By Michael Kahn
March 31, 2009
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If you believe the direction of the markets has anything to do with emotions and sentiment, then you need a tool to help get a handle on them. What if there was something that would have tipped you off to the changing investment landscape in late 2007, before your clients were calling you demanding answers? Would you be interested?
Of course you would.
What if I told you that tool was called technical analysis? Most of you just rolled your eyes. Before you click to the next article, however, ask yourself why the price of your favorite diversified mutual fund tanked 50 percent last year.
Was it the Bear Stearns collapse? The Madoff Ponzi scheme? The failure of Fannie Mae and Freddie Mac? Despite their significance, the stock market started to fall many months before any of these happened. The reason is that the market itself knew that some very big problems were going to come to a head, even though the fundamentals still seemed quite sound.
Often there is a disconnect between the fundamental definition of value and perceived value reflected in the stock price. How many times has a company released blockbuster earnings only to see its shares begin to fall?
Better yet, how many bear markets began just when the fundamentals looked great? The answer is – all of them.
Wouldn’t it be great to identify market trends before you lose money? Keep your mind open and enter the world of technical analysis.
Technical analysis, or charting, is the study of the ebb and flow of real money as it changes hands. It is not the mysterious voodoo portrayed by some in financial planning and investment management circles. It is merely a tool used to assess risk and reward and supply and demand.
No voodoo there. It need not replace your current methods of fund selection and asset allocation. Our firm uses it as a tactical enhancement to supplement our core investment approach. We also use it to validate ideas because, at the end of the day, the only thing that matters is what the market thinks. The charts tell us just that.Display article as PDF for printing.
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