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Taboo Talk: Technical Analysis

Rarely discussed, often used.

Speaking the Unspeakable
The Wall Street Journal recently featured an unusual teaser: "Thumbs Up For Technical Analysis." In the article, Wasatch Funds president Sam Stewart described his company's increasing use of price-based signals with stock selection. "We used to be 100% fundamental analysis," Stewart told the Journal. Now the firm reviews "several technical indicators."

It's been a while since I've seen a portfolio manager confess to using technical analysis. Well, not using that word.

Picking stocks because of their price movements fell into academic disfavor in the 1960s, when mainframe computers gave professors the ability to collect and crunch large data sets. The University of Chicago's Gene Fama showed that past stock prices had little if any relationship to future prices. Since then, academics have conducted many follow-up studies, nearly all reaching the same conclusion. Among the ivory towers, "chartist" is not a compliment.

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About Author

John Rekenthaler, CFA  John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

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