Asset allocation: can technical analysis add value?

In this paper, we propose a simple approach to for exploiting optimally the information provided by technical analysis. Our optimal asset allocation strategy is easy to apply in practice and is quite robust to model misspecifications. Empirically, we apply the strategy to the US stock market from January 1926 to March 2011. In addition, we also examine strategy’s performances during the recent financial crisis as well as over all the bear markets of the past 85 years. We find that the proposed strategy outperforms the usual fixed asset allocation strategy substantially, and does extremely well during the recent financial crisis.