Market / Technical Analysis

At Shields & Company we see the role of technical analysis as that of attempting to analyze all of the factors affecting stock prices. While this may seem a bit ambitious, it does stress an important point: fundamentals, such as earnings and company management, are only one of the factors that move stock prices. For example, academic studies have determined that as much as 50% of the movement in a stock's price is a function of the overall trend in the market. Similarly, group emphasis is important. Consumer stocks have been the place to be for much of the1980's and 1990's, but it hasn't always been that way. In the 1970's when inflation ruled, it was mining and energy stocks that performed well. Indeed, Coca-Cola sold for 40x earnings in 1972 and only 9x earnings in 1981. Had you bought Coca-Cola at the end of 1972 - a real "buy and hold" stock - you would not have broken even until 1985!

Of course, there are the cases where price is truly a function of earnings or other fundamental developments. But even where the fundamentals are the dominant factor in price action, the "special situations" which really are special, in most cases these simply are not recognizable by traditional fundamental analysis. For example, if you look at most of the better performing stocks each year, or the poor performers for that matter, in most cases earnings proved the dominant factor. However, even here it's not the earnings per se but, rather, the surprise in earnings. The winners consistently beat analysts' earnings estimates while the losers never matched analysts' expectations

Stock prices move in trends and trends tend to continue until something happens to change the supply-demand balance. In the stock market it doesn't matter what creates the supply and demand; the fact of their existence and the balance between them are all that count. The value of charts is in evaluating a stock's activity in relation to its recent past, its environment or setting. With all of the factors that can affect the market, from the Fed and interest rates to international markets and politics, a stock's chart - with its relatively simple price and volume lines -represents actual performance of a stock in the marketplace. The charts tell a story!

For more on Shields' Technical Analysis expertise and capabilities contact  Frank Gretz in our New York office at 1-212-320-3000.