Fair to say, 2002 was the toughest year since the bubble peaked for those market participants once euphemistically dubbed "gurus," particularly those with a fundamental bent. For that, and a variety of other reasons, this column's "Guru of the Year" for 2002 is: technical analysis. This is the third year the column has sought to honor those who've distinguished themselves in a given year. Banc of America's Thomas McManus won the inaugural Guru of the Year award in 2000, while the late Bill Meehan was posthumously
named GOTY in 2001. The selection of a market discipline rather than a specific individual -- as in the past two years -- speaks to the rising ascendancy of technical analysis in both Wall Street and academic circles, the latter coinciding with a questioning of so-called efficient market theories. To our knowledge, no single technician forecast all stock market gyrations in 2002 as well as its ultimate losses. But a variety of individual technicians did make some well-timed market calls . "Technical analysis did a terrific job of identifying the primary lows this year in July and October, and the risks evident in the wake of those March and August highs," recalled John Bollinger, founder of BollingerBands.com. "It gets back to the idea of swing trading; there were four big swings this year and it was really important to be on the right side of them." Certainly, some fundamental analysts had a good handle on the market in 2002. But despite the broader carnage in stocks, following the advice of stalwart bears meant missing out on some serious moneymaking opportunities from the long side. Most notably, the S&P 500 registered more than 20% gains from its July lows to August highs, and from its October lows to late-November/early December highs. Meanwhile, the Nasdaq Composite rose more than 30% from its October lows, and many low-priced tech shares produced far larger percentage gains. Still, on the most basic level, the growing appeal of technical analysis stems from the realities of the bear market, now 3 years old. "Put simply: Technical analysis gives you places to get out, whereas if you wait for fundamentals to turn in a primary bear market, you're screwed," said Jeffrey Saut, chief market strategist at Raymond James. "In a bear market, your mistakes hurt because the wind is in your face."
Looking back, Saut named Cisco ( CSCO) and Intel ( INTC) as two stocks that fell precipitously before the companies' fundamentals really soured. More recently, he noted that many fundamental analysts -- including Raymond James' own -- had buy or strong buy ratings on Circuit City ( CC) as it fell from above $30 earlier this year to under $7 in recent weeks. "Technical analysis had you out in the mid-$20s," Saut said. "If you're using it correctly, technical analysis will prevent the big losses. That's pretty simplistic but that's the nuts and bolts of it." Money managers were going nuts this year as the bear market persisted and expanded. Increasingly, more of them turned to technical analysis, according to several technicians, who said demands for their services from institutional clients increased noticeably in 2002 vs. prior years. Some said they met with clients who never before cared about technicals, although none would specify names, as there's still a taboo against chart readers in some fundamentalist circles. "This year seemed to be a year in which more people were willing to take a look" at technical analysis, said Rick Bensignor, chief technical analyst at Morgan Stanley, one of those sources in greater demand from more clients in 2002. "My guess is it's because other standard analysis tools have continued to fail and not given
money managers the type of information that led to good decision-making." The problem with fundamental analysis in a bear market is that it's hard to make a fundamental case to buy stocks if the economy is stagnant, corporate profits are slumping, and equity valuations remain historically high. Yet, that's precisely what Wall Street's so-called major strategists argued at the beginning of 2002. With the exception of former J.P. Morgan strategist Doug Cliggott, every major Wall Street strategist forecast 2002 would be a strong up year for stocks and scant few of them adopted postures during the year that accurately reflected the bear market. (Heading into 2003, only two Street strategists -- Merrill Lynch's Richard Bernstein and J.P. Morgan's Carlos Asilis -- forecast the S&P 500 would finish below current levels. Cliggott, now head of U.S. research at Brummer & Partners, also forecasts a fourth year of declines.) Not surprisingly then, serious damage has been done to the reputation and influence of traditional fundamental analysts. A few years ago, Goldman Sachs' Abby Cohen could roil markets with a mere utterance. Now, her pronouncements barely cause a ripple, which brings us back to the growing appeal of technical analysis.
In conjunction with his work on technical analysis, Lo also coauthored a 1999 book entitled "
A Non-Random Walk Down Wall Street ." In title and substance, the book contradicts the Random Walk theory, which is based on the notion that prices fully reflect all available information. Or, in other words, that the financial markets are efficient. "When we first wrote on the rejection of random walk in 1998 , it was extremely controversial, and we got a lot of flak," Lo said. "Now, it's part of the orthodoxy that there are short-term departures from efficient markets, driven by fluctuations in supply-demand that ultimately get smoothed out in the long run, but in the short run can create violations in what people think of market efficiency." Technical analysis is designed to pinpoint those short-term departures, which is why it shone in an otherwise dismal year.