Are stocks random?

Question

I know you can do a technical analasys when day trading, but what about regular stocks. If I were to go to Yahoo stocks ang look at google's stock, could I make any technical analasys of that stock? Or is it just random? Obviously it's effected by the market and the companies success, but can you analyze it in a technical way? How?

Answer 1

It all depends on perspective. If you look at daily data, stocks prices are completely random. Weekly data exhibit moderate reversion. Over 6-12 months, stocks are likely to trend (some more than others), while over 3-5 years, there is a strong tendency to revert.

Answer 2

There is a reason that technical analysis is not taught at universities -- it is voodoo.

Here is an interesting experiment for you to do. Import the S&P 500 index into Excel. Now calculate the daily return for each day. Now do a scatter plot graphing each day's return against the next day's return. Look at the pattern you get. Is there any predictability at all?

Repeat this with monthly data.

Doing this, you will see that there are no real patterns and that the market is pretty random.

Academic studies do show that there are some trends in some stocks (what some people call momentum). A closer analysis of these trends show that most of the abnormal returns come from small companies that have very little analyst coverage. Without any coverage, bad news comes out slowly, so they trend downwards rather than having a quick correction. If you were particularly good at finding these companies, you could short them and make an abnormal return. However, the cost of acquiring information might be greater than the return.

I do not belieev that the market is perfectly efficient, but believe that it is close enough.

Answer 3

You can do technical analysis but at any point in time it may or may not give definitive signals. You can't apply TA to any stock and have it magically spit out a buy or sell. After a quick look at GOOG, it's not at a point that I would buy or sell and that means any trade has a higher risk of failure than if I were to wait until it provides a good signal.

On weekends, I do a quick scan of about 500 daily charts (with certain TA indicators) and look for certain patterns. Out of 500, I usually come up with about 30 - 40 that warrant a closer look. I start by drawing trendlines and looking closely at the TA patterns and will throw out about half. I then pull up a weekly chart to make sure the daily and weekly indications are in agreement. In the end, I will end up with 3-10 stocks to go with. Sometime on Monday morning I will buy/short up to 6 of those stocks, and almost invariably, about 2/3 will go as predicted. The losers get tossed early on and I let the winners run.

I trade short term - a few days to a few weeks and TA works great for me and with all due respect to the professor, it's not voodoo in my world. For the past 10 years, my lowest annual return is 16% and the highest is 63%.

TA is not a science - it is an artform and it takes practice. Just don't try to force it on your favorite stock.

Answer 4

Stock movements, when looking at a distance can seem random. You have to remember, all the people and funds that invest in a stock do so at random times. So they might buy a stock becuase they have a large order to buy it.
But often a stock price moves for many different reasons. Like profit announcements (exceeding or doing poorly), economy news (like oil for example) and rumors (like a company buying another company or a CEO stepping down). These are soem factors to keep a look at when watching a stock price.
Also there are numerical values to keep track of. Like market segment, P/E ratios, cash flow, inventory levels and high/low prices.
My suggestion, to learn more, use yahoo (or any other website like cnn.com to track your own portfolio (grounp of stocks). Watch how they perform and then look at the reasons why they performed that way during the day. Also, on financial sites like cnn.com they have experts that will wiegh in. This way, you can learn by experience but without loosing any money.

Answer 5

I think that the shorter the time frame you are measuring returns, the more random the price movements are. Conversely, its much easier to correctly predict things if you take a long-term view. While there is alot of academic writing about market efficiency/randomness (specifically Malkiel; A Random Walk Down Wall Street), there are investors who have been able to beat the markets over long time periods (Buffett, Lynch, Danoff, Neff, etc.); normally they did so by taking a long-term perspective and being patient to allow their foresight to pay off. The simplest way I can respond to the question of "Are short-term movements random?" is to ask you how many rich day traders there are, compared to long-term investors.
Hope this helps.

Answer 6

No of course they arent, millions of different variables can effect how the stock market works. YOU SHOULD KNOW THAT ACCOUNTANT REAL ESTATE OR WHATEVER YOU CALL YOURSELF EXTROADANARE