The Flameout of the Technical Analysts

Popular Swami’s arise in the stock market from time to time who claim to be able to foretell what the Dow Jones average will do next, based on the recent movements of the squiggly lines. This is called technical analysis, although, in reality it could scarcely be less “technical.” The problem seems to be that about the time the swami has figured everything out and developed a vast following, the market changes character, so that his fall, when it comes, is spectacular.


James Dines was the big name in the 1970s. But in late 1974, right at the bottom of the bear market, he took huge ads proclaiming, THE DINES LETTER HAS NEVER BEEN SO BEARISH. In just over a year the Dow thereupon soared from 600 to 1,000. At about the same time other ads appeared, trumpeting the tidings that THE DINES LETTER FEELS GOLDS ARE ON THE VERGE OF A HISTORIC UPMOVE. The yellow metal had a final kick and then dropped in half.


That about did it for Mr. Dines, who was succeeded as everybody’s favorite prophet by Joe Granville. Joe published a subscription service, appeared on TV talk shows, and lectured all over the country. His pronouncements became front-page news, and could move the market by themselves. He announced that he never expected to make another mistake. Then came the great bear market of 1982. Granville commanded his followers to sell out, right at the bottom, below Dow Jones 800, and then to go short. By the end of 1983 the market had soared to 1,300, and many volatile issues had tripled or quadrupled. A subscriber who actually followed this advice would have had trouble paying for the renewal of his subscription.


In mid-1982 came large magazine ads by William Finnegan Associates, a firm of computerized seers in Malibu, California, solemnly assuring the reader, “If you happen to know what the Dow Jones Average will be eighty trading days from now, you could make quite an impression on your friends. Not to mention your banker. Well, you can know.” To find out you bought a module for a Hewlett-Packard MP-41 computer, you tapped in certain market data, and the program in the module revealed the market outlook for the following eighty days.


The absolute bottom of the 1982 bear market came on August 13, at 767 on the Dow. Every single day for the next eighty days the William Finnegan Associates program called for a market drop, starting with the first day, which predicted a 7.5 percent decline. Instead, the market ran up to over 1,000 during the period.


Why is technical analysis so difficult, not to say impossible? Perhaps because the technical analysts, like alchemists, seek a simple solution to a problem more complicated than they realize. The stock market is the encephalogram of tens of millions of investors, who transmit their greed and fears to each other through the ticker tape and the media. The rules, if any, by which this movement occurs are as complicated as the human psyche itself. The technical analysts who try to reduce it to an orderly formula often forget that the game is changing continuously. In other words, rather than asking what tomorrow will bring if the future is like the past, one should be asking how the game is changing, and how, therefore, the future will be different from the past.