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So whaddya think -- has the market bottomed? That's the question every investor wants answered as we swing through these incredibly volatile up and down days. You can find any opinion you want. Because the question is so important and the answer so uncertain, even normally sensible people are listening to Wall Street's tea-leaf readers: the technical analysts. (Lately they've been focusing on the Dow's "double bottom.") Not that they know the answer either, but sometimes you just want another point of view, no matter how nutty, like when the newspapers ask an astrologer who will win the Super Bowl.
I realize I'm going to make a certain number of people mad, but I may as well just say what I think: Technical analysis may have some value as entertainment, but that's about it.
Now I don't want to understate its entertainment value. I mean, if you need to lighten up your day a bit, you could do a lot worse than read a passage like this:
"Major long-term trendline support on the S&P 500 has been breached as major oversold readings on many technical indicators have failed to produce nothing more than one-day rallies. The trendline drawn off major market lows in 1987, 1990, and 1994, coming in at 940, and using a semi-log chart, provided little support."
Those sentences happened to come from a July column at BusinessWeek Online, but you can find material just like it all over the Web. And I have to admit, I love it. The idea that we can predict where the S&P 500 will go tomorrow by knowing where it was 15 years ago - well, you can't help smiling. This same columnist draws other "trendlines" off of prices from 28 years ago! And then the refinement of putting the data on a semi-log chart - yes, I do know what that is, and I know why he does it, but who cares? The whole premise of technical analysis is so ridiculous that there's simply no point in going down that road - except, as I say, for fun.
The premise, of course, is that if you chart price and volume data in just the right way, you can figure out where prices will go next by looking at the picture. Why should that be so? No one can tell you.
One of the main reasons technical analysis is scorned by so many is that its proponents can't tell you why it should work. That's why it's so often referred to as voodoo or black magic. Its practitioners claim to have discovered mysterious forces that govern the markets, but exactly what those forces are or why they work - that's still unknown after all these years. Human events, war, peace, revolution, technological breakthroughs, economic policy - these aren't what really determine securities prices. They are mere foam on the waves of…of…of the mysterious forces. Technical analysts hate being compared to astrologers, but you can see why the comparison is hard to avoid.
Ah, some will say, but people make money with technical analysis, and you can't argue with results. True, but what are the results? Some people make money, others lose money. I've never seen a respectable study showing that technical analysis consistently beats the market.
The inescapable conclusion seems to be that technical analysis survives because the markets produce nearly infinite quantities of data, and in that data a determined seeker can find patterns. There's all kinds of data showing that our brains are hard-wired to find patterns. It's what we do. It has helped us survive. Trouble is, sometimes the patterns aren't real. You can find them in totally random data. If you flip a coin and it comes up heads three times in a row, you may decide this coin likes to come up heads - yet it may be a perfectly ordinary coin. So the pattern you found by looking backward will tell you absolutely nothing about looking forward.
Imagine that coin-flipping example made a thousand times more complicated, elaborated endlessly by legions of people over decades. The result is technical analysis. Yet as excruciatingly complex as it has become, it retains its most basic trait: It is a set of patterns that have been extracted from reams of historical data but that are useless in telling us what will happen next.
So has the market bottomed? We'd all love to know. The technical analysts are giving us a lot of mumbo-jumbo about "initial chart support," "price action," "double bottoms," and what happened in 1974, but they can't give us an answer. We know for sure, however, that months or years from now, long after it's clear when the bottom actually happened, when it's much too late to do anyone any good, the technical analysts will tell us how it fit precisely into this pattern or that.
And, to be sure, it will make entertaining reading.
Geoff Colvin, editorial director of FORTUNE and co-anchor of Wall $treet Week with FORTUNE, writes the "Value Driven" column that appears in the magazine. He also writes twice-monthly pieces, such as this one, for the Web site of Wall $treet Week with FORTUNE.
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