Do the stars hold the key to the stock market?

A large body of academic investment research indicates that technical stock market analysis has about as much credibility as astrology.  Technical analysts use graphs and charts of prices and trading volume to make predictions about individual stocks, industry sectors, and the stock market itself. Although technical analysis is still widely practiced on Wall Street, academic research says the method rests on a fundamental flaw, because current trends and prices are not predictive of future trends and prices. Then what does one make of a market analyst who combines traditional technical stock market analysis with astrology?

Market analyst Arch Crawford gained fame in 1987 because he supposedly predicted the October stock market crash of that year (never mind that he called the crash for Aug. 24, 1987, a few months early). Crawford claims he predicted Iraq’s 1990 invasion of Kuwait, the Chernobyl nuclear accident, and even the death of Princess Diana, all through astrological signs. Despite those claims, his newsletter’s investment recommendations lagged the stock market by almost seven percentage points throughout the 1990s, according to Hulbert Financial Digest, an independent monitor of investment newsletters.

Crawford’s predictions haven’t been too accurate in recent years. He made several startling predictions in a full-page interview published in Investment News in June 1999. Although he predicted that the bull market of the 1990s was about to end, his timing was a little off. He also missed the ensuing boom in the bond market. Crawford predicted that a solar eclipse on Aug. 11, 1999 would herald a “devastating decline” of up to 50% in the stock market, with the bottom of the market coming in October 1999. Unfortunately for him, the market continued to rise steadily through the end of 1999, before heading into a three-year bear market beginning in early 2000. The bottom wasn’t reached until October 2002, three years after Crawford’s predicted bottom.

Even so, investors who heeded his warning and got out of stocks might have avoided some heartache over the next few years. But did Crawford steer them into the bond market, which would have been the best haven? He did not. Instead, technical charts on interest rates told him that the long-term downtrend in rates was over and that “much higher rates were on the way.” He advised investors to stick with short-term bonds. Meanwhile, long-term bonds soared for several years as the Federal Reserve pushed down rates, the economy slowed, and the Sept. 11, 2001 terrorist attacks sent investors fleeing to the safety of U.S. Treasury bonds.

What about the future? Investors may want to watch out for the year 2012, he warns. That marks the end of the Mayan’s long-term calendar. Stay tuned.