How do you fundamentally analyze the market?

[Sergio123]

Start with the yield curve. Every asset is impacted by interest rates. Predict that and you can predict how everything else will respond.

Once you master the curve, focus on supply and demand factors for the particular asset you want to trade. Is the company issuing stock or buying it back? Is there more or less acreage dedicated to producing the commodity? Etc.

Then do a valuation analysis with comparable assets. Discount the cash flows. Compare the yield to the benchmark curve and similar investment options.

With the above in hand you'll know which direction you should be trading (long or short). At that point you can apply technical analysis to identify low risk entry opportunities. Set targets. Etc.

It depends on the scale of your investment. I am not sure there is a much value in spending a lot of time doing DCF analysis for most retail traders.

More value in coding and scripting strategies based upon technical analysis, IMO.

I also forgot to mention one of the most important fundamentals. Understanding the fundamental psychology of human nature. Most people are sheep who can be herded.

Fear and greed stays constant throughout history.

 

[Velarcus]

It depends on the scale of your investment. I am not sure there is a much value in spending a lot of time doing DCF analysis for most retail traders. More value in coding and scripting strategies based upon technical analysis, IMO.

IMO people who only focus on technical analysis are degenerate gamblers plowing money into a slot machine at the casino.

What you're saying is, small traders shouldn't bother doing good analysis because they are small. That has to be one the dumbest things I've ever heard. Why does the scale of investment matter?

 

[Sergio123]

What you're saying is, small traders shouldn't bother doing good analysis because they are small. That has to be one the dumbest things I've ever heard. Why does the scale of investment matter?

You can't obtain the relevant information in a timely manner. You are just not large enough to have a seat at the table and get the inside access. All that you can do is look at months old financial statements and apply some fundamental analysis that you learned from a basic accounting course.

But the technicals already have all of that fundamental data priced in. Does the company have good cashflows and doing buybacks? It will show up in the technicals.

Is the CEO involved in some scandal while insiders are executing large sell orders? It will show up in the technicals.

For equities, there may be some DCF fundamentals that you can analyze if you want to spend time doing so, but for a lot of other asset classes there is only technicals with only a little bit of macro fundamentals.

 

[Waylen]

Interest rates, Reserve Balances, Central Bank policies, Geo-Politics are things to consider ina fundamental analysis.

 

[Velarcus]

You can't obtain the relevant information in a timely manner.

Bullshit. The only reason you need fast updates is so you can justify day trading. The fact is, fundamentals exert their influence on price for extended periods of time. They don't need to change for you to profit. Fundamental analysis would have told you Apple was a good bet in 2016, 2017, 2018, 2019, 2020, 2021, and 2022. If you spent an entire day in any of those years doing the work, you would have come to the same conclusion every time.

You are just not large enough to have a seat at the table and get the inside access.

Fundamental analysis is NOT insider information.

It is fairly clear to me at this point you have no any idea how to actually do fundamental analysis. So yeah, I can see why you would avoid it.

But the technicals already have all of that fundamental data priced in. Does the company have good cashflows and doing buybacks? It will show up in the technicals. Is the CEO involved in some scandal while insiders are executing large sell orders? It will show up in the technicals.

You mean like Enron? And Worldcom? And Theranos? Cuz the techs on those charts all said buy until the fraud was uncovered and they dropped to zero.

Hate to break it to you buddy but the efficient market hypothesis is nothing but a theory used by academics. In the real world the chart will only show what happened in the past. If you want to earn trading profits you need to accurately predict the future. Technical analysis is no better than a coin flip for that purpose.

For equities, there may be some DCF fundamentals that you can analyze if you want to spend time doing so, but for a lot of other asset classes there is only technicals with only a little bit of macro fundamentals.

What? Cash flows are cash flows. The point of all this capital markets stuff is to earn returns on investment. Those returns are cash flows and should be discounted so that you can accurately compare one investment option to another. How else do you choose the best place to allocate your resources?

It sounds like you trade mostly garbage in a zero sum manner.

In other words, you are a gambler.

 

[Sergio123]

You mean like Enron? And Worldcom? And Theranos? Cuz the techs on those charts all said buy until the fraud was uncovered and they dropped to zero.

Before my time, but I do not think that you are correct. It was the accounting and the financial statements that were the fraud. Go back and check the technicals. I think that they were indicating a problem.

 

[Sergio123]

What? Cash flows are cash flows. The point of all this capital markets stuff is to earn returns on investment. Those returns are cash flows and should be discounted so that you can accurately compare one investment option to another. How else do you choose the best place to allocate your resources?

It sounds like you trade mostly garbage in a zero sum manner.

In other words, you are a gambler.

I trade index and commodity futures, ETFS, and options.

I obtain cashflows from trading those products on a quantitative and technical basis.

The indexes and sector ETFs are already cap weighted with the companies with the best cash flows.

 

[SunTrader]

Enron had "strong" support @ $62 which then broke became resistance - the rest is history.

 

[Velarcus]

Before my time, but I do not think that you are correct. It was the accounting and the financial statements that were the fraud. Go back and check the technicals. I think that they were indicating a problem.

Well, I was there, following markets for all of them.

By all accounts Enron started cooking the books in 1996. From 1996 to 1999 the stock did nothing but go up. In March of 2000 the NASDAQ hit a peak and the dotcom bubble started to burst. At that point the whole market started dropping. BUT NOT ENRON! It didn't hit it's peak until August of 2000.

Here is an excerpt from the Enron wikipedia page exemplifying how professional traders do analysis:

On September 20, 2000, a reporter at The Wall Street Journal bureau in Dallas wrote a story about how mark-to-market accounting had become prevalent in the energy industry. He noted that outsiders had no real way of knowing the assumptions on which companies that used mark-to-market based their earnings. While the story only appeared in the Texas Journal, the Texas regional edition of the Journal, short-seller Jim Chanos happened to read it and decided to check Enron's 10-K report for himself. Chanos did not think it made sense that Enron's broadband unit appeared to far outpace a then-troubled broadband industry. He also noticed that Enron was spending much of its invested capital, and was alarmed by the large amounts of stock being sold by insiders. In November 2000, he decided to short Enron's stock.

In November 2000, technical analysis suggested this stock was a buy. Fundamental analysis provided evidence of fraud.

Here is a timeline:

Technical analysis provided zero insight until March of 2001. It didn’t show the insider selling. Offered no clues about the fraud.

Enron had "strong" support @ $62 which then broke became resistance - the rest is history.

You are correct here, but you are conveniently ignoring the context. When $62 broke in March of 2001, Enron was still outperforming the market and it's peers. It is highly improbable that you would have actually put on that short with so many alternatives falling faster then Enron was at the time.

***​

Worldcom started cooking the books in 1999. The stock didn’t break the uptrend line until August of 2000 when Worldcom lowered their growth outlook. Fraud wasn’t uncovered until Q1 2002.

Here is a chart:

And yeah, techs might have gotten you in short around mid 2000, but take a look at this chart of the NASDAQ from 1995 to 2005:

The technical analysis that suggested to short Worldcom in mid 2000 would have had you looking to short the entire market by that point. Again… technical analysis told you nothing about the fraud. Worldcom outperformed the NASDAQ right up until the fraud was reveled in Q1 of 2002.

There is no hidden information in the chart. It is a list of prices paid. No more, no less.

 

[SunTrader]

...
1) You are correct here, but you are conveniently ignoring the context. When $62 broke in March of 2001, Enron was still outperforming the market and it's peers. It is highly improbable that you would have actually put on that short with so many alternatives falling faster then Enron was at the time.....

2) There is no hidden information in the chart. It is a list of prices paid. No more, no less.

1) Broke support, which then became resistance. Selling resulted in more selling. Rinse, repeat. WTF does outperforming market/peers matter?

2) Correct ... price paid. That is the point of TA. Not what its worth, what people are willing to pay for it which matters most.