WSJ ($) reports today that
Investors Take Cycles for a Spin. Sigh. The Journal article reports a revival of investor interest in charting - the attempt to predict future prices by looking at the past history of stock prices. Charting does NOT work, because securities markets are weak form efficient. The weak form of the Efficient Capital Market Hypothesis posits that all information concerning historical prices is fully reflected in the current price. Put another way, the weak form predicts that price changes in securities are random. Randomness does not mean that the stock market is like throwing darts at a dart board. Stock prices go up on good news and down on bad news. If a company announces a major oil find, all other things being equal, the stock price will go up. Randomness simply means that stock price movements are serially independent: future changes in price are independent of past changes. In other words, investors cannot profit by using past prices to predict future prices. Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy. See Burton G. Malkiel, A Random Walk Down Wall Street 196-204 (1996) (critiquing recent studies purporting to find violations of the weak form hypothesis).