We are often told that history does not repeat itself, but one of the most basic tenets of technical analysis of stocks is that it does. Chart reading is about looking back at patterns that have emerged before, and assuming that they will be seen again. The biggest problem with that in general is that it doesn’t take account of changes in fundamental conditions or market sentiment, the two most important drivers of price. Over the years, to compensate for that, I have developed a way of looking at things that, for want of a better phrase, I will call “technical fundamental” analysis.
The technical side is that I look for repeating patterns, the fundamental side comes from the fact that I look for those patterns in terms of economic conditions and sentiment, and the market’s reaction to those things rather than to price levels.
The easiest way to explain that is with an example, and there is a relevant one right now.
Yesterday, both the S&P 500 and the Nasdaq closed at record highs, but if you listen to the headlines, that would seem to be unlikely at best. All the talk is of coronavirus and the potentially devastating economic effect it will have on China, and therefore the world. There is also a smattering of “valuations are too high!” headlines and maybe a few Bernie Sanders scare stories. Yet here we are at yet another record close.
It could be said that stocks are “climbing a wall of worry,” a phrase that was used frequently a couple of years ago. To look for parallels, I searched for that phrase in my archive of articles I have written and found I had used it only once in the last decade of writing, in a piece written in August of 2018.
Back then the most prominent worry was the tit-for-tat tariff war that was in full flight. The U.S. and China seemed to be competing to raise import taxes the most and potentially do the most damage to the world’s economy. There were other things, too. The Fed’s path on interest rates was unclear and, surprise, surprise, there was political turmoil in the White House.
All of that led me at that time to say that investors should be a little cautious, as a correction was coming before long. It was not that I didn’t see stocks going higher, it was just that gains would probably be small, while the correction, when it came, had the potential to gain momentum and quickly become a significant move.
Here’s what happened to the S&P 500 in the six months following that piece:
A “technical fundamental” analysis suggests that we are in a similar place right now. We are once again climbing a wall of worry and we are at levels that make big gains in the near future unlikely, but also mean that any downward move once the support of earnings season ends could quickly gain momentum.
Just as back then, I am not saying that stocks can’t continue to move higher. It is just that the balance of risk and reward is tilting toward risk and a cautious approach for a while looks justified in case history does repeat.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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