Is the Trend Your Friend?
Technical analysts, or "chartists", make their investment decisions according to how share prices are behaving. Martin Zweig was one of the most famous investors who relied on so-called technical indicators. He made his name by calling the 1987 crash. (See Marty Zwieg Predicted Black Monday)
Zweig combined technical indicators with fundamental analysis. His best-known quote is:
The trend is your friend. Generally, a rising trend in rates is bearish for stocks; a falling trend is bullish.
— Marty Zweig
Chartists face a particular problem. Past share price behavior can't tell you anything about the unexpected real-life events that will send future prices plummeting or soaring.
Let's look at a recent example of a failed forecast. In March, one Wall Street chartist told the media that stocks were in a "danger zone", and "further weakness" was ahead. This was just days before Trump's tariff announcements, which did send stock prices spiraling, but not in the way the analyst had expected.
The market then rebounded so far that the S&P 500 is now some 16% higher than on the day of the "danger zone" warning.
Even the most famous value investor, Warren Buffett, became infatuated with technical analysis as a young man. But he soon changed his mind:
I realized technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.
— Warren Buffett
If you want to learn more about Zweig, check out his book, Winning on Wall Street. It's well worth reading. For Buffett, one must-read is The Snowball: Warren Buffett and the Business of Life by Alice Schroeder.
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