A New Anomaly: The Cross-Sectional Profitability of Technical Analysis
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What they found
The authors applied a simple moving-average timing rule (be in a portfolio when its price is above its 10-day moving average, otherwise hold cash) to portfolios of U.S. stocks sorted by volatility, from 1960 to 2009. The rule added substantial value in the highest-volatility portfolios and almost none in the lowest, producing abnormal returns of about 1.5% to 2% per month for the most volatile decile. The result survived adjustment for the usual factors and was not explained by momentum.
What you can use
- A moving-average filter helps most where price moves are large and persistent, which is in volatile stocks.
- In calm, low-volatility names the same rule just generates whipsaws and costs.
- Timing rules and volatility interact; test your indicator separately across volatility regimes.
Caveats
High turnover; the authors estimate costs but the profitability in the top decile depends on cheap execution. Value-weighting and later samples reduce the effect. Published 2013, so limited true out-of-sample evidence.
Tags: technical-analysis, moving-average, volatility, cross-sectional
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.