During the 2020 calendar year, most of my TSU blogs covered each session of our Foundations of Stocks and Options core classes. By the time I had completed all three FOSO levels, I had gained a well-rounded understanding of the stock market and trading. I knew what I was looking at when I reviewed a stock chart, and I gained functional knowledge on how to place trades. All in all, it was a solid starting point to my trading journey, and if you wish to review that journey, please click on this link for a listing of all my FOSO related blog posts.
However, as important as it is to review the past and remember what we have learned, it is just as important to look to the future and see what we can learn to bolster our trading skills. To this end, there are three main classes or teachers I plan on taking this year: Chris Burgess' class Beat the Market, Alphonso Esposito's class Tick by Tick, and Josh Hesse's class Fibs in Four. Hopefully, my upcoming blogs covering these classes will provide enough of a glimpse behind the curtain to let you know what to expect if you decide to take the class for yourself. So, let's kick off a new trading year with a look at Chris Burgess' Beat the Market teachings.
I've always liked the technical approach which TSU presents in the Foundations of Stocks and Options classes. However, in the back of my mind, I felt the technical approach only looked at a part of a company's picture while ignoring other parts of freely available financial data that might affect a company's outlook. Fortunately, my wife works in the financial sector. Over the years, she has shown me how to review various company's 10-K reports and other publicly available data such as 10-Q and 8-K reports. This freely provided information can indicate the financial strength or weakness of a company's capital standing and even their future outlook on growth. This approach is precisely what Chris Burgess' Beat the Market class teaches you to do. He shows you how to look at a company's information to create a bird's eye view of where the company in question currently is and where it may be going. In short, which direction a company is trending, and is it enough of a trend to warrant a trade.
Fundamental analysis provides the foundational outlook on market and sector trends from a historical perspective. Thus, using fundamental analysis will only appeal to a particular group of traders; however, for people like me who like to look at the overall picture first, fundamentals is an excellent starting point as compared to only looking at a company's current candle and trying to figure out where it will move next. Fundamental analysis provides a method of stacking the odds in our favor as much as possible by finding companies that are more likely to go up and down. After all, economic and market trends usually move big and move slowly, and fundamentals help us to identify those significant trends and then act on them accordingly. In his classes, Chris Burgess presents a step-by-step method of building your fundamental analysis by starting with macro-economic analysis, then moving to a quantitative analysis, and polishing your overall view with a qualitative analysis. In short, going from a bird's eye view of the market down to a worm's eye view of promising trade opportunities.
The first step to building a well-rounded fundamental analysis is by taking a look at a few macro-economic indicators and identifying the trends in the data we collect. When doing this, we are trying to determine if our nation's economy is trending up or down and which sectors are growing and contracting. After all, we want to be on the right side of a trend; instead of fighting against the trend.
It should be noted there are three types of economic data we can access: leading indicators, coincident indicators, and lagging indicators. The different indicators breakdown as follows: a leading indicator postulates what is likely to happen in the future, while a coincident indicator reflects what is currently happening right now in the market, and finally, a lagging indicator reviews what has happened in the past.
For our purposes, we want to use leading indicators such as the Purchasing Manager's Index or PMI, the Non-Manufacturing Index or NMI, the Consumer Sentiment Index, which is released by the University of Michigan, and finally, the Housing Permits report, which is published by the United States Census Bureau. The Purchasing Manager's Index (PMI) measures the general direction trends are moving in the manufacturing sector. The Non-Manufacturing Index (NMI) details the economic activity of various industries by breaking down their employment, prices, and inventory amounts. The Consumer Sentiment Index, which is based on consumer opinion, basically presents the overall health of the economy in a statistical format. Finally, the Housing Permits report provides data on the number of new housing units that are authorized by building permits. When combined and broken down, all of this data will provide an obvious picture of current and future industry trends.
Once you have compiled all your data, it is time to dive a little deeper and determine the best and worse stocks in the given sector or industry you have analyzed. This step is strictly looking at hard numerical data, and we will be examining it in more depth in a future blog.
Once you have identified the companies you wish to trade, it is time to do a qualitative analysis of each company. You want to find out what's happening with the company and the industry around it. You can delve into recent news and find out the company's strengths and weaknesses and how it stands against its industry competitors. This is a more subjective and softer approach than the quantitative analysis; however, it does help to round out the company's full picture, and we will be examining it in more depth in a future blog as well.
The end result of Chris's fundamental analysis is to produce high-quality trade ideas. It will save you time of endlessly scanning charts looking for good stocks to trade as you can be armed with reliable trades upfront even before you open up your charting software. You can then apply your technical trading skills for opening and closing a trade based on your previous fundamental analysis. Simply put, this approach will provide you direction for your trades and a strong foundation upon which you can execute your trades in confidence.