Profit in million dollars on an investment of $ 100 million in S&P 500 at the beginning of 2021. White represents the buy and hold strategy, and blue, purple and orange represent strategies based on the RSI, MACD and Williams% R indicators, respectively. Source: Bloomberg
“If you sold your stock this year because the market was overbought, as reported by Bollinger Bands, RSI or any other technical analysis indicator, then you have lost or received a lot of money,” writes Bloomberg analyst Liu Wang.
The expert back-tested 22 trading strategies based on technical indicators and found that in 2021 15 of them suffered a loss, while the simple “buy and hold” strategy brought in 11% (see the chart above – ProFinance.ru). However, in order to earn this 11%, it was necessary to be in the market all the time, since, having missed only the five best trading sessions, instead of 11%, the investor would receive only 2%.
“This year we have seen a very strong market with few corrections,” says Larry Williams, creator of the Williams% R indicator. “All overbought / oversold indicators, including mine, generated few buy signals and many sell signals.”
For all of 2021 and most of 2020, an overbought market led to either more overbought or consolidation, but not a correction, says Jeff DeGraaf, co-founder of Renaissance Macro Research. Between 2004 and 2015, he was annually ranked among the top technical analysts by Institutional Investor.
“Overbought / oversold signals are useless if you ignore the dominant trend,” the expert notes.