Tags: david | frazier | Indicators | technical | fundamental | Forecast | Stocks

A Blend of Indicators Is Best for Forecasting Stocks

Tuesday, 14 Sep 2010 01:07 PM

Many investors, including professional money managers, rely entirely on fundamental factors, such as a company’s operating results and various economic statistics to forecast the direction of stock prices and to position their investment portfolios.

Many other investors rely exclusively on “technical” indicators, such as the price action and trading volume of stocks and numerous investor sentiment indicators, to decide in which securities to invest at any point in time.

Unfortunately, neither of those approaches produces positive results during all investment environments.

ALERT: Frazier: Stocks Rolling Over. Get Out Now.

For example, several investors with whom I had spoken during the past few days thought that stock prices would rise sharply today if the August retail sales report from the U.S. Department of Commerce, which was released at 8:30 am this morning, showed that sales of goods such as automobiles, clothing, and household furniture rose last month.

However, just the opposite happened. Although the Department of Commerce reported today that retail sales rose for the second month in a row during August, stocks declined right out of the gate this morning, with the Dow Jones Industrial Average falling 44 points as of 9:45 am Eastern Time. Although stocks recovered during the following hour, the Dow Jones Industrial Average was up only a very modest 31 points just before 1 p.m. today.

While many fundamental analysts were confused by investors’ reaction to today’s retail sales report, I expected stocks to either decline somewhat or increase only a bit today regardless of the readings on the August retail sales report. That’s because numerous technical indicators — statistics concerning internal developments in the stock market — revealed last Friday that stocks had risen to overbought levels and that stocks would therefore likely pull back this week.

A similar situation occurred on June 18 and again on Aug. 6 of this year, with price-momentum, advance-decline, and investor sentiment statistics indicating that stocks had risen to overbought levels on those dates and that stocks would therefore pull back during the ensuing days. Sure enough, the Dow Jones Industrial Average fell 782 points (7.5 percent) from June 18 to July 2 and 668 points (6.3 percent) from Aug. 6 to Aug. 26.

Unfortunately, just like fundamental indicators, one can’t rely solely on technical indicators to determine the near-term direction of stock prices. For example, the same indicators mentioned above suggested on Nov. 10, 2009, that stocks were trading in overbought territory and were therefore due for a pullback. However, rather than declining, stocks trended higher during the ensuing two months, with the Dow Jones Industrial Average advancing 373 points (3.6 percent) from Nov. 10, 2009 to Jan. 10, 2010.

The reason that stocks likely advanced during the two-month period mentioned above can likely be attributed to the fact that the readings on several economic statistics (such as retail sales, manufacturing activity, and sales of homes during that period) were much higher than Wall Street analysts had forecast.

Because of the conflicting type of information that is often presented by fundamental and technical indicators, I use both of those types of indicators, as well as sector rotation statistics, to determine the positioning of my investment portfolio.

Although I still make mistakes during certain types of investment environments, that approach enabled me to avoid the big downturn in stocks during 2008 and to capitalize on the substantial rally in stocks during 2009.
 
Note from Moneynews:
If you’d like to learn how to use some of those same indicators to manager your investment portfolio,  try a free sample of David’s investment advisory service, The ETF Strategist. The service helped investors generate a 35.8 percent investment return since its inaugural edition on Sept. 18, 2007, through Aug. 31 of this year. In comparison, the S&P 500 Index lost 24 percent of its value during that same period. Click Here to Find Out More.

About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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DavidFrazier
Many investors, including professional money managers, rely entirely on fundamental factors, such as a company s operating results and various economic statistics to forecast the direction of stock prices and to position their investment portfolios. Many other investors...
david,frazier,Indicators,technical,fundamental,Forecast,Stocks
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2010-07-14
 

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