Trading against
recommendations issued by a technical analysis model and with them -
yielded the same results. Fama-Blum discovered that the advantage
proffered by such models is identical to transaction costs.
The proponents of technical analysis claim that rather than forming
investor psychology - it reflects their risk aversion at different
price levels. Moreover, the borders between the two forms of analysis -
technical and fundamental - are less sharply demarcated nowadays.
"Fundamentalists" insert past prices and volume data in their models -
and "technicians" incorporate arcana such as the dividend stream and
past earnings in theirs.
It is not clear why should fundamental analysis be considered superior
to its technical alternative. If prices incorporate all the information
known and reflect it - predicting future prices would be impossible
regardless of the method employed. Conversely, if prices do not reflect
all the information available, then surely investor psychology is as
important a factor as the firm's - now oft-discredited - financial
statements?
Prices, after all, are the outcome of numerous interactions among
market participants, their greed, fears, hopes, expectations, and risk
aversion.
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