Happy New Year, traders.
We’ve officially closed the books on the previous year. And what a year it’s been…
The Fed finally announced its long-awaited pivot… signaling that rate cuts are finally coming in 2024. This is the “green light” that many investors and traders have been waiting for.
But if you’ve been waiting for the Fed to finally show its hand, you would have missed out on an epic melt-up in the markets.
Stocks bottomed in October 2022. And although there have been pullbacks along the way, the broader market indexes have performed admirably.
The Dow Jones Industrial Average (DJIA) broke 37,000 for the first time ever on December 13. The Nasdaq broke to a new all-time high on December 19. And the S&P 500 is currently about 2% away from reaching a new all-time high.
The point we’re trying to make in this essay is that there’s often a difference between what the markets should do and what they actually end up doing. This difference often leads to the downfall of traders and investors who rely on fundamental analysis.
Don’t get me wrong – fundamental analysis is incredibly important… just not in the way most people think.
Let’s say you know beyond any doubt that a company is going to beat earnings.
But what do you do with that information? What kind of action are you going to take?
After all, there isn’t a clear connection between an earnings report and how the stock is going to perform.
We’ve all seen stocks trade lower after a seemingly glowing earnings report. And on the other hand, we’ve also seen stocks trade higher after a lackluster earnings report.
How about another example? What if you knew the economy was going to stay strong over the next several years? Surely, you could use that information to buy stocks and make a fortune.
Not so fast…
The stock market and the economy generally move in the same direction, that’s true. But stocks often lead the direction of the economy.
This means there can sometimes be a significant distortion between how the markets are doing and how the economy is performing.
For instance, if you knew the first three months of 2024 would represent the strongest increase in GDP for the next few years, you’d probably think now is a good time to buy stocks.
That was the case for the last quarter of 1987. And if you owned stocks in late 1987, you would have owned them through what remains to this day one of the worst market crashes of all time.
The truth is that fundamental analysis is great at telling us when and where to look. If Tesla is reporting earnings in a week, we know that’s a stock we might want to keep an eye on.
And the first Friday of the month usually marks the release of a slew of reports that tell us how the job market is doing.
Events like Fed meetings and employment reports are all marked on economic calendars. There’s a whole bunch of them out there. The one I prefer to use can be found at the Forex Factory.
But as we just covered, knowing about these events – or even the outcome of them ahead of time – isn’t enough.
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That’s because fundamental analysis does a terrible job of telling us what to actually do.
Fundamental analysis can’t tell us where to place a protective stop loss or where to set a realistic profit target.
Only technical analysis can help us with that. That’s why whenever we talk about the markets here at Jeff Clark Trader, we usually incorporate a price chart.
Technical analysis is the study of those charts, and it happens to be both an art and a science. There isn’t one right way to look at the technicals of a market. Everyone has their own slightly different way of doing it.
On Wednesday, I’ll show you my way of doing it. It’s not all that complicated. Anyone can learn it with a bit of time and dedication. And most importantly, my method consistently delivers results.
And we won’t just be looking at historical examples from years ago, either. We’re going to look at markets that are relevant to you right here, right now.
Until then, happy trading.
Imre Gams
Analyst, Market Minute