Fundamental vs. Technical, NFTRH Style

aliceThis excerpt from NFTRH 365 provides clarity on what NFTRH is and is not.  It was written in response to a new subscriber’s questions about what exactly is meant by “Fundamental analysis” and “Technical Analysis” as presented in NFTRH.  If you are considering a subscription to this high quality service, the following helps explain what it is and what it is not.

Fundamental vs. Technical, NFTRH Style (NFTRH 365 excerpt, 10.18.15)

Per a newer subscriber’s request, I’d like to break down exactly what is and what is not NFTRH’s modus operandi with respect to what I call ‘fundamental’ indicators and ‘technical’ indicators. We all have different interpretations of the meanings of words and phrases and I want to use this segment to be very clear on what NFTRH is and what it is not. It’s good to reaffirm these things every once in a while.

After we cover that, I am going to give us all a break this week and limit the wordiness, economic data and other subjects that we often work through. We were first on the Semi Equipment → Manufacturing → PALL-Gold Ratio → Economy → Jobs continuum nearly 3 years ago and we were first on the Declining Machine Tool Sales → Manufacturing Easing → Jobs? → Economy? string today. We have been clearly focused on stock markets and precious metals, with a lot of words of explanation. This week the charts, many of which are macro charts, will say it all… or most of it, anyway

So speaking of macro charts, when I talk fundamentals I am almost always talking about macro fundamentals or sector fundamentals. I am not talking about any individual company’s fundamentals, where I would be a rank amateur at best and potentially dangerous to a reader’s financial health at worst (if I tried to put on that hat). That is because I would not be interested in that area even if I had the time to do it, which I do not. In fact, my personal unvarnished opinion is that anyone who recommends individual stocks as investments without doing their own deep company-specific analysis – or worse yet, only using charts – is reckless at best and disreputable at worst.

The closest I have come to specific company fundamentals was in highlighting General Electric (a trade that you may have noticed I totally screwed up) because the company sold its finance business to concentrate on its core manufacturing business. That one was a general view from a former manufacturing guy who in his finance suit does not like the idea of leveraged entities financing other (in some cases) leveraged entities. In other words it was macro-based highlight within my former area of expertise (manufacturing).

Other examples were in talking about Fanuc and how it was a machine tools company with a cool robotics segment, but also a vulnerability to coming weakness in machine tools, as noted in an update last summer (ref. Mori Seiki blow out pricing). This in response to a little Fanuc/Robotics hype that started seeping through from a few financial (read: non-manufacturing) types…

On Japan, Robotics, Machine Tools & Manufacturing

Before that we highlighted the 3D Printing scam, because I had decades worth of experience with Fanuc and had also been aware of what the 3D Printing space was and was not. I felt it was my place to comment in a very negative manner when I saw Wall Street pump these things to naïve investors (and to great heights)…

3D Printing; No Barrier to Future Losses for Investors

But what I mainly do from a fundamental perspective is to manage and define the ecosystem within which individual companies and sectors exist. Manufacturing related items like the above are easy for me. I am no expert in tech, consumer goods, healthcare, finance, etc. I have developed a decent view on commodities and even more so, precious metals, but even there things I thought I knew have been proven not to be so over the last few years. So it’s an ongoing learning experience (and all about ego containment, humility and the ability/willingness to make adjustments).

This ecosystem is what I call the macro fundamentals. They can be visible to us in bond spreads, inter-market spreads, inter-metallic spreads… anything that compares relative risk acceptance vs. relative risk aversion or liquidity vs. illiquidity or growth vs. contraction. As just one example, junk bonds topped out vs. investment grade and Treasury bonds in late 2013, and the ratios declined for most of 2014. That was a divergence that eventually manifested in the October 2014 market correction and a very difficult 2015 for the stock market. For this we use charts, but I do not call it technical analysis, I call it macro fundamental analysis.

Indeed, most of the inter-market ratios are technical analysis that is all about macro fundamentals; i.e. clues or hints about what is being forecast for the future environment in which industries and companies exist.

Then of course there is straight up TA. Ask me about Elliott Waves and notice the dazed look in my eyes. Ask me about all but the most basic cycles and watch me fidget uneasily. Ask me about Dow Theory and hear my dismissive response. Ask me about trend lines, wedges and worst of all, ‘golden’ and ‘death’ crosses and hear my responses range from ‘meh’ to outright negativity.

TA is not what its most fanatical promoters claim it to be. Big daddy TA himself, John Murphy of Stockcharts.com has said that there is no one-size-fits-all and that you should take what works for you and leave the rest. I have noticed that his personal TA is as simple or even simpler than mine, and mine is pretty simple.

The bottom line is not to baffle ‘em with bullshit and try try try again to find tools that will affirm what you want to see. The key is to find what works most consistently and trust your signals – which will sometimes be wrong – to guide you toward the best probabilities, not guru-like conclusions or directives.

Bottom Line

  • This publication does not do company-specific fundamental work. We do limited sector-specific fundamental work (like manufacturing, which is my history) and gold mining (which is so dependent upon certain macro environments).
  • Macro Fundamentals are real economic and market signals that have a history that can improve our ability to be in line with probabilities. They are the ecosystem within which fundamental stock analysts operate and indicate whether that environment is positive, negative or in transition. The most fundamentally sound company in the world may not be a good investment if its environment is going down the tubes.
  • Technical Analysis has a well-earned reputation among many for being little more than smoke and mirrors. That is because it is a tool that begs the viewer to take it all with a grain of salt. In the right, preferably humble, hands TA can be a consistent guide. But here again is my opportunity to put before you my greatest and most public failing. That was when I had the 888 target for HUI based on its big ‘blue sky’ breakout above 519 in 2010. It made it to 638 in 2011 and then completely soiled itself. The key then became the ‘humility’ part and for the sake of our financial health respecting, not existing in denial of, the parameters that went on to indicate Caution → Extreme Caution → Bear Market.

There is no magic fundamental or technical bullet, only a willingness and ability to combine these things, cross-reference them and continually refine probabilities based on history and trends. I have maintained from the first day I began public writing that gurus making ‘calls’ are dangerous to regular people who think said gurus have the magic bullet or secret sauce or whatever it might be. There is only consistent work and the want to be right in the final analysis. The rest is noise in my opinion.