WSJ: A Fund-Company Chief Embraces Technical Analysis

By SIMON CONSTABLE

If it wasn't for the global financial crisis that began in 2007, Sam Stewart, president of the Wasatch Funds, might never have considered using so-called technical analysis to help pick stocks.

But these days he wouldn't consider doing otherwise.

Technical analysis, also known as chartism, is the art of using patterns in stock-price charts to help make investment decisions. It differs from "fundamental" analysis, which looks at the economics and finances of industries and companies.

It's unusual for investment managers who rely on fundamental analysis to give much weight, if any, to stock charts, says Vinny Catalano, chief investment strategist at New York-based Blue Marble Research, a market-research and asset-management firm. Fundamental analysts, he says, often dismiss technical analysis as fluff that lacks any theoretical underpinning for its conclusions. But not Mr. Stewart.

In the fall of 2007, he saw value in stocks. The major indexes were starting to drift lower then, and some sectors, including financials, were already tanking. Some stocks looked cheap to him, based on fundamental analysis, so he bought them—and lost money as markets plunged in 2008 and into 2009.Wasatch Advisors, the fund-management firm Mr. Stewart founded in 1975 and still runs, is well known for doing solid fundamental research and generating competitive returns. "We used to be 100% fundamental analysis," Mr. Stewart says.

In retrospect, Mr. Stewart says, "I lost sight of the forest for the trees." If he had looked at the charts at the time, he'd have said to himself, "You are crazy" to consider buying, he now says.

So, while Wasatch still conducts intense fundamental analysis, Mr. Stewart now monitors "several technical indicators that were flashing warning signs prior to the global financial crisis," as he explained in an April 4 letter to Wasatch shareholders.

He focuses on two technical indicators to supplement his analysis. One is point-and-figure charts, designed to display patterns in share-price movements in a way that makes it clear when a new upward or downward trend has emerged. The other is moving averages of share prices. For instance, if the current price of a stock is above both its average over the past seven weeks and its average over the past 21 weeks, and both moving averages have an upward slope, then the stock is in both a short-term and long-term upward trend. Many chartists see that as a buy signal.

For those who are bullish on stocks, Mr. Stewart has some good news. The same indicators he ignored at his peril back in 2007 "are giving me reasons for optimism today," he wrote to shareholders.

See original story here.