Pawns in a Rich Man’s Game

Bespoke Investment Group is reporting that 10% of U.S. corporations are raising earnings expectations, compared to 4.1% that are lowering them. That’s the largest gap on record, and suggests that analysts still have earnings projections that are too low.

It’s hard to blame the analysts for being cautious. While the economy has improved, uncertainty about unemployment is an issue. It’s easy to imagine that consumer demand could drop. Still, let’s not ignore what corporations are saying. After all, they are the ones in direct communication with their customers. I can’t help but be a little optimistic that there is more upside for the stock market.

Don’t ignore the consolidation news from the commercial real estate sector this morning. Mall owner Simon Properties (NYSE: SPG) is offering $10 billion for its rival, General Growth Properties (NYSE: GGP).

Several investors and economists believe commercial real estate will be the next shoe to drop. And within that sector, shopping malls are probably the most beaten down group. That Simon Properties is considering a buyout means that it sees opportunity. And it is moves like these that often mark a bottom for an industry or sector.

I’ve recommended a commercial real estate stock that may have some terrific upside. Maguire Properties (NYSE: MPG) is back to its support level at $1.50. If you didn’t catch it there last time, you might want to give it a look.

You’ve probably noticed that I’ve started featuring commentary from TradeMaster Daily Stock Alerts’ Jason Cimpl more prominently in Daily Profit.

I tend to focus on what you might call "big picture" trends regarding unemployment, the economy, oil, China, etc. And while I will discuss the movement of the major indices (Dow Industrial, S&P 500, etc.) on occasion, I’m not what you’d call a "technical analyst." I only dabble in the art of analyzing moving averages and On Balance Volume.

Jason Cimpl, on the other hand, lives and breathes this stuff. He is a bona-fide financial analyst, and has the collegiate credentials and investing track record to prove it. He can also read an earnings report and balance sheet with the best of ’em.

Jason’s also a trader, seeking to profit from the day to day movement of the stock market.

It’s not uncommon to hear long-term investors belittle the technical analyst for ignoring fundamentals. At the same time, it’s clear that investors do sometimes lose sight of fundamentals, like during the Internet bubble or during the 2009 sell-off.

I received an email from a Daily Profit reader that I think sums up the conflict between the technical and fundamental analyst, and also offers us an opportunity to understand and incorporate the strengths of each discipline.

Garry R. writes:

Ian, I find statements such as this statement in your 1/20/2010 email to be confusing, as well as very annoying:

TradeMaster’s Jason Cimpl… "Typically, indices in a bull trend would have made a push higher into the close. Despite the weak close and his growing pessimism, he did note that market internals were "spectacular."

Shouldn’t the market (prices) be based in "internals"? I’m no expert but I’m of the opinion that we’d be much better off if there were no Technicians and/or "trend line" investing. When there’s a market crash or an "Irrational Exuberance" bull market, trend line (technical) investing just aggravates the excessive "trends"?!

It’s seems to be so common now to see a stock price with no relationship to the company’s fundamentals! I see "Technician" comments every day about "trading ranges"; when to sell, when to buy, when to go short or long. I only see negatives in this kind of trading; certainly, this is "great sport" for the insiders; but it also makes the average 401K investor feel like he/she’s just a pawn in a rich man’s game. Where am I going wrong?

Somewhere around 70% of the daily volume on the New York Stock Exchange (NYSE) is institutional trading. (That’s hedge funds, mutual funds, pension funds, etc.) So, as individual investors, our trading (or investing) volume is a tiny part of a huge pie. I don’t mean this to be discouraging. Rather, it’s a truth that can set us free.

It’s vital for us to understand that Wall Street’s goals are not always aligned with those of individual investors. Likewise, fundamental valuations aren’t always the driving force behind stock prices.

Mutual find managers measure their performance against benchmarks. One of the most popular is the S&P 500. If the S&P 500 rises 8% in a year, and a fund manager makes 12%, he or she is considered a success and makes his or her bonus. Fund managers will absolutely take profits on positions to lock in performance, regardless of fundamentals.

Now, over time, a stock’s price will tend to reflect its fundamental valuations. But price also reflects investors’ expectations, and those are always subjective. That’s why in bear markets, P/Es of 15 might be considered expensive, while in a bull market, the same P/E might be considered cheap.

At the end of the day, investors, even the institutional ones, are human. And human investors are largely driven by two emotions: fear and greed. I would never call Warren Buffett a technical analyst. But even he hints at a technical perspective when he tells us to "…be greedy when others are fearful…"

How do we decide when investors are fearful or greedy? We pay attention to what they are doing. The technical analyst looks for clues in investor selling and buying activity to discern what’s coming next. In other words, if we know that market direction is largely influenced by institutional activity, then watching what they do can give us an edge.

The bottom line is that technical analysis doesn’t drive the market. It gives us a clue as to what the big players are doing, and by extension, where the market is headed. And we can use that information to make money. In fact Jason Cimpl used his analysis to lead TradeMaster Daily Stock Alerts members to 5.4%, 6.5% and 15.5% gains between February 4 and February 8.

Right now, Jason has been advising us that the bulls are taking a stand and pushing prices higher. Specifically, he’s watching the S&P 500 level of 1085 as an indication of the bulls resolve. I can also tell you that he was getting his readers positioned for more profit opportunities in his weekly subscriber’s video from Friday. But if you want to find out what he’s recommending, you’ll have to ask him at TradeMaster Daily Stock Alerts.

Ultimately, technical and fundamental analysis methods work together to not only identify the right stock to buy, but the right time to buy it.

To top