at UBS, says the DeMark indicators are crucial in the post-crisis world because so many traders are avoiding making bold moves that might jeopardize their jobs. “People are managing career risk rather than portfolio risk,” Perl says.
Traditional investors who look at fundamentals and managers of quantitative funds can barely hide their contempt for the technicians.
“Comparing technical indicators to what we do is like comparing bush medicine to the research performed by drug companies,” says Matthew Beddall, chief investment officer at Winton Capital Management, a quantitative hedge fund staffed by physics and math PhDs.
Technicians who, like DeMark, are believers in Fibonacci numbers and the golden mean are especially annoying to quants. “There’s a golden-ratio mania, and most of it isn’t based on any kind of fact,” says George Markowsky, a computer science professor at the University of Maine who holds a PhD in mathematics. Markowsky wrote a paper in 1992 rejecting most of the claims of the golden-mean believers. “It’s amazing to me that adults take this stuff seriously,” he says.
Investor Warren Buffett is also dubious of the notion that a stock or index’s direction can be predicted merely by studying historical price data.
“I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer,” the Berkshire Hathaway chairman joked to an audience at Vanderbilt University in 2005. A spokesman says that Buffett stands by the statement.
Oswald Gruebel says he’s with the Oracle of Scottsdale, not Omaha, on this one. “I only use his system,” says Gruebel, former chief executive of both Credit Suisse Group and UBS, Switzerland’s two largest banks. A trader by training, Gruebel manages his own portfolio using DeMark’s work. “It tells you when everyone else has sold and you should be buying,” Gruebel says. “His system is the best I’ve seen in 50 years.”