Forecasting the Equity Risk Premium: The Role of Technical Indicators
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What they found
The authors compared 14 technical indicators (moving-average, momentum, and volume rules) against 14 macroeconomic variables for predicting monthly U.S. stock market excess returns from 1951 to 2011. Technical indicators forecast about as well as macro variables out of sample, but they captured different information: technical indicators did best at detecting the onset of recessions, while macro variables did best near the end. Combining both types with a principal-component approach beat either alone.
What you can use
- Price-based signals contain information about the market's direction that fundamentals do not, and vice versa.
- Trend indicators detect the start of downturns faster than economic data, which arrive with a lag.
- Combining technical and fundamental signals beat either one used alone.
Caveats
Monthly index-level forecasts with modest out-of-sample R-squared; economic gains depend on being able to shift allocation without costs. A free Fed working paper version exists.
Tags: technical-analysis, forecasting, equity-premium, macro
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.