Fundamental Analysis For the Stock Markets

There are basically two schools of thought when it comes to analyzing the stock markets, technical analysis and fundamental analysis. These are two different and often competing schools of thought where one school says that the other is wrong. However neither both are correct, but for different reasons. A useful way to think of it is the fundamentals will tell you Why a stock is moving and the technicals will tell you When the stock will move.

Technical analysis is the study of price action and timing to enter the market. Fundamental analysis is the use of information about the company’s financial condition to make investment decisions. Technical analysis is generally the easier of the two methods to understand as it usually entails looking at one line crossing over another line for a buy or sell signal. However fundamentals can be quite a bit more difficult as it generally looks at things like price to earnings ratios (P/E) or debt to equity ratios. While these things can be useful they are also quite relative. In other words a P/E ratio of 25 might be high for one company a P/E of 75 may be low for another. At times markets can become quite irrational with frenzied investors buying and buying pushing prices to dizzying heights. Likewise at times markets can be fearful and investors sell and sell even when there are good values to be found.

A simple and proven method of doing fundamental analysis is by using the Investors Business Daily website. It gives you a statistically sound and scientifically proven method for evaluating the fundamentals of a stock by looking at a few different things.

Investors Business Daily was started by a man named William O Neil, who wrote a book called “How to Make Money in Stocks: A Winning System In Good Times or Bad” In it he details how he looked at the 500 best performing stock market winners dating back to 1953 stocks. What he found is that they all of them had certain things in common and he created a formula called -

Current Earnings-Should be up by 25% or more.

Annual Earnings-Should be up 25% in each of last 3 years.

New Product or Service

Supply and Demand-Trading volume should increase

Leader or Laggard-If you want to buy a stock buy the leader if you want to short sell, sell the laggard.

Institutional Sponsorship-Large institutions should be purchasing the stock that you want to buy or selling the one you want to short sell.

Market Indexes-are trending in the direction you are trading.

The Investors Business Daily website simplifies this formula by giving a letter grade to a stock from A to E. An A is a stock that has good fundamentals with quarterly earnings increasing, an accumulation by institutional investors and a number of other sound factors. While a D or E stock presents a good opportunity for short selling because the stock is fundamentally weak and its earnings have consistently declined.

At the end of the day fundamental analysis is probably not enough to be successful in the stock markets unless you have a very big bank and can afford to wait for a long time for your investments to recover in the event of a down turn. However when fundamental analysis is combined with technical analysis you can create a very powerful system that can make you wealthy.

Palmer Owyoung is the Founder of OptionSpreadTrades.com

A website dedicated to educating the small investor and helping them to achieve financial independence.

Averaging returns of 5-15% a month. To subscribe to the free newsletter and receive a 9 part options trading course go to http://www.OptionSpreadTrades.com

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