Bloomberg’s back-testing model purchases the S&P 500 when an indicator signals a “buy” and holds it until a “sell” is generated. At that time, the index is sold and a short position is established and kept until a buy is triggered.
A strategy following RSI signals has dropped 10% this year. The damage occurred as stocks entered the year with unbridled momentum that touched off an order to sell. The trade has since been in place as the S&P 500 never pulled back fast and long enough to flash buy.
The moving average convergence/divergence indicator—better known as MACD—has suffered a loss of 9.8%. Five of the nine trading signals that the model has produced have been buys, and four of them have lost money. In addition, all four short recommendations have been losers.
Technical Trouble
Such is the cost of betting against momentum in a market where the S&P 500 has already eclipsed the average Wall Street strategist’s year-end target.
“Today, and for much of 2020, the overbought conditions have been absorbed by the market with more strength, or at best a pause,” said Renaissance Macro Research co-founder Jeff deGraaf, who ranked as the top technical analyst in Institutional Investor’s annual survey for 11 straight years through 2015. “Overbought/oversold conditions are useless without first defining the underlying trend of the market.”
Williams, who has been trading since 1962, agrees. Technical analysis tools aren’t broken, he says, but in a bull market that’s as resilient as this one, investors need to use them in the right context.
“You have to have a different tool, if you will, for a job you’re doing,” he said. “I have a hammer that can build a house, but if I use the hammer to dig a hole in the ground, that’s going to be really hard.”
—With assistance from Claire Ballentine.
This article was provided by Bloomberg News.