Analyze This: The Fundamentals or Charts?
The last 12 months have been very tough on traders, financial planners, and investors alike. Stocks have been annihilated, especially those in the financial sector. Think of any global financial institution -- Citigroup, UBS, Barclays, the Macquarie Group, just to name a few -- the value of these shares sank by at least 100 percent in 2008.
Additionally, the other major bubble to burst was the commodities sector. The price of crude oil has dropped over 70 percent from its peak at $147 a barrel back in the summer of 2008. And copper, aluminum, gold and iron ore prices have also dropped sharply.
Frozen credit around the world together with no global demand for goods such as cars will do the trick every time.
Will things get better this new year when the news seems to be getting worse around the world everyday? Layoffs are increasing quite dramatically. Businesses are going down one by one. The latest scandal to hit the headlines -- the CEO of India's Satyam Computer Services resigning after disclosing that profits had been falsely inflated for years.
In these turbulent times, how can investors navigate their way through the global markets? Is it possible to chart your way through recessionary waters or can you rely on basic fundamental analysis?
We put these questions to two experts, Michael Yoshikami, chief investment strategist at YCMNet Advisors and Daryl Guppy, CEO of guppytraders.com.
According to Yoshikami, fundamental analysis focuses on examining information and trends related to a company's current position in the market place. It also examines macro trends and assesses their impact on a company or industry’s outlook.
"Fundamental analysis has been the foundation for investment assessment for decades. It is used by Warren Buffet and most Wall Street analysts," Yoshikami says. "This type of research seeks to understand how cash flows from a company in relation to it's share price. It is a method of determining if the share price outlook is justified by its financials."
Yoshikami adds that while fundamental analysis has strengths, it is not without its flaws. Its primary shortcoming is that information can be assessed by different people in many different ways.
(Watch a discussion between Michael Yoshikami and Daryl Guppy on chart and fundamental analysis)
This subjectivity means that answers derived are based on user implementation. Additionally, fundamental analysis conclusions need time to play out. Short-term movements are often difficult to predict or explain.
There is also the question about the data source. If numbers are coming directly from a company, how reliable and accurate are they? Good examples of this were the results coming out from Enron, Lehman Brothers and most recently, Satyam.
Yoshikami though feels that in general, fundamental analysis provides a foundation for understanding ones investment choices. "It's an effective tool when used with the degree of caution and skepticism," he says.
In contrast to fundamental analysis, chart analysis focuses solely on stock price activity. The relationship between price bars, or candles, is vital, Guppy says. The price is not adjusted or modified.
"Chart analysis uses trend lines and support and resistance levels. Chart analysis includes chart patterns such as head and shoulders, triangles, cups and rounding bottoms. Traditionally these were hand drawn lines on a price chart," Guppy adds.
Investors make the decision to enter or exit the market based on price movements and trend changes. There is no time lag in this instance.
A good example of how chart analysis works to identify the gaps between what a company says, market perception and deception would be how investors traded Wachovia's stockprior to Wells Fargo acquiring the bank.
Guppy goes on to differentiate technical analysis from chart analysis. "Technical analysis applies mathematical calculations to aspects of price activity to derive a technical indicator."
A moving average is an example of technical analysis because the value of the averages is not exactly the same as the open, high, low or close price for the day.
The Final Analysis
In the final analysis, it really all depends which approach you, as an investor, are comfortable with. Many will swear by the fundamentals and an equal number will advocate technical/chart analysis. Both methods have had successes and failures.
Given market conditions and the scandals of late, sometimes neither approach can predict trends and results in such extraordinary circumstances. Who would've thought Bernard Madoff to be a crook, or who could have predicted that people would buy bonds at a zero percent return?
However, in the months to come when markets stabilize, these approaches may once again come back into play.