Understanding Your Investment Path

The old adage; “Working Smarter versus Working Harder” has never been more relevant in today’s global markets.  The road to achieving your goals of investment success is getting congested; who really has the time to find a clear path?

The Solution

I take a two pronged approach to investment management, including both

1) fundamental and

2) technical analysis.

While in most cases, many advisors will preach their efforts of exhaustive company report analysis and sell side analyst reports, I am sure you have seen more times than not the missteps that occur in the actual performance of these investments. The reason may be attributed to how much this analysis actually has on the performance of stocks.  I cite Benjamin F. King's study, quoted repeatedly since 1966, because it remains valid and has yet to be disproved to the point of dismissing its logic.
Market and Industry Factors, Journal of Business, January 1966:

Of a stock's move ...

• 31% can be attributed to the general stock market,
• 13% to industry influence,
• 36% to influence of other groupings, and the remaining
• 20% is peculiar to the one stock."

This is where I differentiate myself to help you find that clear pathway to meeting your risk adjusted investment goals.  I layer technical analysis into your investment strategy.  Technical analysis is simply the process of analyzing historical market activity and investor behaviour in an effort to determine probable future price trends.

One common misconception surrounding technical analysis is that its proponents believe the fundamentals of an underlying asset (i.e., supply and demand) do not affect the price of the asset.  This is far from the truth. In fact, technical analysis is really an indirect study of fundamentals. The major difference between technical and fundamental analysis is that the technician studies the effects of supply and demand—that is, price, volume, sentiment, and open interest over time—while the fundamental analyst studies the causes of price movements.

INTERMARKET ANALYSIS

Intermarket analysis is the study of the linking and relationships among financial and nonfinancial markets, both domestic and global. Its basic premise is that all markets move together and not in a vacuum. For example, a decline in the U.S. dollar is normally positive for the commodities markets. Rising raw material prices normally signal increasing inflationary pressures.  Bond prices typically respond negatively to this pressure and stock markets, eventually, follow the direction of bonds. World equity markets are also impacted by the trading direction of the U.S. dollar and commodities, which in turn can affect again the trend of domestic equities. Intermarket analysis is the study of these market linkages through the application of technical analysis.


Portfolio Application

Top-down and Bottom-up Analysis

Intermarket analysis lends itself very well to a top-down process. As the review begins with an examination of the four main markets (commodities, bonds, currencies and equities) to discover their current relationships to each other, this broader picture serves as a foundation for additional analysis within these four markets. The investor steps down from the four markets to indexes, sectors and finally stocks or exchange traded funds (ETFs). This progression from a larger vantage point to a more narrow focus on the individual stock or ETF is one of the main advantages of adopting the top-down methodology.  Intermarket analysis supports the view that the trading direction of commodities, bonds, currencies and equities largely dictates the trading direction of the individual stock or ETF. 
The bottom-up approach, used in fundamental analysis, supports the view that the individual investment (stocks and ETFs) should be the main focus, and exterior elements such as sectors, indexes and markets have a limited or even inconsequential effect on the individual investment’s trading behaviour. A review starting from the bottom up challenges the investor to make assumptions as to why an individual security is trading in a particular manner and direction before supporting analysis from sectors, indexes and markets can substantiate it. In effect, it is essentially placing the “cart before the horse.”

The Business Cycle and Relative Stock Market Performance

Stock Market Sector Rotation Model

Intermarket analysis is best served by starting with results and evidence and then moving to a conclusion to buy a specific security, as opposed to beginning with an assumption and searching “up the ladder” for supporting or refuting data.

If you are looking for something different or don't feel that you are hitting your mark, I can always be reached directly @ 416.775.4651 or srutledge@union-securities.com for a no obligation portfolio review.