A Tug Of War Between Technical & Fundamental

October 19, 2020

Here’s a question for investors out there:

Are you more of a “technician” or always a “fundamentalist”?

First, we’ll need to understand the difference between Technical and Fundamental Analysis.

Technical Analysis	Fundamental Analysis
Identify opportunities by analysing statistical trends from trading activity such as price movement and volume	Measuring intrinsic value by looking at business strengths and results, as well as operating environment and macroeconomic factors
Assumes fundamentals are already priced in and tries to find patterns that lead to outcomes with high probabilities of occurring	Assumes ‘efficient market theory’ holds in the long run and attempts to take advantage of inefficiencies in the meanwhile
Discerns psychological aspects through review of historical price patterns	Believes short-term psychological blips will correct themselves
Short-term trader by nature	Takes a long-term view

Technical Analysis

Identify opportunities by analysing statistical trends from trading activity such as price movement and volume
Assumes fundamentals are already priced in and tries to find patterns that lead to outcomes with high probabilities of occurring
Discerns psychological aspects through review of historical price patterns
Short-term trader by nature

Fundamental Analysis

Measuring intrinsic value by looking at business strengths and results, as well as operating environment and macroeconomic factors
Assumes ‘efficient market theory’ holds in the long run and attempts to take advantage of inefficiencies in the meanwhile
Believes short-term psychological blips will correct themselves
Takes a long-term view

Sources: https://www.straitstimes.com/business/retirement-years-millennials-more-sanguine-than-those-over-50

The tug of war between technical and fundamental has always been ongoing and the current economic downturn brought on by the pandemic has just added more cause for deliberation. With ample central bank liquidity and exceptionally loose monetary policies, should you be the technical investor that buys on the dip? Or do you need to take a cue from the fundamental investor who believes in continued correction as prices are not equivalent to underlying economic situations of the present?

There is definitely a need to proceed with caution as

“there is the stock market’s significant disconnect with realities on the ground for the economy and many companies. While growth and employment have recovered, the pace of improvement has moderated and hopeful expectations for a V-shaped recovery have increasingly given way to both less upbeat short-term projections and greater concerns about longer-term damage to the vitality of supply and demand.”¹

In my personal view, governments and central banks will continue to do their utmost to improve the unemployment rate (which is currently at 8.4%²; compared to the long-term target of 6%) and inflation rate (now at about 1%³; compared to targeted average of 2%). As we endeavour to overcome current challenges and return to pre-COVID conditions; as long as portfolios (of your own and your clients) are positioned towards that direction, there will be ample potential for healthy, stable gains.