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Technical Vs Fundamental Analysis


Both sides seem partly correct to me.

Technical and Fundamental methods of market analysis have their respective partisans. I like the adage that Fundamental analysis tells you what to buy or sell and Technical analysis tells you when to buy or sell it. Like all attempts to "beat the market" both methods require a combination of talent and experience to pay off. Nor are the payoffs predictable. The best-founded firms can be destroyed by an adverse wind of regulatory overreach or technological progress. The best-established trends can be crumbled by an earthquake that destroys their foundations.

Very successful analysts can enter periods of under-performance when their methods become irrelevant to new circumstances. Therefore it seems best not to put too much trust in anybody's ability to forecast market movements. It's especially important to have an exit strategy that protects you from severe reversals of fortune, some signal that the smart folks are abandoning ship and you should seriously consider following their lead.

I still feel confident that the best strategy for most investors is to put some considerable fraction of your income into the market every year, using a low-cost, broadly structured index fund like VFINX, and throw away any reports you don't need for tax preparation. Do this for 20 years and you'll be a happy investor. Do it for 40 years and you'll be a very wealthy retiree.

It's easy to look back and see the stocks or funds you should have bought, when you should have bought and when you should have sold. The shoulda-woulda-coulda game will just make you sad. Some people beat the averages and most people who beat the average one year lag it the next.

Average stock market returns are nothing to sneeze at. At 7% a year, your money doubles each decade. At 10%, every seven years. It doesn't take long for a $10,000 contribution to grow to $100,000 under average stock market conditions.

I think it's important to recognize that market volatility can be scary as you near retirement. It makes sense to transfer a portion of your holdings each year to something safe, like 5-year TIPS. You could begin doing this when you retire. My personal rule is to look at what I need (or must take from an IRA) each year and double it for my TIPS contribution. That insulates me from having to sell stocks in a down market. The idea that a sixty-year-old person should have 60% of his portfolio in fixed income seems ultra-conservative to me. A lot depends on individual circumstances.

You might find it useful to compare TIP (the TIPS ETF) with its 200-day simple moving average for help with timing purchases. You may have to wait many months to find a good entry point, but it's worth it. I buy TIPS only when TIP is BELOW its 200-day SMA. I do NOT buy TIP shares, however; I buy my TIPS from Fidelity. TIP has a much longer duration than I'm comfortable with given today's low interest rates, and it's very susceptible to panic selling when rates go up. With the actual TIPS, I know I can get my money back when I need it.

An active investor needs to read widely and think hard about what he reads. Skepticism is necessary, but cowardice doesn't pay. One has to have a bit of boldness to succeed, but bold is not the same as rash. There's no pat answer to life's hard questions. Living with uncertainty, with regret, with fear and greed... this is the life of a successful investor.

Of course I persist in wanting to beat the odds, so I use NoLoad FundX advice in attempting to pick winning funds. I already know I'm no good as a stock picker; I could have bought any number of things ten or twenty years ago that would have given me triple digit returns if I'd just known. Shoulda-woulda-coulda...

The FundX method attempts to find funds that are beating the market over the past year and ride them until they begin to lag. It has had good and bad spells. When I questioned whether their method was still useful, they responded with a long analysis showing that they have outperformed more than underperformed over the past 37 years, AND their periods of outperformance averaged 8% better than SPX vs 4% worse in the years of underperformance. Over the entire period, they have beaten SPX by 3 percentage points according to Hulbert. The FundX method is the best friend I've found along the road to retirement.

As for sources of technical analysis, I'm still fond of Carl Swenlin's Weekly Wrap published Saturday afternoons at ( Carl is suitably modest in his forecasting and seems accurate as regards the long term. I also watch On-Balance Volume and sector rotation for clues as to market moods. I particularly treasure Carl's motto: "Technical Analysis is a windsock, not a crystal ball."

At present I see SPX continuting to use its EMA50 as a staircase with a matching trend in OBV. The sentiment indicators I follow are turning north, and the fear trade in bonds and utilities seems to be "off" for now. My best source of macroeconomic analysis (Jeff Miller) is strongly bullish and Carl says we're in a secular bull market, so I'll remain moderately aggressive until the wind changes.