Skip to content
Subscribers Only
Investment Alerts

Charts v fundamentals

December 21, 2022

I am listening to my music (2,400 liked songs which helps me stay chilled in the face of this endless bear market. Subscribers may recall how impressed I have been by being able to use Spotify and other sources to build my list, which is awesome because it is all music I like. What has been amazing is to find how many people all over the world love listening to and singing country music. Also incredible is the world of fabulous music that disappeared almost without trace when the Beatles and the group sound arrived on the scene. Fortunately it is still there and with help from Spotify I have been mining this treasure. It turns out the pounding head banging beat we have become used to in large parts of the Anglo Saxon world has not spread everywhere. Some people still listen to music. It’s an age thing, I know.

I think there is potential to apply a similar strategy to stocks, to build a liked list of shares. Since I am expecting a new bull market to begin next year, probably earlier rather than later I think the time is approaching to launch this search and I shall be writing more about this in future alerts. We can’t just stick with the same old same old when it comes to stocks for a new bull market because almost certainly a new bull market will have new leadership with many shares we have never heard of coming to prominence. A new bull market plus new names should be very lucrative and I am planning to start the hunt.

Charts v Fundamentals

I have an important advantage in this search because I know what I am looking for, my long-time mantra of 3G, great growth, great story, great chart. This is where the fundamentals come into play. We need to find out if the company is delivering great growth and we need to look at the story to see if that growth is likely to be sustainable. This part of what I do is all about fundamentals. In effect, I use fundamentals to tell me what to buy. I do not expect it to tell me when to buy (or when to sell which is also important to me because I know that as a spread better I am going to have to sell at some point).

One way to think of this is that I am a long term investor in the stocks I buy but I only want to hold them when all the stars are aligned. When the charts are negative I want to step aside. When the charts are positive I want to hold them.

Just digging a bit deeper on the philosophy behind all this there is a question every investor needs to ask himself. How can I use fundamentals to tell me when to buy a share? There is only one way and that is to buy cheap and sell dear. But this just raises another question. How do you know when a share is cheap? How do you know when it is dear?

The big challenge here is that stocks typically start to look cheap when the shares are about to plunge and look dear early in a new bull market so the appearance of cheapness and dearness is a treacherous indicator. It is also highly subjective. It depends on what you consider cheap or dear and what you think is going to happen to a complex range of variables. It has much in common with trying to predict the weather. Good luck with that one.

I don’t go down that road at all. I am a total one trick pony on the fundamentals. Is it a sexy growth stock? Answer yes then I like it and it usually does not take rocket science to make this determination. After that it is all about charts and for me that means the indicators that I use.

Now here comes a subtlety in what I do. There are zillions of stocks out there. It would be an incredible labour to look at all of the possibilities to find the 3G characteristics for which I am looking.But there is another way and that is to start with the charts. There are always insiders who have special knowledge about what is happening and this is normally reflected in the behaviour of the shares. So the best clue that a share might be 3G is to look for shares with strong charts.

Then I look at the fundamentals to see if they meet the rest of the 3G package. If they do then I look at the chart action to see whether the shares are in a period when you would want to hold them or a period when you would want to avoid them.

Inevitably this is a best efforts process. If I or anyone else had some 100pc reliable way of doing this we would have a licence to print money and they don’t come along very often. What is great about the charts is that I am able to tell you what I think of any stock based on my technical indicators.

What do I think of Tesla? Looks terrible. What do I think of Apple It looks scary enough to avoid and has done since April 2022. On my scoring system it scores 0/9. What do I think of Pinduoduo? It looks better with a score of 6/9 but if you say you only want to buy 9/9s I would say that is a logical position to adopt.

That is the beauty of my chart indicators. I can score any chart. Bitcoin scores 0/9. As a speculation it is insanely exciting but not right now according to my charts. Take Carvana. The company is battling against bankruptcy. The Coppock indicator began falling in June 2021 when the shares were $300 v $4.21 presently. There was a trend line break down in November 2021 at $270 against a background of a steeply falling Coppock line. There was a dead cross on the moving averages also in November when the shares were around $280. Since the breakdown there has been no strong buy signal and we don’t have one now. The shares score 0/9.

Let us take another share, Block Inc, formerly known as Square with the code SQ. This chart looks better. It could be building a base and the Coppock line looks poised to turn higher from negative in 2023. but right now it scores 0/9. It would be pure speculation to buy these shares.

What about Intuitive Surgical (ISRG). This looks much better with a clear golden cross on the moving averages. The ETF with the biggest exposure to ISRG is BOTZ, Global X Robotics & Artificial Intelligence, which also has a clear golden cross. Neither share yet has a rising Coppock line so ISRG scores maybe 4/9; that’s not bad but is it enough to commit funds in this market; maybe a nibble but nothing more.

Out of these three shares Carvana is battling to avoid going into administration, Square is reacting to headwinds by cutting expenses including hiring plans while Intuitive Surgical is much closer to all systems go coming out of lockdown.

There was a film years ago starring Dudley Moore and featuring a gorgeous Bo Derek who under some outrageous scoring system from back in those wild chauvinistic days was a perfect 10. In shares it seems we are looking for perfect nines.

Strategy

A great deal depends on this chart when looking at how the stock market may fare in 2023. If this latest period of consolidation is a continuation pattern and 10 year US Treasury yields break higher that will hit the stock market hard. It is another reason for feeling cautious at the moment.

On the plus side it is not quite such one way traffic on the downside. Some shares are breaking higher.

Further reading

More >
Subscribers Only
Investment Alerts

Buy Signal for Another of America’s Iconic MegaCaps

July 2, 2024
Subscribers Only
Investment Alerts

Arm Holdings Has That Trillion-Dollar Look

June 30, 2024
Subscribers Only
Investment Alerts

A DIY Portfolio To Beat SOXX – 12 Semiconductor Superstars

June 20, 2024
Subscribers Only
Investment Alerts

An AI Stock with Huge Ambitions

June 17, 2024