Super brief look at the market before we get started on the main topic of today’s blog. Rumor has it that the markets have been volatile. If this rumour is true, we’d better take a look at the charts to see if the situation is dangerous. Below is a chart of the S&P 500. The annotations on the chart are, hopefully, suffice to present how we should view the market movements of late. I’ll jump the gun and give you my conclusions:
- The S&P is trapped in a box residing between 2630 support and 2820 resistance. You can see how precise that box has contained the markets.
- If 2630 breaks, the vital support that the market MUST hold resides in the 2540-2580 zone.
- If 2540 breaks by a reasonable degree (i.e. more than 10 pts) and that break lasts for more than 3 days—I will be selling. This would imply a break in the long termed trend. I’d expect to leg out and see how things develop.
- Do not prejudge that that scenario will happen. Just observe, and react accordingly.
Who’s the better analyst?
One of my clients wrote an email to me asking what t situations might benefit a particular form of analysis over another. I suggested to this client that it comes down to…. nobody is “best” all the time. Also, there are fundamental people who are NOT good fundamental people, technical people who are NOT good technical people, etc.
Sometimes I hear somebody say “Mr. X technical guy said the market would crash and it didn’t, thus Technical analysis doesn’t work”. Similar can be said of bad fundamental calls. I often think of the fundamental analysts who, in 1999-2000, had price targets for Nortel to hit $180/sh. Several fundamental economists were talking about “Peak Oil Theory”-in 2007/8– and targeting oil to hit $200/barrel. This was done at the time when it peaked at $140 in 2008 – and promptly fell to $30. So there are good and bad calls – and, like an auto mechanic or any other profession – some are smarter than others at doing their job. In other words ….it’s pretty dumb to generalize one strategy as “wrong”….and the other as “best”. That being said, there are times when some managers can do better than others. This doesn’t imply that one style of manager can’t make ANY money in a given market environment—its more about relative performance question. Let’s take a look at how this might happen.
To simplify things, I thought I’d classify Investment Management/Analysis style into three main categories. I’m simplifying things here, folks! So cut me some slack if you feel I have generalized.
- FUNDAMENTAL/ GROWTH Analysis
Growth managers and analyst look for quantitative factors such as earnings growth as an isolated factor, and in light of the companies peers or the companies own history. They look at management, future growth catalysts, cost cutting, expansion vs costs, and other factors that might inspire somebody to believe that the company will be bigger and/ or better in the future. Rather than just focus on an earnings multiple, they might be willing to buy a stock who’s PE multiple might expand due to a high future growth outlook. Within this category are GARP (growth at a reasonable cost) managers who try to buy lower PE stocks that can still grow. Because their view is often longer termed in nature, uptrends are best for these folks. Bull market conditions allow buy and hold growth managers to rule the roost. In house CFA Craig Aucoin is probably best described as a GARP kinda guy.
- FUNDAMENTAL/ VALUE Analysis
Value managers tend to look for beaten down stocks that may have been unfairly punished. Or, stocks that may have had some bad history – but are now on the mend. They do look at earnings, but focus is on relative value for those earnings. In a consolidation after a bear market (aka 2002, 2009), technical analysis people can do well here after they identify a market that is breaking out, but deep value managers are king! This, given the value manager’s propensity to step in earlier than a trend following strategy. Growth managers are not in their element in this stage. After all, its at this stage that the market is down yet growth is not yet happening. This leaves growth managers out of luck. Technical people will look for the breakout that allows the new trend to begin… typically weeks or even months after the bottom. So, while not as late to the party as the growth guys, TA’s are one or two steps behind the value managers.
- TECHNICAL Analysis
In a bear or consolidating market (i.e., 2008/9, 2011, 2014 for the TSX, 2015…and…2018!) Technical Analysis rules the roost. ValueTrend usually has its best relative performance during choppy markets. Our recent performance in the choppy markets of 2018 illustrates this potential quite well. Technical Analysts can look to play the swings in a sideways market (see this blog ). In a bear market, TA’s don’t adhere to the “Buy & Hold” mantra of their Fundamental Analyst friends. We raise cash, or rotate between assets typically much quicker than either type of Fundamental Analysts will. That helps us in choppy or poor markets.
Some TA’s use variations within the practice, such as Elliott Wave Theory (EWT). I’ve covered EWT here. I am a classic TA – as I tend to look at peak and trough movements with just a few basic technical indicators. I specialize in incorporating sentiment into my work – which was presented in my thesis that I wrote some 20 years ago when I obtained my CMT designation. But the basis of my practice is mid – termed trend identification.
We like to think that our practice of conservative growth orientated fundamentals with our classic technical trend analysis is a pretty good combination for most market conditions. While pure growth managers may outdo us in a runaway market such as 2017, and value managers may get the jump in a bottoming market like 2009 – we feel our way of combining the two disciplines is a good marriage for the ever-flowing market environment. I hope the above has given you some input on who’s dad is smarter in a situation where one dad is a Technical Analyst, and the other dad is the Fundamental Analyst. Next week, we’ll cover who’s dad will win in a fight. Joking.
I will cover my Bear-o-meter reading in the next blog, which incorporates a wide number of factors within trend, sentiment, momentum and breadth categories. Stay tuned.