Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Key to Interpreting the Stock Market - Technical Or Fundamental Analysis?

Stock-Markets / Stock Market Valuations Feb 18, 2008 - 07:36 AM GMT

By: Clif_Droke

Stock-Markets

Best Financial Markets Analysis ArticleOne of the best practitioners of technical analysis of the last 30-40 years, and one of my personal favorites, was Ralph Bloch. Bloch was for many years the chief market technician with Raymond James and was renown for his down-to-earth manner and “say it like it is” approach to the stock market.

Bloch was known for using only the most basic of all analytical tools when it came to T.A. and he relied mainly on the charts and the tape for his trading decisions. When it came to his technical approach to the market, he once described himself as “a ham-and-egger…I'm a Technical Analysis 101 guy all the way.”


He was once asked by an interviewer why he didn't use the more sophisticated tools like the stochastics indicator. He responded, “Number one, I've no idea what it is and number two, I'm not even sure I can spell it.” He always maintained that today's traders tend to get caught up with the large variety of tools at their disposal and they end up neglecting the most important and basic ones. His track record was top-notch and was a testimony to the soundness of his approach.

One of the things Bloch always maintained was that technical analysis, to be extremely useful, should be used mostly for short term trading. Beyond the short term, he said, technical analysis loses its accuracy and is less useful for the longer term time frames. That's not to say that looking at long-term charts is a wasted exercise, only that a strictly technical approach to predicting the long term outlook for stocks isn't advisable. To get the long-term outlook, one must look beyond the purely technical approach. That's where fundamental analysis comes in.

I've always found it ironic that the two most basic types of trading and investment styles, namely technical and fundamental, are usually at odds with each other. Ask any die-hard technician what he thinks of the fundamental approach and he'll usually respond, “The charts tell me all I need to know. They record the fundamental outlook, so why bother looking at fundamentals?” A fundamental disciple will usually retort, “Charts and indicators are just squiggly lines and have no prognosticative value whatsoever. You've got to parse the numbers to get to the bottom line in the stock market.”

Actually, both sides have their good points and their limitations. In my experience, any attempt at predicting or trading the markets from a short term outlook using only fundamental analysis is akin to financial Russian Roulette. Fundamental analysis just isn't geared toward predicting short term outcomes, especially since there are so many invariables involved. On the other hand, any attempt at making long-term predictions using strictly a technical approach is equally foolish and has no consistent accuracy.

The longer term outlook is what fundamental analysis is made for. The short-term is for technical analysis. The two disciplines should learn to work with each other instead of constantly bickering about which approach is superior. Both have their own unique merits but neither will work consistently as a standalone approach across all time frames.

It's with some frustration, then, that I listen to analysts who keep trying to predict the longer term stock market outlook using technical analysis alone. Over the past few weeks I've heard dozens of experts weigh in on the financial outlook for the 6-18 months ahead and make all kinds of comparisons to the previous bear market versus where we're at now. I've seen them pontificate on scores of long-term charts of the Dow and S&P with all kinds of trend lines and channels, moving averages, indicators, etc. These technical tools are being used by many traders and analysts to predict a repeat of the 2000-2002 bear market since, according to them, there is so much similarity between what these technical tools look like now vis-à-vis 2000-2002.

At face value, they may very well have a point. But we've already established that technical analysis isn't designed for making predictions about the longer term. That's why I consider it a fallacy to look at the weekly and/or monthly charts of the S&P 500 index, compare moving averages and trend lines, chart positions, etc., and expect to come up with a reliable outcome. Technical analysis simply can't tell you what direction to expect of the broad market beyond a certain (and relatively brief) window of time.

So putting the technicals aside, how can we know where we stand in relation to the previous long-term top in 2000? The answer is found in fundamental analysis. By fundamental I mean the basic supply/demand balance for stocks. This takes into account things like float, earnings and yields, comparative valuation and a few other basic factors. Specifically, we'll start with the most basic of all fundamental approaches: money supply analysis.

We've long noted that the MZM and M2 money supply has been in an upward trend in the past couple of years. This is good news for the economy in the longer term as the last bear market and recession was preceded by a contraction in money supply. This is one reason why I don't believe the present situation can be compared to 2000-2002. Just look at the huge spike in M2 and MZM money in just the last two weeks alone. It's obvious that the monetary regulators are dead set on reversing economic conditions and forestalling recession.

Valuation remains bullish, which means the longer-term trend for stocks is bullish as reflected in the IBES Valuation Model. According to IBES, stocks are nearly 50% undervalued compared to the 10-year Treasury yield. This is the most undervalued that stocks have been in the last 35 years. Heading into the 2000-2002 bear market, stocks were dramatically overvalued according to IBES. The situation has been reversed today and this is a big reason why another repeat of 2000-2002 isn't expected.

Valuation is the key here, for it provides the backdrop for the bull market to continue in the longer term. This is a critical component that wasn't present heading into the previous bear market. Share counts are also drastically reduced compared to eight years ago as the supply of shares in the late ‘90s was dramatically increased, especially in the tech sector. With mergers and acquisition and takeovers (not to mention Sarbanes Oxley) reducing the supply of shares, stocks have less overhead pressure in times of weakness.

A final consideration is sentiment. The past month has seen more bearish news magazine and newspaper front covers than I can ever remember seeing. A couple of weeks ago the infamous “Road to Recession” cover appeared in Newsweek . Another bearish cover was seen on a recent issue of Business Week . The headline says, “Meltdown: For Housing, the Worst is Yet to Come.”

Here are more recent headlines from the Financial Times which further underscore the hyper-fear in the financial markets. Such a high level of fear is consonant with an intermediate-term bottoming procedure in the stock market:

“Corporate America braced for recession”

“The start of the great unwinding”

“Beware of a market rally…it could be a false dawn.”

With the worst of the financial crisis already reflected in the front covers of the major news magazines, you can bet the stock market has already discounted the future. Keeping in mind that the stock market looks ahead by 6-9 months, the revelations of the past year have already long since been digested by the market. As pointed out in the previous newsletter, the Dow is only down 100 points or so from a year ago when the sub prime fiasco first became news. If the doom-and-gloomers are correct about the bearish long-term implications of the bad news, wouldn't the Dow be down 1,000-2,000 points or more by now? Something to think about.

By Clif Droke
www.clifdroke.com

Clif Droke is editor of the daily Durban Deep/XAU Report which covers South African, U.S. and Canadian gold and silver mining equities and forecasts PM trends, short- and intermediate-term, using unique proprietary analytical methods and internal momentum analysis.  He is also the author of numerous books, including "Stock Trading with Moving Averages."  For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules