The Profitability of Technical Analysis during Financial Bubbles

This article examines the use of technical analysis, namely, a moving-average technique, to improve upon a buy-and-hold investment strategy during financial bubbles. Econometric techniques can identify financial bubbles in real time, and these techniques successfully identify commonly acknowledged bubbles in the US stock market. The authors find that technical analysis significantly improves investment returns over a buy-and-hold strategy during three of the five financial bubbles since 1928 and performs identically in the other two. The authors also demonstrate similar results using three international markets. TOPICS:Developed markets, financial crises and financial market history, portfolio theory, technical analysis Key Findings • Technical trading techniques may be effective during periods of market instability, such as a financial bubble. • Econometric techniques can identify stock market financial bubbles in real time. • The combination of technical trading and real-time identification of financial bubbles can be used to significantly outperform a buy-and-hold strategy.