There are two main schools of thought on Wall Street. Some believe that fundamentals are all-important when analyzing a stock. They can't be bothered with ascending triangles, stochastics or other technical indicators. Earnings, cash flow and the predictability of those numbers are what drive stock prices, according to the fundies.
On the other hand, pure technicians believe that information is already in the stock price. They look at supply and demand of the security. Channel checks, meetings with management, and earnings models won't tell you the trend of the stock as far as they're concerned.
"Price is fact. Earnings on the other hand are estimates," says Ralph Acampora, the head of technical research at Knight Capital Group. "You restate earnings. You never restate price."
Then there are those (like me) who believe both methodologies are functional, although perhaps not always equally. I find technical analysis especially useful when working with contrarian investment ideas. One of the downfalls of contrarian investing is that sometimes you have to wait before your thesis is played out. For example, I could be correct that
business is not as robust as the bulls claim, as detailed
But it could take a few months for that to present itself (or it could take some time before the Street begins to care). Using technicals to refine your timing can help the contrarian sleep at night knowing that the odds are tilted in your favor. It's certainly no guarantee for success, but it's similar to betting with the house instead of against it.
For example, I presented a
bearish case for
P.F. Chang's China Bistro
earlier this week.
As you can see from the chart below, the stock broke a trend line that had been valid for more than five years. The longer a trend line is in effect, the more significance is placed on a break. During rallies, the stock failed to penetrate the level of the break. The shift in the technical picture indicates to me that something has changed dramatically.
Losing Its Sizzle
Perhaps it's simply that after a multiyear uptrend that saw the stock rise by more than 500%, it needs a breather. Or, it could be that some of the issues that I raised in my previous column will cause a downturn in the stock. Whatever it is, we know that the previous uptrend is over.
Mostly, The Real Story will be focused on fundamentals and pointing out where I believe the Street has it wrong. But using technicals to try to time the inflection points on those ideas can be an invaluable tool for improving returns.
Two weeks ago, I
wrote about Jeffrey Spotts, a technical analyst who believes
stock looks attractive. After Monday's 5% jump on earnings and details of the automaker's "Way Forward" plan, Spotts remains a bull. He's especially encouraged by the increase in short-sellers. In January, short interest grew by nearly 9% to 105.4 million shares. Spotts owns Ford shares personally and for clients.
On the fundamental side, George Magliano, director of automotive industry research for the Americas, at Global Insight, was more upbeat than the last time we talked. "They were aggressive. I liked the fact that they're looking to design cars for middle America," he stated. "They're responding to reality."
I remain neutral on the stock. I believe the company is taking steps in the right direction, especially in its attempt to change the culture at Ford. However, I want to see results before I'll believe this company is fixed. (Ford shares rose 1.8% to $8.67 on Thursday.)
Another company I've written about recently,
American Pharmaceutical Partners
, took a tumble Wednesday, falling 7.4% on higher-than-average volume -- something technicians definitely watch, by the way. (The stock rebounded a modest 0.7% on weaker-than-average volume Thursday.)
The decline was likely prompted by disappointing sales of Abraxane. According to health care information provider NDCHealth Corp., Abraxane sales were $11.6 million in December, representing an 8% market share of the taxane market. That compares with sales of $14.5 million and a 9.7% market share in November.
Keep in mind that data from NDC, which is owned by Wolters Kluwer, (or
-- another information provider) is not a 100% accurate representation of a company's sales. Ironically, I believe Abraxane eventually will be a strong performer. My issue with the company is with the conflicts of interest that I
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;
to send him an email.