Economic Review

4/27/09

Technical and Fundamental Analysis, is one good without the other?

Technical analysis of securities includes such analytic techniques just as charting or applying mathematical computations to corresponding prices. The ultimate objective is to discover trends, breakouts or general entry or exit points for Stocks, Bonds, Currencies etc. Fundamental analysis, on the other hand, relies on business theory, economic underpinnings, and valuations based on characteristics that pertain to that markets (e.g. cash flow, etc).

The recent up move in US equities has been largely buoyed by technical analysis, where chart points have implied that the major Equity indexes should have rallied over the past weeks and some say this uptrend should continue. The problem with this scenario is that the underlying fundamentals to the Equity sector simply do not support euphoric gains from here. Economic activity continues to suffer and key elements such as unemployment will most likely continue to increase in coming months. Outside of some bottom picking in California real estate, the only good news the market has seen are some good earnings from bailout and Tarp recipients.

So in case you’re scratching your head over the recent run in Stocks, you’re not alone as inside selling has increased dramatically. So stop scratching because the rally is not on solid footing. Yes, price action can continue to move higher but when the technicians bail, it could get messy.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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