1. Fundamental vs. Technical
Analysis: The Ying & Yang of
Equity Security Valuation
Prepared by:
Allen D. Hahn, CFA, CMT
February 29, 2016
Discussion Topics
Introductions
What is Value ?
Do you want to be
a Fundamental or a
Technical Analyst?
Practical
Applications of
Technical Analysis
Questions
2. What is Value?
Desirability
Monetary Unit
Moral Principles or Beliefs
Result of a Function or Operation
Graduation of Tone
To Have High Regard For
2
Many different
meanings; no
universally accepted
definition
A value judgment is
often placed in context
Value may change
depending on the
context in which it is
being measured
3. Why Do Equity Securities Require
Valuation?
Buy-in/out of Professional Partner
Fairness Opinion to Board of Directors
Inclusion in an Investment Portfolio
Dispute Resolution
SEC/GAAP Financial Reporting Requirements
Capital Funding/Bank Lending
Market Trading
Taxation
3
Equity securities
require valuation in
many different context
Different “rules”
will be applicable to
formulating a view on
value
4. Differing Philosophies of Equity
Security ValuationSecurity Valuation
Methods used to
analyze securities and
k iFundamental analysts believe make investment
decisions are broadly
classified as either
fundamental or
technical analysis
Fundamental analysts believe
securities are priced according to
fundamental economic data
Radically different
schools of thought
followed by
professionals in the
investment industry
Technical analysts think investor
behavior and supply and demand
factors play the most important
role
4
5. How Does a Fundamental Equity Security
Analyst Approach Valuation?
5
Attempt to study
all related economic,
financial and
quantitative factors
affecting the
company’s business
Fundamental
analysts emphasizes
the financial and
competitive position
of the company
The fundamental
analyst believes that
there is an intrinsic
value (inherent worth)
of an equity security
Fundamental
analysts view the
optimism and
pessimism of the
crowd as “noise”
6. The “Bottom UP” View of Fundamental
Valuation Analysis
6
Paradigm of a
fundamental approach
to equity security
valuation
The focus of
“bottom up”
valuation is the
financial position of
the company
Financial
statements, SEC
reporting,
management
documents and
independent due
diligence provide
input information to
the analyst
Methods of
valuation include an
income, market and
adjusted balance sheet
approach to derive
intrinsic value
7. How Does a Technical Equity Security
Analyst Approach Valuation?
7
Analyze statistics
generated by market
activity
Technical analysts
do not attempt to
measure the intrinsic
value of an equity
security but to
measure its
supply/demand
characteristics
Technical analysts
use statistics, chart
patterns and other
tools to predict the
future direction of an
equity security
8. The “Top Down” View of Technical
Valuation Analysis
8
Paradigm of a
technical approach to
equity security
valuation
Focus of ‘top down’
valuation is the
supply/demand
indicators for an equity
security
Price tendencies,
momentum, confirming
data and support
/resistance areas are
key input information
Methods of analysis
include moving
averages, price
indicators, analogues,
form and cycle analysis
9. Does All this Mean that One Valuation
Approach is Better than the Other?
9
The decision to use
fundamental and/or
technical analysis is
based on the purpose
of the valuation
Not only is it
important to
understand technical
analysis, an
understanding of the
company’s financial
position is typically
relevant in the
valuation process
Technical analysis
will not represent the
intrinsic value of a
company because the
price of securities can
move in an irrational
manner
Knowing how to
perform both
fundamental and
technical analysis is
essential for both
investors and traders
10. Tendencies of Fundamental and
Technical Analysts
Fundamental
Multi-disciplinary
Creative
Research (qualitative)
Team orientation
Institutional
Theoretical finance
Technical
Quantitative
Rules-based
Research (quantitative)
People orientation
Individualistic
Psychology/Behavioral
Finance
10
11. Technical vs. Fundamental Analysis:
Which Approach?
11
Availability of
information is key
criterion on which
approach to use
Purpose of the
valuation will also
channel decision
making
Investment time
horizon
Fundamental Technical
Closely-Held
Large-Cap
GlobalOTCBB
Small
Cap
Mid
Cap
Large
Cap
12. The Opportunity to Exploit the
Mispricing of Securities
12
Technical analysis is
often more reliable and
predictable in the
short-run, whereas
fundamental analysis is
longer-term oriented.
Time horizon: short-
term (days);
intermediate-term
(months); long-term
(1.0 yr +)
Long-term
forecasting with
technical analysis
13. Tools of a Technical Analyst: Indicators
13
Literally hundreds
of price monitoring
tools that will
generate buy and sell
signals
Chart patterns,
form models, moving
averages, cycles,
indicators, oscillators,
among others
Price momentum
indicators are
common tools in
technical analysis
MACD relies on a
moving average cross-
over system to
indicate the likely
direction of future
prices
