In an earlier blog post, I asked the question, \u201cDo you use fundamental or technical analysis?\u201d If you recall, it was somewhat a trick question because the topic covered how technical analysis principles could be applied to fundamentals such as economic data.\u00a0 Today, we will circle back around and cover a more traditional comparison of the two disciplines with the purpose of showing how technical analysis is a major input to many actively managed mutual funds.<\/p>\n
To borrow a paragraph from the earlier blog; fundamental analysis attempts to uncover the driving forces or reasons for either a current or future investment theme. They may be based on actual results from corporate or economic releases such as sales numbers, employment statistics, new product launches, and countless other data series.\u00a0 Technical analysis attempts to study the results of investor actions, based on the concept that certain actions imply continuation or reversal in direction of the underlying investment or theme.\u00a0 Technical analysis based traders often employ tools such as moving averages, pattern analysis, and volume studies.\u00a0 One could say that \u201ccause and effect\u201d are both assessed when incorporating fundamental and technical analysis.<\/p>\n
The two approaches are often seen set against each other. But like the\u00a0movie\u00a0Batman v Superman, it is just a matter of perspective and misunderstanding.\u00a0 The two can be friends \u2013 even super friends<\/em>.<\/p><\/blockquote>\n
In addition to the differences already noted, let\u2019s contrast other characteristics but do so through the lens of their potential shortcomings. Fundamental analysis seems very rational.\u00a0 It mostly takes facts and figures that are assessed in order to gauge business conditions in the economy, sector, or individual company.\u00a0 How is that a shortcoming?\u00a0 Investment markets can act irrationally.\u00a0 In fact, they tend to do so more often than not and can do so not only for short-periods of time but for extended periods.\u00a0 There is an old Wall Street saying, \u201cthe markets can remain irrational for longer than you can remain solvent\u201d.\u00a0 If that statement makes sense to you, then it should be logical to incorporate methods that assess human behavior\u2019s impact to prices which is a key benefit to incorporating technical analysis.\u00a0 Fundamental analysis relies on public information.\u00a0 The shortcomings here are related to garbage in, garbage out as well as the reality that not all relevant information can be known to all those using this discipline.\u00a0 Now let\u2019s be fair, technical analysis also has its share of shortcomings.\u00a0 A common complaint is it does not explain why the bullish or bearish bias exists.\u00a0 If one were to know why, then perhaps greater conviction and position size could be maintained as short-term aberrations away from the \u201ctrue fundamentals\u201d \u00a0can be filtered out.\u00a0 That leads to another shortcoming in that technical analysis has a tendency toward a greater number of whipsaws and false conclusions.\u00a0 Notice what we just did \u2013 the shortcomings helped to define the two disciplines but the shortcomings were also counter-balanced by the strengths of the other.\u00a0 This sort of synergy is the reason why many investors and portfolio managers incorporate both to some degree even if there is a leaning to one side or the other.<\/p>\n
In using technical analysis, we are attempting to measure people\u2019s thinking by looking at their buying and selling actions. Garfield Drew, a well-known trader from early last century once said, \u201cStocks do not sell for what they are worth, but for what people think they are worth.\u201d\u00a0 Those two ideas sum what technical analysis is all about.<\/p>\n
I believe technical analysis is, and should be, the heavier weighting behind investment decisions, especially in regards to active portfolio management<\/p><\/blockquote>\n
Author and trader, Stan Weinstein once said, \u201cThe chart is the ultimate reality\u201d. My interpretation is he means whether or not a movement is justified by the underlying fundamentals, the gain or loss impacts the net worth of the investor.\u00a0 The goal of investing is to increase our net worth, plain and simple.\u00a0 If the fundamentals are generally deemed to be positive but the stock goes down 20%, then what good did that investment do for the investor?\u00a0 We have all witnessed declines of that magnitude or thereabouts without true changes in the underlying fundamentals.\u00a0 \u201cThe fundamentals will eventually be recognized and my stock will go back up\u201d.\u00a0 I\u2019ve heard that one too many times to count.\u00a0 Even if that were to be true, can we really absorb such potentially large losses including the opportunity costs while waiting?\u00a0 Technical analysis is not a crystal ball or silver bullet but it can act as a thermometer for investors to gauge the health of the market or individual investments.\u00a0 As we all know, a person may look healthy on the outside while their body holds a sickness yet to display external symptoms.<\/p>\n
In coming weeks, we will cover topics that outline tools and techniques that interpret the message of thermometers put in the mouth of the market. \u201cBuy low and sell high\u201d has been a Wall Street creed for decades.\u00a0 Fundamental analysis may be able to identify undervalued and overvalued investments but technical analysis more efficiently identifies trends and potential trend changes that serve as the basis of why active portfolio management funds seek to rotate investments and adjust to rational and irrationally-based risks.<\/p>\n
Disclosures<\/strong><\/p>\n
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by\u00a0Spectrum Financial, Inc.\u00a0in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Spectrum Financial, Inc. expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. \u00a0For full disclosure please see disclosures page here.<\/span><\/a><\/p>\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
In an earlier blog post, I asked the question, \u201cDo you use fundamental or technical analysis?\u201d If you recall, it was somewhat a trick question because the topic covered how technical analysis principles could be applied to fundamentals such as economic data.\u00a0 Today, we will circle back around and cover a more traditional comparison of […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[46,42,39],"class_list":["post-983","post","type-post","status-publish","format-standard","hentry","category-market-research","tag-active-management","tag-fundamental-or-technical-analysis","tag-technical-analysis"],"_links":{"self":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/983"}],"collection":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/comments?post=983"}],"version-history":[{"count":6,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/983\/revisions"}],"predecessor-version":[{"id":989,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/983\/revisions\/989"}],"wp:attachment":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/media?parent=983"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/categories?post=983"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/tags?post=983"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}