StockFetcher Forums · General Discussion · Techie + Fundie = Trendy (!?%@#)<< >>Post Follow-up
nikoschopen
2,824 posts
msg #40520
Ignore nikoschopen
1/20/2006 4:43:02 PM

It goes without saying, albeit a mouthful, that the fundies sow while techies reap. Just how much this translates on your cash register is beyond me, but the need for a balanced understanding between the two have been hastily swept up under the rug and was never properly addressed. Even as a techie myself, there are some murky areas within technical analysis that doesn't quite add up by reading tea leaves alone. As such, fundies can and will come handy when ure, well, wading neck deep in mounting losses and know nothing about the reason for the stock's plunge. But I digress.

Please post anything that may aid in the understanding of the two analyses (minus the bald-faced lies and character assassination).


nikoschopen
2,824 posts
msg #40527
Ignore nikoschopen
1/20/2006 6:51:57 PM

"With their floppy, three-cornerd court jester hats and big smiles, Motley Fool co-founders, Tom and David Gardner offered a message with great appeal: Don't listen to the pompous "wise men" of Wall Street. You can do better investing on your own. Now, more than a year[sic] after the meltdown of the tech-heavy Nasdaq Stock Market, I found a sadder but wiser Fool. "To look and see your portfolio substantially negative forces you to question your assumptions."

--Peter Navarro, "When the Market Moves, Will You Be Ready?"

Hmm. Unless your myopic view neglects to take into account all the lying SOB broker qua whores who aided and abetted corporate malfeasance at the expense of the unsuspecting public. Well, too bad, so sad, you're f..ked. But I'll let the matter rest for now.

According to Navarro, the economist, the notion of any dichotomy between the techies and the fundies is a misnomer. Every stock and every sector you consider should go through BOTH a technical screen and a fundamental screen to determine its relative strength or weakness. As for what fundies can actually do, its selection criteria is based on down-to-earth factors such as how much money the company is making and how well the company is run -- the so-called "quantitative" measures of company strength (eg. top line, bottom line, P/E ratios, etc.) -- as well as "qualitative" factors like a company's management quality, its labor relation, and its rate of technological innovations (ie. ą la Peter Lynch). (Of course, techies will rebuff the claims of fundies with their own seal of approval for what constitutes quantity or quality.)

One of the main precept of fundamental analysis is that every damn stock has an "intrinsic" or "fair" value but that stock prices do not always reflect fair value in the short run. These price discrepancies provide profitable opportunities to buy undervalued stocks or to short overvalued stocks. And, naturally, to determine a company's fair value, fundies dig deep within the earnings statement for quantitative measures, such as earnings growth, liquidity, and leverage.

Blah, blah, blah, snorts the nonchalant techies, who have for years carefully ignored this twin alter of quality/quantity for patterns and signals. For them, everything begins and ends with human behavior, which is reflected in price patterns. What they look for are predictable patterns or trends, that repeat themselves time after time. Couple that with volume and, voilą!, you have a roadmap to success. Only if it were that easy.

Disclaimer: My knowledge is none too bright when it comes to fundamental analysis. So perhaps others can pick up the slack from where I left off. But the main gist of this thread should really be about fundamatal analysis from the technician's vantage point, and I didn't do a helluva job of delivering on that promise. If you believe there is too much fluff without substance (thus far) I apologize. Maybe I can dredge up some useful dirt from the books that have collected dust over the years.


guru_trader
485 posts
msg #40548
Ignore guru_trader
1/21/2006 1:40:37 PM

What makes the market tick?

Take, for example, the drop of the Dow on Friday ...

"Stocks plummeted amid fears of an imminent terrorist attack on the United States and surging oil prices. The market took a further pounding after several blue-chip firms announced earnings downgrades. The Dow erased its gains for 2006. Citigroup and GE joined a growing list of companies, including chip maker Intel Corp. and Internet media firm Yahoo Inc., whose quarterly results have disappointed investors."
~Source: http://finance.news.com.au/story/0,10166,17890294-462,00.html

What?! I didn't notice anything; my stocks continued rising on Friday.


nikoschopen
2,824 posts
msg #40554
Ignore nikoschopen
1/21/2006 2:35:29 PM

The old adage, which we hear more often than not, is "a rising tide raises all boats". There are exceptions to the rule, of course. In my 52-week breakout filter, I found 8 stocks that made a new 52-week high yesterday on very strong volume (mostly oil related stocks) What gives? Sector rotation and Intermarket dependency, which I will cover when time permits.


nikoschopen
2,824 posts
msg #40565
Ignore nikoschopen
1/21/2006 5:19:22 PM

"Curiously, however, the broken technician is never apologetic about his method. If anything, he is more enthusiastic than ever. If you commit the social error of asking him why he is broke, he will tell you quite ingeniously that he made the all-too-human error of not believing his own charts."

--Burton G. Malkiel

"There is only one side of the market and it is not the bull side or the bear side, but the right side."

--Jesse Livermore

Here's a variation on the theme of fundamental analysis, courtesy of Jack Schwager's "Fundamental Analysis on Futures" (1995):

The cause-and-effect relationship is entirely the province of fundamental analysis. In contrast, intrinsically all methods of technical analysis are based on patterns. Thus, the trader who wishes to understand a market's behavior must turn to fundamental analysis. Some of the key attributes of fundamental analysis include the following:

1. Fundamental analysis provides an extra dimension of information not available to the purely technical trader.
2. Fundamentals may sometimes portend a major price move well in advance of any technical signals.
3. A knowledge of fundamentals would permit a trader to adopt a more aggressive stance in those situations in which the fundamentals suggest the potential for a major price move.
4. An understanding of the underlying fundamentals can provide the incentive to stay with a winning trade.
5. The way in which a market responds to fundamental news can be used as a trading tool -- even by the technical trader.

Schwager further emphasizes that much of the conventional wisdom about fundamental analysis is inaccurate and sheds a light or two on the fallacies of supply/demand analysis. I reproduce the following excerpts verbatim. (note: since Schwagger based his book on futures rather than on equities, portions of the passage have been changed to make it more suitable for those who solely trades stocks)

FALLACIES, OR WHAT NOT TO DO WRONG

1. Viewing Fundamentals in a Vacuum

"The fundamentals are bearish" is often thought to be synonymous with an abundant supply situation. Such an interpretation might seem plausible, but it can lead to inaccurate conclusions. For example, assume that Intel is trading at $30 and in transition from bullish to bearish. Given this scenario, an expectation of lower prices would be reasonable. Assume that prices begin to move lower. Are the fundamentals still bearish at $25? Very likely. At $20? Maybe. At $15? At $10? At $5? The point is that at some price level, the fundamentals are no longer bearish, no matter how large the forecast on the impending price drop. In fact, it is entirely possible that the fundamentals could be bullish in a bearish situation if prices have "overdone" the downside -- a situation that is far from infrequent. Thus, fundamentals are not bullish or bearish in themselves; they are only bullish or bearish relative to price. The failure of many analysts to realize or acknowledge this fact is the reason why the fundamentals are so often termed "bullish" at market tops and "bearish" at market bottoms.

2. Viewing Old Information as New

Newswire services and newspapers frequently report old information and new information in much the same manner. For example, a story with the headline "Worldcom Projected to Beat Earnings Estimate" may sound very bullish. However, what the story is not likely to indicate is that this may be the fourth or fifth such estimate released. Very likely, the previous estimate also projected an upbeat assessment on a very rosy scenario. For that matter, the current month's estimate might be lower than the forecast previously declared. The main point to keep in mind is that much information that sounds new is actually old news, long discounted by the market.

3. One-Year Comparisons

The use of one-year comparisons is fairly widespread, probably because it offers a simple means of instant analysis. This approach is overly simplistic, however, and should be avoided. For example, consider the following market commentary: "Intel indicates that the semiconductor market has finally turned a corner. The world supply of semiconductor chip is down 10 percent, which should push prices higher..." Although this type of analysis could be right on target in some situations, it will be susceptible to error if used consistently.

Sharp-eyed readers may already be citing fallacy number 1, that is, short supplies do not necessarily imply higher prices, since the market may already be discounting such a development. However, some additional potential errors pertain specifically to the one-year comparison. Just because the report indicated a 10 percent drop in supplies does not mean it implies large supplies. Perhaps the supplies were extremely low the previous year. Although one-year comparisons can be used sparingly for illustrative purposes, they should never represent the sole basis of fundamental analysis.

4. Using Fundamentals for Timing

If this list of fallacies were ordered on the basis of frequency of occurrence, this item would be a strong contender for the number 1 spot. Fundamental analysis is a method for gauging what price is right under given statistical conditions and can be used in constructing annual, quarterly, and in some instances monthly price projections. However, it is ludicrous to attempt to boil supply/demand statistics down tot he point at which they provide an instantaneous price signal, which is exactly what some traders do when they rely on fundamentals for timing.

Trading on the basis of newspaper articles, newswire stories, and floor information falls into this category. It is no surprise that speculators who base their trades on such items are usually spectacularly unsuccessful. The only major exception are those traders who use this type of information in a contrary way, such as viewing the failure of the market to rally after the release of a bullish newswire story as a signal to go short.

5. Lack of Perspective

Assume the following scenario: Scanning the financial pages one day, you notice the following headline, "Intel Estimates a Major Bottleneck in the Semiconductor Production and Distribution due to Hurricane Katrina." Does such a large production loss suggest a major buying opportunity? Wait a minute. What large production loss? Just how large is large in the context of "major bottleneck"? By the same token, consider this headline: "Government Official Estimate 10,000 Cattles Killed in Recent Midwest Winter Storm." Ten thousand cattle might sound like a very big number if you were to picture them on you front lawn, but viewed in terms of the total cattle population of about 100 million head, the loss does not even equal the proverbial drop in the bucket.

This example is based on supply, but cases involving domestic consumption or exports could be illustrated just as easily. In each instance, the same question should be asked: How important is the event (e.g., production loss, new export sales) in terms of the total picture.


nikoschopen
2,824 posts
msg #40568
Ignore nikoschopen
1/21/2006 6:22:52 PM

If you were to ask a group of average investors (fundies & techies alike) to name the optimal way to make a killing in the stock market, they would most likely mention "market timing". Whether you're the value-type who buy low and sell high or the growth-type who buy high and sell higher, this idea of making a quick bang for the buck doesn't pan out as one would like. For not only is market timing one of the hardest technique to master, it's also the least successful.

As an alternative, there is a technique embraced by fundies & techies alike that have year after year outstripped ure daddy's average yearly return of 10% (so methinks). It ain't "buy & forget" approach nor "diversify until you drop" method either. It's called "sector rotation". Needless to say, the payload is higher for those who buy into hot stocks of the day than those who devote their hard-earned money on losers that are suffering from the couch-potato malaise. While sector ivnesting will drain some of ure sleep due to higher volatility, with calculated risk this could be overcome.

I should note that, rather than pure sector ratation, my interest lies with intermarket analysis. For instance, why does higher grain prices drive up beef prices? (Because increased cost of grain - a major cattle feed - will shrink meat production, which in turn will drive up meat prices.) Why does higher inflation data transforms the stock market into a bloody pulp? (Because of inflation hawks like Alan Greenspan will raise the interest rates, and subsequently make it even more difficult for you and me to borrow.) And speaking of inflation, the question of "where are we in the economic cycle?" carries an ominous undertone of "is Greenspan & Co. done with its irrationally exuberant policy of raising the interest rates?" Naturally you'll then wonder which industries will benefit the most and, consequentially, which companies will experience growth the most?

(To be continued...)


EWZuber
1,373 posts
msg #40578
Ignore EWZuber
1/22/2006 3:03:04 AM

nikoschopen
Iran threatened to disrupt oil supplies. I suspect this had an impact on the market and the XLE and OIH.


TheRumpledOne
6,358 posts
msg #40595
Ignore TheRumpledOne
1/22/2006 4:51:52 PM

I thought Greenspan had been replaced?


nikoschopen
2,824 posts
msg #40600
Ignore nikoschopen
1/23/2006 2:47:28 AM

"The stock market was hammered this week by two factors. First, there was disappointment over guidance given in key earnings reports. Second, there was concern over the situation with Iran and the implications for oil prices."
(Source:http://www.briefing.com/Investor/Public/MarketAnalysis/AfterHoursReport.htm)

"Assuming the U.S. Senate confirms Bernanke--and it is widely expected that it will--he would assume office Feb. 1, one day after Greenspan's term expires. The timing of Bernanke's ascension to the chairman's post is critical, because he will have to decide at that time whether he feels the Fed should continue the campaign of quarter-point rate increases that it began last year to head off any nascent inflation.

Since June 2004, the Fed has raised its target for the federal-funds rate, the interest that banks charge one another for overnight loans, from 1% to 3.75%. If the Fed continues to raise rates one-quarter point during the remaining three policy meetings of Greenspan's term, the rate would stand at 4.5% when Bernanke takes over. The question for Bernanke at that stage would be whether the Fed should raise rates again at its March 28 meeting, the first policy gathering at which Bernanke would be in charge.

Professor Richard Marston says the Fed should forego any action in January and give the Federal Open Market Committee under Bernanke a chance to raise rates in March if it feels a hike is necessary. "If Greenspan were going to be at the Fed another year, the Fed would probably raise rates in November, possibly in December, then again in the spring, then perhaps pause at 4.5% to see how the economy is responding," suggests Marston. "The final rise to 4.5% is not guaranteed, but is most likely at this stage. The economy is resilient. Even oil at $60 per barrel cannot bring it to its knees."

But Marston says Bernanke's appointment makes the timing of further rate hikes awkward. "Bernanke needs to establish his inflation credentials. He is a fine economist and knows that the more conservative a reputation a central banker has, the more successful that central banker will be. If I were at the Fed, I would argue that it should hold up any action at the last Fed meeting in January under Greenspan. Pass the champagne and cake and applaud this great central banker. Then let Bernanke begin his tenure with perhaps a final interest rate hike in March. The markets will get a clear message, then the Fed can proceed from there under the new leadership."

Siegel and Silvia agree that Bernanke needs to establish that he will be as diligent in fighting inflation as Greenspan and Greenspan's predecessor, Paul Volcker.

There is a consensus that the Fed is getting close to ending its string of rate increases, according to Siegel. The Fed raised rates to 4% on Nov. 1, and Siegel believes there will be another quarter-point hike at the December meeting. "But whether there is a January increase is in the balance," Siegel says. "When that meeting comes, it's going to be a transition point. It will be near the end of tightening--if not at the end--and Greenspan will have to judge whether the economy warrants a pause or even a decrease if the economy weakens significantly. Bernanke has to show his anti-inflation bona fides. I think if Greenspan holds off on a rate hike in January, and Bernanke later does an increase, it would show the Fed is really anti-inflationary. But the problem with that is if the economy is weakening, it would look awkward. The market wouldn't call for it."
(Source:http://www.forbes.com/entrepreneurs/2005/11/16/interestrates-federalreserve-greenspan-cx_1116wharton.html)


nikoschopen
2,824 posts
msg #40655
Ignore nikoschopen
1/23/2006 10:33:09 PM

John Murphy notes in his well-acclaimed book, "Intermarket Technical Analysis" (1991), that the U.S. stock market doesn't trade in vacuum. It is heavily influenced by the bond market. Bond prices are themselves very much affected by the direction of commodity markets, which in tun depend on the trend of the U.S. currency.

MARKETS DON'T MOVE IN ISOLATION

All markets are related. Stock traders must watch the bond market. Bond traders must watch the commodity markets. And everyone should watch the U.S. dollar (well duh! It's ure money). There was a time when all this didn't apply. They were left to themselves without much concern for anything outside their pristine quarters. For the technical analysts, it was difficult enough to follow just one market; to consider outside influences seemed like heresy. However, things are now fast changing.

FOUR MARKET SECTORS: CURRENCIES, COMMODITIES, BONDS, AND STOCKS

The key to intermarket analysis (IA) lies in dividing the financial markets into four sectors. How these four sectors interact with each other will form the basis for IA. The U.S. dollar, for example, usually trades in the opposite direction of the commodity markets, in particular the gold market. While individual commodities such as gold and oil will have inverse relationship with bond price, the stock market will often mirror the price fluctuations of the bond market. (However, for those who trade stocks, this analogy can be extended to sectors and their industry components, AKA "sector rotation".)

The most fundamental premise of IA is this: when in doubt, look to related markets for clues. One of the great advantages of IA is the suggestion that important directional clues can be found in related markets. Of course, IA provides "background" information, not primary information. Traditional technical analysis still has to be applied to the markets on an individual basis, with primary emphasis placed on the market being traded. Nevertheless, IA will warn traders when they can afford to be more aggressive and when they should be more cautious. Suppose IA suggests that two markets usually trend in opposite directions, such as between treasury bonds and gold. Suppose further that the two are trending, for whatever reason, in the same direction. By relying on IA, the trader who gets bullish readings in both markets that usually don't trend in the same direction knows one of the markets is probably giving false readings.

Trading is in reality the manifestation of intermarket relationships at work. These intermarket relationships include, but not limited to, the following:

♠ action WITHIN commodity groups, such as the relationship of gold to platinum or crude to heating oil;
♠ action BETWEEN related commodity groups, such as that between the precious metals and energy markets;
♠ the relationship between the CRB (Commodity Research Bureau) Index and the various commodity groups and markets;
♠ the INVERSE relationship between commodities and bonds;
♠ the DIRECT relationship between bonds and stocks;
♠ yet another INVERSE relationship between the U.S. dollar and the various commodity markets, in particular the gold market;
♠ the relationship between various futures markets and related stock market sectors, for example, gold versus gold mining shares;
♠ U.S. bonds and stocks versus overseas bond and stock markets.

(To be continued...)


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