CHARTING THE FUNDAMENTALS

 

In my experience, fundamental and economic analysis predominately drive Wall Street. Therefore, it is my belief that the Technical Analyst, while being 100% true to their craft, should as best as they can complement and not compete with the Fundamental Analyst and Economist. 

That said, when I used to speak at client meetings and/or seminars, or to new in-house fundamental research associates, I would start by stating that “earnings drive long-term price movement, but, by studying price action, technical analysis aids in discerning when and if a change in fundamentals is coming and/or developing.”

Within the context stated above and in reviewing the chart below, I can make the following observations:

  • The last painful and extended pullback period by the S&P 500 (SPX) was between 2015 and 2016.

  • Prior to 2015-2016 the trend of the SPX Earnings (GAAP) was “up,” defined by a pattern of higher troughs and higher peaks—the simple definition of an uptrend.

  • Once the SPX’s earnings trend turned “down,” defined by a pattern of lower peaks and lower troughs, the index (and the entire equity market) corrected.

  • Currently, despite all of the headline news, geopolitical events, inflation concerns, volatility in the currency markets, valuation concerns, trade war, mid-term election and seasonal concerns, the earnings trend of the SPX continues to move higher, and the Russell 3000 (representing approximately 98% of all investable assets in U.S. equities) closed at a record high last Tuesday, 7/7/18.

 S&P 500 Weekly Chart. Until the price movement went almost parabolic in January, the higher earnings trend produced higher equity prices. S&P 500 Earnings (GAAP). Higher earnings trend (higher toughs and higher peaks) equated to higher equity prices. Lower earnings trend (lower peaks and lower troughs) equated to lower equity prices.

Summary: Admittedly, this is a very basic discussion relative to P/E analysis. However, while short-term price and time corrections will occur, until earnings trends turn “down,” as defined above, and/or negative technical divergences occur across all equity market capitalization segments, the odds favor the current primary uptrend has further to go.

In the meantime, a band of selling pressure (resistance) for the S&P 500 exists between 2850 and 2873. An initial level of buying interest (support) for the SPX exists at 2825, followed by a layer of support between 2800 and 2790.

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know if we can do any additional work for you. 

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 08.12.2018. Chart sources: Stockcharts.com. 

PDF Copy of Article: Day Hagan Tech Talk August 13, 2018 (pdf)

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Investment advisory services offered through Day Hagan Asset Management, an SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member NYSE, SIPC). None of the entities listed here in this disclosure are affiliated.