Market Strategies: Value Investing, Technical Analysis

Article excerpt

"In the long run, we're all dead," John Maynard Keynes once said. And many investors may want to similarly dismiss their value-oriented financial advisers, who often admonish them to shun the high-priced stocks that have led the market to new highs and, instead, focus on shares that are cheap on the basis of fundamentals.

Sure, these investors think, a company's stock price will eventually reflect its earnings and book value. But how long are they supposed to wait for those so-called value stocks to climb?

I have a suggestion for such investors: Try supplementing your value investing with technical analysis, which focuses on historical patterns of a stock's price and trading volume. In contrast to value advisers, who look at how the market ought to behave, technicians examine how it does behave. Technical analysis can help keep a value investor from stubbornly fighting the market for years on end. There are many types of technical analysis, but the most basic tools are known as "support" and "resistance" levels. A stock's support level is the price from which previous rallies have sprung; a technically inclined investor who misses one rally will be inclined to buy the stock if it falls back to the support level. Enough such buying, of course, makes it difficult for the stock to fall beneath that level. Conversely, a stock's resistance is the price where previous rallies have failed. Technically minded owners of a stock who didn't sell at the peak of a previous rally will be likely to sell if the stock rebounds to that price. With enough selling pressure, a stock will have difficulty penetrating its resistance level.

Many value investors may find all this sacrilegious. For years, such investors -- focused on fundamentals -- have ridiculed technical analysis as little better than reading tea leaves. Yet several academic studies have shown that there is something to it. The best known of these was published in 1992 by the finance professors William Brock and Blake LeBaron of the University of Wisconsin and Josef Lakonishok of the University of Illinois. …