Securities Analysis 101

The goal of any financial analyst or stock technicians is simple: to beat the market. This victory metric is typically measured against the S&P 500.  This goal is basically boiled down to ones ability to predict the direction of the stock market and identify undervalued stocks that are poised to outperform. This may sound like a simple concept, but where it becomes murky is within the debate on which values are to be used in this determination. For example a fundamental analyst would insist that this underlying value can be determined best from the forces that affect the economy, industry groups and related companies. Essentially identifying the supply and demand forces that affect the stocks prices for the products & services offered. While a technical analyst will attempt to forecast future price movements based on examination of historic price movements.

 So which theory is best? Which strategy produces higher returns?  As a contributor of Stocknod my answer is both types of analysis should be used when analyzing securities, as the two strategies compliment each other in a full evaluation at both the micro and macro levels. To expound on this let’s look further at the question of whether markets are efficient. Just what is dictated by the current pricing of a security? Is the current pricing a fair market value? Or are there underlying forces that exist that have somehow skewed pricing? These are the questions and opportunities that we must uncover to identify the stocks that are undervalued and subsequently poised to outperform.

An “efficient market” in the academia level is defined as a market in which the price is an unbiased estimate of the true value of the investment. Simply stated, the current price of a security fully reflects all available information and is the fair market value. “All” being the sum value of all views whether bull, bear, or other held by market participants. It is a fair value based on the supply and demand value of the market. Any deviations above or below what is deemed as “fair value” is considered to be random and over the long term will reflect the true value. So it is this period of deviations where the opportunity exists in making profits trading stocks. So in short, the goal of any trader is to identify these existing anomalies or potential future anomalies and move in and out of the market accordingly. These anomalies will disappear almost as fast as they are identified and again is primary reason that Stocknod alerts have been such an effective trading tool in staying in tune with pricing strikes.

Most within the academia realm believe that security prices are deemed as “semi-strong” efficient. Remember by semi-strong we are referring to the fact that public knowledge is factored into the stock prices and it is relatively difficult to identify these deviations from the true value based on public information. And only new information should affect the price. Reviewing price reaction to breaking news, there seems to be evidence to support this theory. The flow of information and detection times have been increased due in large part to the internet, and market news are factored into the pricing almost immediately. Few will argue that a surprise, either negative or positive will drastically move the price of a security. I think we can all attest to this fact based on popular case history.

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