Ask Mike:
Why do you believe technical analysis should be done before fundamental?

Question:

Sharon from Fairfax, VA, asks:

I was fascinated with your talk on your 10 Must Follow Rules for Consistent Profits in the Stock Market on Friday. It was excellent. Thank you for being so thorough.

I wanted to ask you this at your booth after your talk, but I never seemed to find a time that you weren't swamped with a crowd of people all wanting to talk to you.

So, I hope you don't mind me asking you this question in an email: Everything I have been taught, before hearing you, was that we are supposed to screen stocks on fundamentals, first and, then look at technicals. You said just exactly the opposite. Would you please elaborate?

Thank you,

Sharon

PS: I signed up for the free trial and am looking forward to checking everything out.

Mike's Response:

Hi Sharon,

I am glad you enjoyed my presentation and am sorry we did not get the opportunity to talk during the show.

You are correct. I believe you should 'Trade like a Technician, but think like a Fundamentalist.'

I have two simple, yet significant, reasons why I start with a technical analysis before I do a fundamental analysis on a potential holding in one of my portfolios:

I would never buy a stock, regardless of its fundamentals, if it was not giving a strong Buy Signal. So, I only want to be looking at stocks with strong Buy Signals.

My approach to stock-picking is to first find all the stocks exhibiting a strong Buy Signal, and then rank them from best fundamentals to worst. I narrow this list to generally no more than 25 on a weekly basis. Then, I look at my diversification constraints in my portfolios to determine which of the stocks are appropriate.

This is a process of elimination. But, my first step is to find those stocks with good Buy Signals in Industries that are in Bull-mode. Then, I look to buy only those stocks with the best and highest level of growth-based fundamentals.

And… another point... Keep in mind that fundamental data are, by design, historical. Yes, we often get guidance from companies on the likelihood of future fundamental values, but these are a guess, at best. The trailing fundamental data are just that… trailing. Just because a company has had great fundamentals in the past, does not necessarily mean they will have equally good or better fundamentals in the future.

My last point is this… a stock's price is not determined by its fundamentals. A stock's price is determined simply by supply-and-demand the more demand there is for shares of a company's stock, the higher the stock's price will move the lower the demand, the lower the stock's price will move.

Fundamentals play an important role in selecting good quality stocks but, fundamentals are not a panacea. Neither is a technical analysis of a stock's historical pricing trend. Both, a fundamental analysis and a technical analysis are important in any stock selection.

Welcome aboard, Sharon, and thanks for the question.

Regards,

Mike