The basis for his judgement is due to a study conducted into the systematic link theory of the Technical Analysts; by looking into past share price movements you are able to predict the future ones. Kendal’s opinion is that share prices move like ‘a stumbling drunken man’, in that you don’t know the way they will move, left or right. The information one has received is no indication of they are going to move. Since share prices are based upon the current and new information, the analysts are unable to predict the future movements since they can’t foresee the information coming out.
When looking at it with Kendal’s point of view, you can understand his belief that Technical Analysts are irrelevant, however the fact that these positions are still around and are earning around the £80k mark, they are obviously still highly valued aren’t they? Secondly, there are several articles from the likes of BBC news, relating to share price movements in companies like Morgan Stanley and Goldman Sachs. These articles include statements about how analysts reported that they expected profits to be higher or sales to be higher than what they actually were.
Figure 1 – Goldman Sachs share price
The pattern occurred for Goldman Sachs, where it was reported by its analysts at CitiGroup, that profits were expected to fall by 38%, with its poorest performance being in its major areas of investment banking.
Figure 2 – Morgan Stanley Share Price
In Morgan Stanley’s case, on the 19th January it was announced that profits were below that of expected, again by analysts. Figure two showing that its share price fell accordingly on this day, despite being an improvement on the previous year. The movements of both Morgan Stanley and Goldman Sachs could in one way be seen as expected in an efficient stock market, in the sense that the share prices reacted quickly.
However the question can arise to whether, mostly in the Morgan Stanley case that the fall and ultimately the decisions by its shareholders to sell were rational? Since the profits still rose, but not as much as the analysts expected, it is clear even to this day, that surely the Technical Analysts do play an important part in determining the decisions and ultimately the actions made my shareholders to buy or sell, don’t they?
I would say technical analysts opinions are important or else the £80K fees they are paid would be spent elsewhere; but considering Jonny’s point about how monkeys and playmates can often predict which companies are going to make the best returns (http://jonnycusack.blogspot.com/) it is an intriguing question.
ReplyDeleteIt could be said however, that technical analysts create someone who can be blamed if investment decisions go wrong. A useful way of ensuring you keep your reputation if your the one who relied on their information.
At the moment im not able to agree nor disagree with your arguement with regard to analysts and the role they play. The reason for this is, what do you think would happen if the FTSE decided to restrict or block the input of the analyst? Since the market and its investors have operated in this way for so long would it actually be better off without them and become more efficient?
ReplyDeleteI suppose one part of the arguement that i can confirm my agreement with is the fact that they must offer some value if they are able to command such a salary.
That is a very interesting point - how would the markets operate without the analysts? I think most people do rely on and therefore react to what analysts say, because they have a lack of knowledge or simply time to try and analyse any trends themselves. I agree to Kendal that you can not predict the information and therefore you should not be able to predict the share price movements, however in most cases surely there has to be some trend that you can base your future expectations on, no?
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