From: hal@finney.org
Date: Fri Oct 22 1999 - 10:40:31 MDT
I don't think that the Shiller paper falls into the category of "technical
analysis", anyway. Technical analysis is distinguished from fundamental
analysis by its emphasis on patterns in price movements independent of
the fundamentals of the stock (its earnings, market prospects, etc.).
You could show a market technician a price chart and not tell him what it
was prices of - could be an Internet stock, a Treasury bond, pork belly
futures, anything - and he would apply the same techniques to look for
patterns and make predictions.
In the case of Shiller, yes, he is looking at charts and looking for
correlations between data sets. But the figures he is looking at, prices,
earnings, and their ratios, are generally considered part of fundamental
analysis, not technical. P/E's are the basic tool of the fundamentalist,
the first method he uses to judge whether a stock is fairly valued and
how much it is likely to appreciate.
All Shiller has done in this context is to calculate P/E's a little
differently, using 30 year average earnings instead of current year
earnings, and then to compare them to price appreciation over a ten
year period. He's also looking at the market as a whole rather than
at individual stocks. But this is squarely in the fundamental analysis
camp and is a very reasonable and natural way to apply fundamental theory.
Just because he used a chart to display his results doesn't make him a
chartist or a technician! He could have simply listed his regression
fit parameters in numeric form and made his predictions on that basis.
But then only a statistician would have a good feel for how good the fit
actually was. Displaying the data in chart form makes it understandable
to a much wider audience.
My main concern with the market is how it will react to the next extended
decline. It can't go up forever. Once we hit a bear market that lasts
a year or more, it will test the faith of investors who have seen stocks
do nothing but go up at record breaking pace. To the extent that today's
historically high valuations are due to investor psychology built on a
decade long expansion, a change in that psychology may bring the market
back to more normal P/E levels.
Hal
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