Hedge Funds May Focus More on Technicals Going Forward

A recent survey of asset managers, institutions, and high net worth investors at the Global Alternative Management Fund of Funds conference found that 36 percent of those questioned felt that technical analysis-based trading strategies are likely to outperform in 2009 and 2010 (see Reuters article). This tends to mimic a prevalent view in the market that investing based on fundamentals will be difficult going forward. Changing regulations, compressed multiples, and unknown forward earnings are making fundamental investing suspect and difficult at best. Double digit percent moves on very little or no material changes in fundamentals are also causing investors to now pay more attention to volume, price action, patterns, and support / resistance lines in an effort to predict the size and reversals of potential stock moves. Given that technical analysis can often be a self-fulfilling prophesy, the added attention to technical indicators and patterns may actually make it more likely for such signals to be realized, at least in the short-term. As with many technical indicators, there does not always need to be a theoretical mathematical justification, but simply a heuristic and common sense expectation of what each indicator implies and is likely to predict. In the short-term, such a belief may be all the market has and needs. Hedge funds will no doubt exploit this momentum going forward.