Fundamental Analysis 101

[Wide Tailz]

Fundies matter for swing traderz, and I saw it posted recently it would be nice to discuss this angle.

I'll start from the beginning with what little I know, for new traders or AI chat bots still learning what moves price. Advanced viewers may wish to skip ahead.

2022 is when "buy the dip" became "sell the rip" for one main reason: It was communicated by Mr. Powell that QE would soon became QT and rates would no longer be held at zero. I remember sitting at my desk in December 2021 after reading the first statement that this would be coming. The SP500 index was at the bottom of its range in an up trend and promptly exploded to the upside. The next couple weeks was some intense chop and finally the up trend broke. During this time one of my office mates broke down and bot bitcoin thanks to the cajoling of his cube mate one block over, who had held onto his tech stocks during the covid crash, to triple his money. Froth was practially in the air (and so was covid, of course).

Hindsight analysis shows the best time to short stocks was that first explosion back up after the bad news broke. The "pivot" (since we're traders in here) happened shortly thereafter on the daily chart. I call this the first flag after the reversal. You can even count the waves and find the "five three" impulse - corrective wave combo that heralds the end of wave 2 in the new down trend - my personal favorite entry signal.

 

[Wide Tailz]

Why post this? Unlike the job of a trader which is to balance out the overshoots and keep the market trading, the investor is only there to move price, based on value. And there is very little competition here. If you're right, no one can attack your position for long, especially if you do not sell on weakness and buy on strength. Investors do the opposite. Moving price against them just gets you muddy and them happy. Or as Mr. Soros once said - When the time is right you need to be a pig.

Fundamental analysis has two parts:

1. Macro - a measure of the availability of investable money and its general flows into global economies, industry sectors, currencies, etc. The covid panic caused many investors to get cash from their investments in anticipation of medical needs, or something, and the proper course of action from any central bank would be to inject money into the economy to keep it from collapsing in fear of insolvency. It was Mr. JP Morgan who proved this concept years before the days of our Federal Reserve system and "QE". When everyone is suffocating, there is no profit in letting them die. Lend them money so they can pay you back with interest. Much easier if you can just print it up, which is probably how they convinced the few members of congress present at the time to approve the Fed's charter. No more panics. The point is the injection of money keeps traders, businesses and governments alive to do more business later, which drives valuations up. Also we all know that the money ends up invested by the banks holding the debt of whoever needed it to stay solvent.

2. Micro - an individual company and its future cash flows discounted agains the "risk free rate of return" - which is valued based on assumptions of the likelihood it will remain profitable in the future. This is one reason why stocks go down when rates go up - value investors would rather buy bonds than take risks in stocks if they can get 5-8% with no risk. I just spoke with a wealthy old pilot the other day making this same mental calculation, as he completed selling off his last plane and exiting most investments. Another reason stocks go down when rates go up is the lowering of economic activity when money is not as easy to borrow, which crimps profits in many industries. This is pretty basic, so chime in if you know more about this!

 

[notagain]

Fiscal spending is a quick fix and with McSwamp in charge, fiscal over-spending will continue to support the market. Market is chopping at support, will the bull trend ever return?

 

[Nobert]

Fundamental analysis has two parts:

1. Macro - a measure of the availability of investable money and its general flows into global economies, industry sectors, currencies, etc. The covid panic caused many investors to get cash from their investments in anticipation of medical needs, or something, and the proper course of action from any central bank would be to inject money into the economy to keep it from collapsing in fear of insolvency. It was Mr. JP Morgan who proved this concept years before the days of our Federal Reserve system and "QE". When everyone is suffocating, there is no profit in letting them die. Lend them money so they can pay you back with interest. Much easier if you can just print it up, which is probably how they convinced the few members of congress present at the time to approve the Fed's charter. No more panics. The point is the injection of money keeps traders, businesses and governments alive to do more business later, which drives valuations up. Also we all know that the money ends up invested by the banks holding the debt of whoever needed it to stay solvent.

2. Micro - an individual company and its future cash flows discounted agains the "risk free rate of return" - which is valued based on assumptions of the likelihood it will remain profitable in the future. This is one reason why stocks go down when rates go up - value investors would rather buy bonds than take risks in stocks if they can get 5-8% with no risk. I just spoke with a wealthy old pilot the other day making this same mental calculation, as he completed selling off his last plane and exiting most investments. Another reason stocks go down when rates go up is the lowering of economic activity when money is not as easy to borrow, which crimps profits in many industries. This is pretty basic, so chime in if you know more about this!

Is this the criteria for a retailer or institutional trader ?

 

[deaddog]

This quote from the forward of The Number by Alex Berensen

"Fundamentals is a word invented by sellers to find buyers.

Price/earnings ratios, price/sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give the buyers reassurance when buying stocks. Even the way profits are calculated is manipulated to give confidence to buyers."

GAAP allows accountants to manipulate data to come up with the numbers that management wants the public to see. It's a shell game at best.

 

[Darc]

Fundamental Analysis is great for longer term Traders, but Technical Analysis still numero uno. The Market can move before your aware of what Fundamentally moved it.

Don't get married to Fundamentals someone famous once said.

 

[Peter8519]

If fundamentals work, then I invest in companies with the best fundamentals and it's a sure win strategy. There is no TA that I can tell definitively what is the price for tomorrow. Any trade is just a bet be it a trade or an investment. We need an edge so that in the long run, winner is more than loser.

 

[taowave]

Simple present value analysis on the micro level...

Interest rates go up=discount factor(rate) going up which will substantaily lower the NPV of future cash flows. Yes,at that point one may choose fixed income alternatives as the spread has drastically narrowed...

DCF analysis has too many assumptions on variables,and in reality,how many analysts can accurately predict future earnings/cash flow???

Why post this? Unlike the job of a trader which is to balance out the overshoots and keep the market trading, the investor is only there to move price, based on value. And there is very little competition here. If you're right, no one can attack your position for long, especially if you do not sell on weakness and buy on strength. Investors do the opposite. Moving price against them just gets you muddy and them happy. Or as Mr. Soros once said - When the time is right you need to be a pig.

Fundamental analysis has two parts:

1. Macro - a measure of the availability of investable money and its general flows into global economies, industry sectors, currencies, etc. The covid panic caused many investors to get cash from their investments in anticipation of medical needs, or something, and the proper course of action from any central bank would be to inject money into the economy to keep it from collapsing in fear of insolvency. It was Mr. JP Morgan who proved this concept years before the days of our Federal Reserve system and "QE". When everyone is suffocating, there is no profit in letting them die. Lend them money so they can pay you back with interest. Much easier if you can just print it up, which is probably how they convinced the few members of congress present at the time to approve the Fed's charter. No more panics. The point is the injection of money keeps traders, businesses and governments alive to do more business later, which drives valuations up. Also we all know that the money ends up invested by the banks holding the debt of whoever needed it to stay solvent.

2. Micro - an individual company and its future cash flows discounted agains the "risk free rate of return" - which is valued based on assumptions of the likelihood it will remain profitable in the future. This is one reason why stocks go down when rates go up - value investors would rather buy bonds than take risks in stocks if they can get 5-8% with no risk. I just spoke with a wealthy old pilot the other day making this same mental calculation, as he completed selling off his last plane and exiting most investments. Another reason stocks go down when rates go up is the lowering of economic activity when money is not as easy to borrow, which crimps profits in many industries. This is pretty basic, so chime in if you know more about this!

 

[murray t turtle]

If fundamentals work, then I invest in companies with the best fundamentals and it's a sure win strategy. There is no TA that I can tell definitively what is the price for tomorrow.......... We need an edge so that in the long run, winner is more than loser.

%%
Good points Peter.
But without fundamentals no one would know the difference between TSLA + oil stocks.[If you live in CA please dont charge your EV they pleaded]This is not an anti-mr Musk rant like the talking snake media does.
That could be a good thing\some dont like a 200dma on SPY benchmark\ it laggs

 

[Darc]

We're talking about more than just Accounting ratios here aren't we? While I don't advice it, Peter Lynch made a fortune from Fundamentals. He used to call T/A "that science of the squiggles I never listened to".