Sunday, April 13, 2008

The Psychological Financial Fusion in the Upcoming Week's Economic and Earnings Data

Good Monday Morning to all our readers, wherever you may be! We hope you're enjoying and learning from our fusion of qualitative, quantitative and technical analysis with every passing week. We will continue to stress the importance of psychological (qualitative) analysis over quantitative data. We give great respect to technical analysis (charts) as well; and we will at times fuse the three methodologies together in order to create some sort of synergistic effect (3+2+3= ..10).

In addition we still incorporate another layer of qualitative "top down" analysis that weighs geo-political factors, which have dominated the media of late. Although this phenomenon is not new, it is new in the sense that never before have humans witnessed so many free markets/democracies, so much new wealth, and so much pull/strain on natural resources. Therefore we believe the price of Crude oil and other commodities related to food stuffs is fair, just, and verifiable to a large degree. We hope you understand the importance of the geo-political environment when committing even a single dollar to any investment from 2008 well into the future. Having a broader view of global perspectives will help you target greater opportunities, both in quality and quantity. So perhaps the term "psychological financial fusion" is even more complex than we first explained; we see the phrase becoming more widely accepted and used by the talking heads going forward, especially in light of world economies adjusting and attempting to digest the US dollar crisis. A mention of Vimpel Communications (VIP) later in the piece will elaborate on how to profit from this developing paradigm shift in market mechanics. We see the weak US dollar being a blessing and not a hindrance to Corporate America in the not too distant future. Perhaps we'll see massive buying in the high end real estate markets by the Euro or other strong foreign currencies. We underline and reiterate our optimism for the US stock and bond investor by the time the leaves turn various colors and begin to fall.

The Week ahead presents the perfect storm of data for this qualitative, quantitative, and technical fusion to occur. Some financial sites & advisors lead you to believe P/E ratios are the main reason to buy or sell a stock: they are dead wrong. We do believe technical analysis is critical to set entry and exit points, but feel qualitative and "top down" analyses are far superior in deciding where, why, and finally what specific stock to buy, sell, or sell short.

We simply won't tolerate third grade division (P/Es) alone in evaluating something as complex as investor sentiment. Never underestimate the importance of geo-political forces and macro economics (top down) as the causes for price swings and thematic cycles. Swings and cycles (up or down) are understood and expected by learned, experienced traders and catch fools off guard. We've met and read many a fool referred to as an "expert", some of whom had been trading for years, but sadly their experience resulted in their relying solely on stagnant quantitative (accounting) knowledge. Our supporters must arm themselves with more than backward looking data, and all accounting, even GAAP, is never forward-looking.

Sometimes a stock price fluctuates 20% or more without any quantifiable data, i.e. earnings. So, maybe the psychology of anticipation of good or bad earnings causes these swings. Or perhaps geo-political or macro economic issues wag the price tail, catching most of the number guys off guard. We use these swings (volatility) as clues and opportunities to enter/exit trades, and build or break positions (long or short). We never explain volatility away by past accounting data, rather by adding two or three methodologies together, giving the psychological/qualitative and technical analysis components a lot more respect. Volatility is something you must embrace and welcome as a best friend, not an enemy. Volatility is the reason free markets exist, so permanently pessimistic men like George Soros should be studied with a grain of salt. We are staunch supporters of the "free market system" with an Adam Smith laissez-faire philosophy as our guiding principle. We believe in no government regulation with dovish (low) fiscal and monetary policies.

For those needing a quick explanation: Fiscal policy is a very important financial element influenced by the sitting President. The House and Senate debate and pass this legislation.

Think about it as the percentage of taxes you must pay on wages from work and income from investments (stocks, bonds, real estate). So if these percentages are raised, the government has more money to spend, and if these percentages are lowered, the individual citizen is empowered. Monetary policy relates to measures that expand or contract the money supply, specifically through tools like fed funds rate, discount rate and discount window.

The theory states that when short term bank rates are lowered the business cycle is stimulated and economic expansion occurs, and when rates are raised the opposite (contraction) results. So after reading our prior article "The 2008 Animal Tug of War", would you prefer a Donkey or Elephant living in 1600 Pennsylvania Avenue? Or perhaps neither? Maybe a Libertarian or Independent candidate emerges more to your liking ...

General Electric (GE) bled the whole market Friday. Did you see that hammer coming? We wrote about it in the Upcoming Earnings Psychology one week prior, and again in the Thursday Intra Day Psychology; we hope you were paying attention. Is your mutual fund manager or broker advising you to set 20% cash aside at all times? We sleep soundly, knowing our supporters enjoy greater leverage (cash) when market shocks occur; whether they rip prices up or tear prices down. Please be prepared for price swings to go either way, up or down, that's the reason we stress the second Commandment so often: Cash is King. Taking advantage of volatility can only be done when you have the ability to fire a shot, long or short (Commandment ~8~), but when you're always fully invested, that is dangerous, foolish, and condemned by our team.

Also, learn to pare down positions before the weekend; therefore we recommended booking the 16%-20% gain in GRMN, which resulted in 7 trading days. Congratulations to all who listened. The markets will be around next Friday, next month, and next year, so never force trades. We want our readers to become predators in the deep and dynamic market, like sharks that patrol the Great Barrier Reef in the Coral Sea off Australia. We want you to become educated, feared, and patient predators, not the perpetually hunted halibut. Circling your target over and over will make for easier and wiser kills/trades/profits. You should incorporate "psychological fusion" in your stock selection process; the use of qualitative, quantitative, and technical analysis together, with greater emphasis on qualitative logic on what to buy/sell and technical analysis (quantitative) on when to buy/sell it.

Think about it, why did Vimpel Communications (VIP) fall $1.24 (3.83%) to $31.15 on Friday? Did their business model inside Russia change because of GE's report and outlook? We know better.

"Psychological financial fusion" will be a theme as we build out this portal; we hope you learn and eventually profit from it.

1 comment:

Anonymous said...

I agree with the downward bias, good analysis on "VIP".