good fundamentals, bad chart
PMs here - what do you do in this situation? if you like a business, good fundamentals, yipit/m-science data all checks out, but the chart looks pretty terrible. think failed breakouts, recent breakdowns, head and shoulders pattern. short because you are likely missing something, or do nothing until the chart stabilizes?
think medium term (1-2 weeks) investment period.
Based on the insights from Wall Street Oasis, when faced with a scenario where a company has strong fundamentals but a poor technical chart, the decision largely depends on your investment strategy and risk tolerance. Here are some considerations:
Fundamentals vs. Technicals: If the company's fundamentals are solid (good earnings, strong market position, positive growth outlook), but the chart shows negative patterns like failed breakouts or head and shoulders, it suggests a disconnect between the company's intrinsic value and market sentiment. This could be due to external factors affecting stock prices temporarily.
Investment Horizon: Since you're considering a medium-term investment period (1-2 weeks), technical analysis becomes more significant. Short-term traders often rely heavily on chart patterns to make decisions, as they can indicate immediate future movements, even if they sometimes contradict the fundamentals.
Risk Management: If you decide to invest based on strong fundamentals, it's crucial to have a clear risk management strategy. This could include setting strict stop-loss orders to protect against unexpected large drops driven by the current negative technical signals.
Wait for Stabilization: Another approach is to wait until the technical charts show signs of stabilization or a positive reversal. This can help align both fundamental and technical perspectives, potentially reducing the risk of entering during a downward trend.
Consider the Market Environment: The overall market environment should also be considered. If the market is volatile or bearish, even stocks with strong fundamentals might be dragged down.
In summary, while strong fundamentals are a critical factor for long-term investments, for a medium-term period like 1-2 weeks, technical analysis and market sentiment play a more significant role. Balancing both, along with a solid risk management strategy, is key to making informed investment decisions.
Sources: What makes a good short?, Shorting Stocks: My Research Process & 7 Rules I Follow, First Steps into Trading, What would you do with $300k, What is the Shorting "Research" Process
I will simply not care because technical analysis is fake?
100%
What matters is if you have an expectation gap vs. consensus/market thinking. E.g. the stock has been getting killed because it missed last FQ and read-throughs from competitors are pointing to a deepening slowdown in end market consumption. Management laid out a very aggressive bullcase at their previous Analyst Day, and sell side community is worried that a -ve Q3 print will be a "rip off the bandaid" moment. You like the stock because after conducting channel checks (guidepoint, thirdbridge, your own private networks) you think the business has bottomed last fq and the company is exposed to a secular theme seeing a pickup in growth. You have conviction that q3 print will reiterate guidance and now see upside risk given that a pureplay competitor in that secular theme is seeing accelerating growth. Your price target is 15% above the streets using today's multiple. Chart looks terrible, HF sponsorship is weak, the company reports in 2 weeks w/ no conference or competitors reporting between now and then. At 2% size it'll take you 3 days to fill on a vwap at 10%.
Polarized
You're either wrong on fundamentals or you found a great long but you'll need to extend the investment horizon and be prepared to double and triple down ehen it goes against you
The former is much more likely than the latter
i usually go to my personal snake oil salesman and rub the snake oil on the underside of my taint. This particular salesman deals a special snake oil that guarantees me to see that technical analysis is fake in equities
In all honesty, the people that talk most about charts are brainless trader-types that don't really understand fundamentals.
Don’t charts tell you what the market is thinking? So provides evidence you are the patsy - if the chart keeps breaking down, someone knows something.
Yes because forced sellers driving down the stock totally have a supernatural understanding.
If you're going to do this for a living, you should aim to be the one that "knows something" about the stock. If you're going to fold every time a position goes against you, this is not for you.
How do MMs think of the discount rate? Do they just use multiples ?
(1) Higher multiple stocks have greater sensitivity to the discount rate
(2) You can bench your stock vs. peers through the period (e.g. 10Yr up 20bp, multiple down 2pts)
(3) Roughly approximate where multiple can go given the level of rates (and if rates move +/- how multiples would move)
(4) Look at the spread of your co. vs competitors, assume that remains ~approx the same if rates move.
Don't over complicate it. Multiples are primarily a bet on the growth on the metric through some period of time, but changes to the discount rate still matter.
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