Market Technicals and Fundamentals Converge

Investors in stocks have the wind at their backs.  The long-term increase in technology and productivity rewards the owners of companies as well as the workers.


When "Mr. Market" seems unaware of this progress, the potential investor gets an opportunity for a bargain.  At "A Dash" we believe that there are several positive fundamental factors:

  1. The obsession with recession has created an extremely negative investing climate;
  2. The actual earnings results, outside of financials, have been solid;
  3. Financial issues, while a special case, show some signs of bottoming;
  4. Forward earnings from companies and the analysts that follow them look pretty good;
  5. Forward earnings ratios, when compared to various bond yields, are quite attractive; and therefore
  6. Stock prices are already pricing in a recession.
  7. Meanwhile — the impact from the Fed rate-cuts and the stimulus package will hit in the next few months….

For us, fundamentals means prospective earnings versus alternative asset allocations.


For our technical analysis we avoid the subjectivity of interpretation through our use of carefully-tested models.  The systems all use technical criteria — no fundamentals (an interesting topic for another day).  We are getting several bullish indications.

The Gong Model

The Wall Street lore is that no one rings a bell at the bottom.  Our modeling guru, Vince Castelli, has worked on this problem, with some interesting results.  His "Gong Model" starts with the hammer gradually pulled back — an oversold condition — and ends with the explosive release.  It is not a perfect signal.  Those seeking such things are expecting too much, and getting a model that is "overfit" to be perfect in hindsight.  Our Gong Model gave a meaningful signal on January 25th with the S&P 500 at 1330 and the NASDAQ at 2326.  The market has moved a little higher since then, albeit with greater volatility.  There is still plenty of time to play this signal, which reflects risk reward over a time frame measured in months.  (Send us an email for a copy of the report).

The TCA – Index Model

Each Thursday we discuss the current results from our Trend, Cycle, Anticipation (TCA) model as applied to ETF trading.  We also use the TCA approach to evaluate the major index ETF’s — SPY, DIA, and QQQQ.  We use the results from this analysis to make sure our accounts are "leaning" the right way.  If the signal is negative, we actually hedge positions with the short ETF’s.

The TCA – Index signal is our principal broad market indicator, and we use it to determine our weekly vote in the Ticker Sense Blogger Sentiment Poll.  This has been neutral for some weeks (Negative TCA, Positive Gong Model).  Last Friday, the TCA model flashed a "buy" signal for both DIA and QQQQ.  We switched our market forecast to bullish on that basis.

Since it is Thursday, our regular model reporting day, we will also provide some bonus information:  The model gave a "buy" signal on SPY as of tonight’s close.  The model does not know about tomorrow’s employment report.  It is based strictly on technical criteria.  The recent signal history is shown in the chart below.  It is clear from the chart that the model is making a "cycle" signal, not one based upon the trend.


Perhaps in a future article we shall delve into this more completely, but the chart does provide an idea of the major factors and the trading history.


The final bullish component is the TCA-ETF model.  We report on this every Thursday.  We hope that those interested in sector ETF trading are finding it useful.  (We have a free report on this model, also available by email).

The recent market volatility has caused a lot of switching from sector to sector, but there has been an interesting trend.  The number of sectors with a "buy" signal has steadily increased.  We view the percentage of sectors in the "buy" range as an important indicator.  Tonight’s run showed an increase to 26, from the 21 reported in the table.  (Results delayed by one day).


The key fundamental and technical factors have come into alignment.  Obviously, there are no guarantees in investing.  There are times when the reward/risk ratio is particularly attractive.  Each person’s circumstances are different.  Having said this, the average investor we meet is grossly under-invested in stocks compared to other assets.

Shown below is the TCA-ETF summary as of last night.


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  • Wayne Mulligan April 7, 2008  

    This is a tough one…calling a bottom or saying that all of the possible negative outcomes of the current economic/credit debacle we’re in have already been priced into equities is a tough pull to swallow. At the end of the day we haven’t seen the complete fall out from the credit crunch yet, more homes are going to be foreclosed on and eventually the Fed is going to run out of “rate cut ammo”. Hopefully things will pick up on a business front before then but let’s look at the facts. Market leaders (finance and tech) have both indicated that this year is going to be rough – Oracle and Cisco (two of the largest technology companies – one in software the other in hardware) have both guided downward this year.
    And when B2B companies are getting hurt, it’s not long before consumer facing companies start to feel the same heat.
    I appreciate the fundamental/technical model you’re using and it seems sound. But with some much uncertainty in the future I’d be loathe to make any big macro predictions right now.
    I think we can both agree, however, that on a strict valuation basis, there are going to be some cheap stocks laying on the street this year. That’s when I want to be around with a fist full of cash and ready to buy stocks like it’s 2002 again!

  • Jeff Miller April 7, 2008  

    Wayne – I have tried to show several approaches that often give quite different results. Right now, they happen to line up. I know that many, like you, are waiting for stocks to get cheap. I wonder how you will know?
    BTW, Oracle did not guide lower. The guidance was “in-line” but some were spooked by a company statement saying that some deals had drifted out of the quarter at the end of the month.
    To me, this shows a market that is willing to pounce on the slightest sign of confirmatory evidence for the negativity. Everyone sees the stock go down. Those who do not own it draw their inference from the stock movement, not from the actual conference call. The stock has rebounded from the slight revenue miss, almost to the pre-call price. (I am paying attention since I own the stock, as do my clients).
    I am quite sure that your worry about the Fed being out of ammo is very widespread, and I appreciate that you took the time to comment. I’ll check out your blog to get more of your viewpoint.
    Meanwhile, as to the ammo, let’s give what has already been fired a chance to have an effect!