Fundamentals
Vs.
Technicals

ithin the realm of investment research there is a friendly adversarial relationship between two very separate and distinct areas of study: fundamental analysis and technical analysis.
Fundamental analysts are those that you typically see interviewed on CNBC to discuss a particular company or industry group. They analyze data that companies provide to the public regarding sales, income, and net earnings, and from the numbers they try to figure out how well a company and its business model is doing, and how well it will do in the future. They pour over this information, calculating their favorite ratios such as price/earnings, price/sales, or debt/equity among a myriad of others. They dissect the data, searching for that one piece of information that all the “other” analysts missed, so that they can be the first to issue the dreaded “downgrade” recommendation or the long-awaited “upgrade.” In either case, a change in an analyst’s recommendation can cause substantial changes in a company’s stock price over the short-term.
By contrast, the technical analyst spends his time in a different way. The focus here is on price action; whether it’s the price action of an individual company’s stock, an industry sector, or the market as a whole (i.e. S&P 500). The technical analyst believes that price behavior is the primary clue as to the financial health of company, sector, and market. The greatest tools at the analyst’s disposal are the charts that apply to his particular area of concern. The basic belief that has to be in place in order to accept this type of analysis is that the market “knows” what’s going on. Think of it this way: General Electric Company has over 10 billion shares of stock outstanding. Those shares are owned by literally tens of thousands of investors located all over the world. Each one of those investors carries an unique “intelligence” regarding the General Electric Company. They act on that intelligence every day in the marketplace by either buying or selling the stock depending on whether they are happy or unhappy with what they know. Even a relatively small group of unhappy investors can send a company’s stock price plummeting.
It may be an oversimplification, but from our perspective, it all boils down to this: fundamental analysts think that they “know” best, and technical analysts think that the market “knows” best. The truth is probably somewhere in between, and the prudent investor should pay attention to both.

Brian Bensch Vice President and Portfolio Manager
Melhado, Flynn’s Strategic Asset Management Group: William G. Roe, Regional Manager, Allen G. Oechsner, Senior Portfolio Manager, Brian D. Bensch, Portfolio Manager, Mark Generales, Sales Manager, Ruth Hauck, Service Manager