Relevance of indicators like RSI for long-term investing

Question

How relevant are indicators like RSI and CCI for investing in stocks when not focusing on day- or short-term trading?

Answer 1

I am more of a value investor but dabble in technical analysis, so let's see if we can figure this out.

Technical analysis, which involves using indicators such as RSI and CCI, is generally used for short term investing. This isn't to say that it is not useful for long term investors, but it is used a lot more in short term investing.

Investments with a time frame of longer than a year are generally considered long-term investments. On the flip side, investments with a maturity of less than a year are considered short-term.

In short term investing (like day-trading), indicators are useful in determining when to buy a stock and when to sell it within a short time period. Using RSI as an example, say you notice a stock hit 20, that should signal a "buy". Then when the stock swings up to say 75, you would want to sell.

In long term investing (like value investing) say there is a stock you've identified as being undervalued. You may want to look at RSI to determine down to a finer level when to buy the stock, and when to sell when you see it is over valued.

Hope this helps!

Answer 2

RSI - Relative Strength Index
CCI - Commodity Channel Index

Both are momentum indicators based on the historical standard deviation of the underlying security. Quoting Investopedia, RSI "compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security."

So, to answer your question, they are relevant for "long term investing" and "short term investing." You have to decide on your definition of "long" versus "short" in order to choose the proper timescales with which to compute RSI and CCI. Computing RSI with minute tick data would be a poor indicator of year-in-the-future performance... and vice versa.

Some would say that no momentum indicator is good for investing because it depends on historical performance (the past) and that it is not indicative of future stock price. But that's a different debate.

Answer 3

If you are deciding whether, (or how much to) invest in stocks, then you might want to check out some of the longer term predictors. For example ...

• Shiller's CAPE ratio seems to have a well established correlation with following 3 year returns - currently indicating a minus 3% inflation-adjusted annual return for S&P 500 !!

• Geremy Grantham[Page 2] predicted minus 4.4% real annual return for US Large CAP over 7 years

• Ned Davis's"single best stock market predictor" seems to correlate with 10 year returns, and to be indicating returns of plus 3.7% per annum.

I have always assumed that any excess returns that could have been derived from short term indicators such as RSI or CCI have been taken ages ago by the computer and artificial intelligence driven traders. I have therefore taken the lazy way out, stayed invested, and just expected the historical average of 7% annual real return.

However, prompted by your question, I am now wondering if I should take some of the above predictions into account, and sell to reduce risk.

Answer 4

Zero practical relevance for stocks. Indicators overall do not present any new information other then information of price/volume history. And for long term (low risk) you cannot rely on price/volume.