By: Bill Spencer — September 11, 2020
Friday Q&A - Whose Side Are You On?
Big Bill Spencer here with the True Market Friday Mailbag.
Today’s question of the week (so to speak) is from a long-time reader named Marcus K.
He addressed the question to me and I’ll do my best to answer.
“Hi Bill. I always read your column in True Market Insiders but this is my first time writing to you. You seem to think fundamental analysis is not as important as technical analysis. My father-in-law makes money in stocks but when I asked him about technical analysis, he said he never uses it. So is there a time to consider a company’s fundamentals?”
First off Marcus, that’s a fantastic question! And it’s one I hear a lot.
Second, please extend my congratulations to your father-in-law. My hat is off to anybody who makes money in the market, no matter their method.
I’ve never said (at least I hope I've never said) that fundamental analysis isn’t “as important” as technical analysis (TA).
If you're a fundamental trader who knows little or no TA... the fundamental analysis is the most important thing in the world -- to you.
What I have said is that I personally use TA much more. All True Market Insider editors use TA more.
But that's not because fundamental analysis is bad, or wrong, or useless.
It's partly because we're “traders” rather than "investors".
A “trader” is more likely to use technical analysis because it's better for anticipating the shorter-term moves of a stock.
A longer-term “investor” is more likely to use fundamental analysis because it gives a clearer picture of the longer-term potential of the underlying company.
When you analyze a company, use fundamental analysis. When you analyze a stock, use technical analysis.
A fundamental analyst spends a great deal of time “unwinding” a company’s financials to get a clear picture of where the company currently stands.
He must first study all relevant factors that already exist. The next step is to study the anticipated changes in the company, the industry, and the overall economy. The goal here is to clarify what will happen in the future.
Obviously, your father-in-law focuses exclusively on fundamentals. I’ve never met the man, but I’ll bet he spends a lot of time poring over Annual Reports, income statements, balance sheets, and the like.
And I’ll bet he’s more of a “buy and hold” guy than someone who moves into and out of positions quickly (say, in a few weeks or months).
I’ll also bet that he focuses on one or two particular industries or market sectors.
That’s true of most of the fundamental traders I’ve known. It's hard enough mastering the ins-and-outs of one industry. It can take years.
Also, industries (and the economy) change over time. Fundamentalists have to be prepared to roll with those changes and, if necessary, start mastering another industry.
To then have to pivot over to another market segment and start digging in from scratch... That's pretty daunting.
Technical traders don't have to limit themselves to just a few sectors or industries.
At the heart of TA is the belief that the "story" of any company is already reflected in the stock chart.
The technician believes that if a company is poised to take off (quite possibly because of something in "the fundamentals"), somebody out there already knows it and is already acting upon what he knows.
By acting, they drive the price of the stock higher.
You can study financials all day long, but they will never tell you that today the stock is heading higher.
And they also cannot tell you, for example, that not only is the price trending higher, but that it's doing so on very heavy volume.
When a technical trader sees that happening with a stock chart, he or she strongly suspects that "smart money" (i.e., giant hedge funds with million-dollar research departments) is already backing the stock.
He knows that, in the short term, the odds of the stock continuing higher are greater than that the stock will head back down.
Finally, technical traders can play any industry or sector. We don't need to know every company or all of the factors that tend to boost share prices in that industry.
Whether it's in the Software sector... the Retail sector... the Precious Metals sector... or the Textiles sector...
Once a technical trader sees that prices of a stock are heading up on heavy volume, he knows to start looking to go long. (Of course, when prices are heading lower, he knows it's time to play the downside and go short.)
There are many more technical indicators apart from price and volume. But they're all used to give the technical trader a clear view of what's happening right now with a stock (or with a sector, or even with the entire market).
And there you have it.
Marcus, feel free to write me back and let me know if my guesses about your father-in-law were correct.
Thanks for reading,
Editor-in-Chief, True Market Insider