Is the popularity surrounding technical analyses overdone?

I came across a very interesting comment on social media this week surrounding the technical analyses of shares. In short, this person believes that it is something that gets “way too much” attention on social media. This person continued by saying that a “horrible” technical analysis system combined with an excellent risk/portfolio management system would easily outperform the results of an excellent technical analysis system combined with a poor risk/portfolio management system.

My late grandfather had a bookshop and as a young teenager I spent quite a bit of time there. I always found it very interesting to watch his clients. They would come in, slowly browse through the shelves and then pause when they got to the comic books. After paging through the comic books, they would move on and end up buying a fiction novel or a biography. Why? Well, because although comic books may not have been their preferred choice of purchase, it was visually a lot more stimulating than most novels. At this point, I need to make it very clear that I definitely do not claim to be a speculative share trader, nor do I claim to be a technical analysis expert. I am also not saying that this person’s opinion is wrong in any way. But I do think it is important to understand the psychology behind the “why is technical analysis so popular on various media platforms?” question.

By returning to the abovementioned social media comment, I would have to say that I don’t think it has to be an “either/or” situation when it comes to technical analyses, but rather an “and” situation. Who says that a balanced investment management system only has to consist of one individual investment tool? Combining a technical analysis with a fundamental analysis doesn’t mean that you won’t end up with any bad apples, but it should definitely improve your chances to achieve success.

Many will probably point out that a fundamental analysis is very complicated and, in most cases, also requires the use of some very expensive data systems, so I would recommend consulting an expert if you are unsure. After all, you won’t consult the best accountant in the country to perform brain surgery. And that doesn’t make the accountant any less competent, it just means that he is not an expert on brain surgery.

That said, I also know that there are many readers who share my passion for shares and I would like to propose an alternative strategy for those who hold a preference towards technical analyses:

Identify companies with higher quality characteristics

I always start an analysis by identifying companies that show better quality growth. There are various ratios to look at, but according to most research reports, the return on equity (ROE) seems to be the most popular. Growth companies are usually companies that also have a higher ROE. Most stock brokers’ online systems offer filters which allow you to sort companies according to several ratios, including ROE.

I did an online search and I found quite a few screeners that could sort ROEs from high to low. But I have to warn you that the results between some of them varied, so I would recommend that you always test the results on other data providers’ systems as well.

I personally prefer the larger, more well-established companies, so I picked the Top 80 largest companies on the JSE and sorted them by ROE from high to low. From there, I only moved the 40 highest through to the next filter.

Look for value

I arranged the 40 shares that made the cut according to price earnings ratio (P/E) from low to high. The reason for this is that the P/E, not unlike the ROE in terms of measuring quality, is probably the most popular valuation tool. After applying this filter, I came across the final 20 shares that, based on the abovementioned criteria, currently seems to offer the best value:

Table 1: Top20 shares identified after combining ROE and P/E filters (source: Iress, PSG Wealth Old Oak, Thomson Reuters,

* Disclosure: Capitec is partly owned by PSG Group, which is also a majority shareholding in PSG Konsult, of which PSG Wealth is a division.

Looking for trends

By focusing on the last 20 shares, it means that the companies you are conducting your technical analyses on should be relatively healthier companies. It also makes the whole process so much easier, because by focusing on only 20 shares, it means that you don’t have to analyse hundreds of graphs on hundreds of shares.

The indicators used will differ from person to person. Some investors like to follow a strong trend investment and don’t mind if it’s getting more and more expensive. As long as they have good momentum, those shares will remain popular. Let’s look at Assore as an example: over the last three years, this share has had its fair share of ups and downs. Technically, however, the long-term trend is upwards, which keeps trend-followers interested.

Graph 1: Technical graph of Assore Ltd (source: PSG Wealth Old Oak &

Other investors prefer to buy shares when it appears to be technically oversold. There are several tools/indicators you can use to determine that, but the most popular ones seem to be the relative strength index (RSI) and stochastic oscillator.

A good example would be a share like Standard Bank which appeared to be in oversold territory in October 2018, but has since strengthened and has not yet entered overbought territory.

Graph 2: Technical graph of Standard Bank (source: PSG Wealth Old Oak and

There are good reasons why share prices move up and down and I would like to warn investors to ALWAYS do their homework before buying or selling a share. At the end of the day a technical analysis (just like a fundamental analysis) is based on historical data which does not guarantee any form of future performance. But an extra arrow or two in your investment quiver definitely won’t make you weaker.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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