Application of Technical Analysis to Portfolio Management

Regardless of whether the strategy is top-down or bottom-up, technical analysis complements fundamental analysis.

Technical Analysis Applications to Portfolio Management: Top-Down Approach

Analysts, traders, and investors  who are interested in global equity markets usually start their top-down examination with global benchmarks. The relative performance of various indexes will reveal important investment data  for long-term investors. To catch trend periods, technical analysis focuses on crucial inflection points on price charts. www.oldhouseonline.com

Intermarket analysis can help with asset allocation decisions. Tactical asset allocation (TAA) is a portfolio management method that involves adjusting the weights of assets held in various asset classes to take advantage of market opportunities. Asset allocation changes can occur within a single asset class or between asset classes. Portfolio managers can use this strategy to add value by taking advantage of market opportunities.

Portfolio managers make discretionary TAA selections based on technical and intermarket data. To make these decisions,  portfolio managers look at patterns and possible relationship changes on relative strength charts.

Short-term charts, such as the daily scale, might help you spot trend shifts early. Longer durations, on the other hand, will  warn you of major supply and demand fluctuations.

Technical Analysis Applications to Portfolio Management: Bottom-Up Approach 

A bottom-up investment technique focuses on the analysis of individual stocks. Bottom-up investing focuses an investor’s attention on a company’s technicals rather than the industry in which that company operates. Individual stock analysis can reveal investment themes in a variety of sectors and businesses.

To use the bottom-up technique, an  investor  requires an investment universe, a collection of instruments from which to choose. Aside from this,  an investor or analyst  needs a plan for selecting instruments based on defined criteria.

To use a bottom-up strategy for stock selection, an analyst must have a process for uncovering prospective trades. Focusing on breakout and momentum is one of the various approaches used in stock selection and financial decision-making. For detecting opportunities, any analyst, investor, or trader might apply their own technique.

The Role of the Technical Analyst in Fundamental Portfolio Management 

A technical analyst may perform a supporting role in a group of investors. The technician can conduct research and uncover investment opportunities by employing a variety of strategies.  A technical analyst meets with the portfolio  or fund managers to discuss the opportunity set and makes trade and investment recommendations.

 A technical analyst should describe the anticipated price move, alternative price targets, and the level at which the analysis invalidates. Besides,  a technical analyst should take a purist approach and stick to their study’s outcomes without being persuaded by other considerations  such as fundamental data.

Position sizing decisions are frequently left to the technical analyst. When making weighting decisions, the portfolio manager, on the other hand, may depend on the technical analyst’s high-conviction recommendations.

Question

Which of the following is most likely the method that involves adjusting the weights of assets held in various asset classes to take advantage of market opportunities?

1. Bottom-up approach.
2. Top-down approach.
3. Tactical asset allocation.

Solution

The correct answer is C.

Tactical asset allocation (TAA) is a portfolio method that involves adjusting the weights of assets held in various asset classes to take advantage of market opportunities.

A is incorrect. The bottom-up approach focuses on individual stocks, then the sector, and finally on the entire market.

B is incorrect. Top-down forecasting estimates a company’s future performance by starting globally and working down to an individual company level.