1.2  Technical analysis and efficient markets.
An overview

In this section we present a historical overview of the most important (academic) literature published on technical analysis and efficient markets.

Early work on technical analysis

Despite the fact that chartists have a strong belief in their forecasting abilities, in academia it remains questionable whether technical trading based on patterns or trends in past prices has any statistically significant forecasting power and whether it can profitably be exploited after correcting for transaction costs and risk. Cowles (1933) started by analyzing the weekly forecasting results of well-known professional agencies, such as financial services and fire insurance companies, in the period January 1928 through June 1932. The ability of selecting a specific stock which should generate superior returns, as well as the ability of forecasting the movement of the stock market itself is studied. Thousands of predictions are recorded. Cowles (1933) finds no statistically significant forecasting performance. Furthermore Cowles (1933) considered the 26-year forecasting record of William Peter Hamilton in the period December 1903 until his death in December 1929. During this period Hamilton wrote 255 editorials in the Wall Street Journal which presented forecasts for the stock market based on the Dow Theory. It is found that Hamilton could not beat a continuous investment in the DJIA or the DJRA after correcting for the effect of brokerage charges, cash dividends and interest earned if no position is held in the market. On 90 occasions Hamilton announced changes in the outlook for the market. Cowles (1933) finds that 45 of the changes of position were unsuccessful and that 45 were successful. Cowles (1944) repeats the analysis for 11 forecasting companies for the longer period January 1928 through July 1943. Again no evidence of forecasting power is found. However, although the number of months the stock market declined exceeded the number of months the stock market rose, and although the level of the stock market in July 1943 was lower than at the beginning of the sample period, Cowles (1944) finds that more bullish signals are published than bearish. Cowles (1944, p.210) argues that this peculiar result can be explained by the fact that readers prefer good news to bad, and
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