Research Results – Time Perspective and Signal Power

Do short term analyses give the best signals in the short term and long term analyses the best signals in the long term? We study statistical return in the short term (22 days), medium long term (66 days) and long term (250 days) following trend signals in the short, medium long and long term charts.

Figure 1: Short term signals, price development the following year. Average price development for stocks in rising and falling trends in Investtech’s short term technical charts.
 

Figure 2: Medium long term signals, price development the following year. Average price development for stocks in rising and falling trends in Investtech’s medium long term technical charts.
 

Figure 3: Long term signals, price development the following year. Average price development for stocks in rising and falling trends in Investtech’s long term technical charts.
 

ppt: percentage points

The charts and tables above show that both short term and medium long term have shown good predictive power. Especially in the short and medium long term, but also to a lesser extent in the long term. Stocks in rising trends in Investtech’s short and medium long term charts have given an excess return of 0.8 percentage points the first month and 1.8 to 1.9 percentage points the following three months, and 3.0 to 3.3 percentage points the following year. Stocks in falling trends in Investtech’s short and medium long term charts have given negative excess return of 0.9 to 1.2 percentage points the next month, 2.2 to 2.8 percentage points the next three months and 6.9 to 8.8 percentage points the following year.

Signals in short and medium long term analyses give better long term prediction, one year forward, than the signals in the long term charts. Stocks in long term rising trends gave excess return of a marginal 0.5 percentage points vs. benchmark in a year, while stocks in long term falling trends gave a negative excess return of 3.5 percentage points. It is logical that long term signals have weaker short term predictive power, but it was a surprise that they are clearly weaker also in the long term.

This indicates that short and medium long term trends, which tend to cover 20 to 300 days in Investtech’s charts, are close and have low regression deviation, make the best predictions. The long term trends, over 500 to 1000 days, make for weaker predictions.

When doing an overall analysis of a stock, for an investment perspective of one month to a year, the trends in Investtech’s short and medium long term charts should be emphasised and the long term trends disregarded.