Technical Analysis, The Parable of John

“Analysis is like a lobotomy” – David Byrne

In the run up to the housing crisis in 2008, real estate was an incredibly profitable investment. A sector many of us were envious of, several partners left their cushy corporate jobs in order to manage their real estate assets full time. John, a senior partner at the time, ended up selling his business, a conglomerate of apartment complexes, and returning to the firm shortly before the financial downturn. At the time, we were all confused. Rumors abounded of, perhaps John’s wife had been sleeping with Ben from accounting again. Had John lost his mind? Perhaps John was dying. Having sat down with John to discuss his return, and as the office would later learn, John explained how he returned in order to be closer to his girlfriend who, unbeknownst to his wife, had recently given birth to a baby boy. John was the father.

Those who know John know him as a connoisseur. From rare coins to caviar, John enjoys gaining intimate knowledge of eclectic pastimes. There was a whole year when John decided to cook lunch for the office every day. While junior traders were glued to their bloomberg terminals, John would buy treasury bonds, leave his desk, and throw together a pasta puttanesca or a black truffle American flatbread. Always a favorite of the secretaries and administrative staff, John claimed it was his peculiarly gifted sense of smell that allowed him to pick only the finest ingredients from the farmers market. That line never failed to cause the new-hires from so-and-so university to swoon. And who could fault him? Although he was a poor husband and father, his talented nose kept everyone in the office happy, even through rough times. Admittedly, the food may have been a ploy to win over the bellies of some of the more staunch employees who remained skeptical given John’s departure and sudden unexplained return. But others saw a real change in him after he became a father. It was as if he was ill, but had found the fruit of knowledge. Or, as he would put it, better ingredients made better pasta.

John would later recount the horrors of his departure and owning rental property. This was of particular interest at the time as many of us saw how far housing prices had fallen, and were eager to get our feet wet. One of the biggest issues, John would complain, was animals. Not tenants, vandalism, or missed payments,  but pets. Although John had adopted an across-the-board no pet policy, tenants were constantly sneaking Fluffy or Fido into their domiciles. “Right under my nose!” he would exclaim, while point to his large beak of a nose. The worst part about it, he would continue, was that oftentimes the pets would live in the apartments for months before anyone found out. Renters went through great lengths to hide litter boxes, food bowls, and other pet paraphernalia. The way John would find out, was during his late night facility inspection strolls. Walking through the halls of the apartments, John explained, they reeked of bullshit.

People have a sense of right and wrong, but when this sense is suppressed, bad decisions are made. The form in which this sense is realized is different from person to person, but John’s took the form of smell. The same talent that made John such a great chef was also what had enabled him to, quite literally, smell the un-approved pets on his property. In a world where decision making is make it or break it, an experienced investor must be able to stop, and “smell the bullshit”.

Many readers may find John’s experience to be relatable. While the cold, analytical trader may have simply dismissed the unmistakable odor of animals to be poor tennant hygiene, or their own upper lip, the eery sense that something is amiss is a powerful sentiment, central to the human experience. As it follows, a sensible person may feel a similar, familiarly peculiar twinge in their nose when they first catch wind of technical analysis. For those fortunate enough to be uninitiated, technical analysis, in the world of finance, is the use of geometry, statistics, and pattern recognition in order to identify trends and predict the future. Put succinctly, technical analysis is the unequivocal equivalent to modern day astrology.

Technical analysis is analytically asinine and anyone who purports otherwise is, quite literally, technically wrong. That is to say, only the technically challenged pursue the slippery slope that consists of graphing lines of support, resistances, and other ridiculous bi-focal-triangulation of fifty day simple moving averages in order to make important financial decisions. Similar to scammers and thieves, a technical analyst would have investors believe that they are the Nostradmi of the trading world, making predictions of world events, analyzing the support levels of crude oil and claiming causal relationship to trends in climate and human productivity. These are the levels practitioners of technical analysis resort to.

If technical analysis is so wrong, so often, why then is it so popular? The answer may lay in the sinister work of insider traders, hedge funds, and market manipulators. The market, it turns out, does not exist to make shareholders wealthy. Maximization of shareholder value is only a subset, a smokescreen, an obfuscation of the motivations behind public offerings and secondary market trading.

Analysts themselves may not be completely at fault. Technical analysis can be seen as the natural result of society’s fixation on the robotic, unthinking, unfeeling, sociopathic miser. A technical analyst’s appeal comes from his or her ability to lose money unsympathetically. That is to say, a technical analyst is so far removed from humanity as to forgo the usage of their brain and instead, as pirates of yore, opt for the use of a sextant and compass instead. One must stop to wonder whether this sad condition is the result of nutritional deficiency, a la scurvy, or some other, incurable, malformation.

Despite all of its flaws,  technical analysis does in fact serve a purpose beyond its heinous fundamental inconsistencies. First and foremost, technical analysis serves a litmus test for one’s sense of bullshit. As John would say, even the best ingredients would not have saved the housing industry in 2008. The same holds true for technical analysis. Should a trader hear an analyst even mention the words, candlestick chart, stochastic, or fibonacci, regardless of context, the immediate reaction should be to retch, as the staunch smell of bullshit is sure to follow. The result should be a more efficient, productive, trading experience. These days, phone apps exist that can be triggered at the sound of particular words to play a loud pulsing high frequency defensive “REEEE-ing” tone should an unsavory technical analyst enter audible range. Methods such as these will save traders many a headache and help reduce the number of brain cells which may decay as the result of trying to understand technical analysis.

Despite the lack of evidence supporting technical analysis, many investors, including some readers, will continue to cling to its ideas. Doing so will hinder your performance. For some, the infantile act of drawing lines, circles, and squares on pieces of paper is more comforting than investing with a strong emotional conviction. But instead of constantly berating technical analysis, this plea goes forth, with all and complete conviction, understand, technical analysis is made up, fake news, and a scam.


Leave a Reply