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Strategies & Market Trends : The Rational Analyst -- Ignore unavailable to you. Want to Upgrade?

To: HeyRainier who wrote (1184)	6/17/1998 10:33:00 PM
From: HeyRainier	Read Replies (3) \| Respond to of 1720

[ Thoughts: Divergences, Fundamental and Technical Analysis ] Here's some recent thinking: The market, whether it is about stocks, currencies, or whatever...is about Divergences. We buy what we see now, in the expectation that future participants will bend to our current divergent perception. The opposite applies to selling. This line of thinking seems to make more sense to me when it is applied to the arena of Fundamental Analysis, in particular the short-selling side of the business: From the short side, when we discover that a company has used aggressive accounting procedures to misstate earnings, we sell it short, with the expectation that the market, in due time, will bend to meet our divergent perception about the issue at hand. Technical analysis also plays a role in divergences: RSI divergences, price/volume divergences, etc., you name it. Discrepancies are to be exploited. If there is growth to be experienced for a certain unfollowed company, we buy it. If there is trouble on the horizon, we sell it before anyone else does. Technical analysis has value in that it allows us to see the buying and selling pressure in an issue before the fundamental news that is affecting it is entirely disseminated to the general public. It can let one get a head start on the competition, but only after someone's hand is tipped, so to speak. But it also has its drawbacks, because emotion at times can become excessive, and it can sometimes cause the price to fluctuate far from its equilibrium fair value, as determined by the fundamentals. Particularly for the smaller issues, the price action on the screen can often just be a result of price manipulation (i.e. the pump and dump); a concerted effort on the part of a small group of well capitalized individuals can drastically affect the technical picture for a certain issue, and those who are foolish enough to disregard the fundamental picture, while only taking into account the pure technical picture, risk losing money on chasing up a stock that has no sustainable, fundamental reason why it should be bid up. But then on the other hand, the pure fundamentalist also risks appearing arrogant (and incorrect) if s/he buys an issue without assessing the longer term technical picture of the stock. If it has been going down for quite a while, it is reasonable to assume that either the fundamentals are deteriorating, or interest has waned in that issue to an extent such that buying pressure has completely diminished (even if it is fundamentally sound). It is when the latter case is applicable that the divergent position can be successfully exploited to extract a profit, assuming fundamentals are sound. The challenge, however, lies in determining if the price movement is emotion-driven, or fundamentally driven. When you are accepting an analyst's earnings projections, you are bending to that analyst's variant perception. If enough believe in it, all that is left from the profit arena is the divergent short-seller's view. The prudent short seller, in my opinion, is one who shorts based on a deterioration of company fundamentals, not based on pure valuation alone. Many a foolish short has met his doom by shorting Microsoft, because some foolish Academic model showed that by theory, since it was overvalued, it should be shorted. I'm sure one model or another can include the Cisco's, Lucent's, and other Gorillas. So, what is all this about? There are divergences to be exploited, but it should be done with the consideration of both the fundamental and technical aspects of the issue. One should also attempt to separate from the price action the irrationalities that on many occasions distorts the price from reaching its equilibrium fair value. End of soliloquy. Regards, Rainier