There has always been a strong debate in the trading world between the technical traders and the fundamentalists. While the technical traders believe that charts and price history will always show the best view of what market participants are thinking at various price levels, fundamental traders would claim that valuation metrics are the only way to see clear pricing of stocks. No matter where you land, today we ask: why use only one?
You likely have seen healthcare stocks take a beating last week and many will look at that as a discount in the short term from a technical perspective. While there's no doubt that prices are considerably less than weeks prior, you really are relying on the short-term, technical oversold conditions to help support prices. Fundamental traders will look at this recent drop in the sector and still see that the sector is not trading at any discount. Their beliefs would be that prices may bounce a touch in the short term, but that the sector still has room to move lower. Looking at a trailing 12 month P/E on the sector, you'd see that it's still priced just above average relative to history.
So, how can one use both fundamental and technical analysis to find good opportunities to invest? Take a look at the energy sector. Currently energy is the most undervalued sector in the S&P 500, trading at a price-to-earnings multiple not seen in over a year - which also happens to be on the low end overall. This is a sector that fundamental traders would agree is underpriced and currently trading at "value" levels. Now, dig deeper at some of the individual stocks in this sector. While it may require a little bit of homework, can you find any stocks that also happen to be trading near support levels or seem to be trying to break out of a downtrend?
With a little bit of work you can take a top-down approach where you look at the valuations and technical levels of sectors and then zoom in to see what stocks are priced cheaply and offer good entry points. Remember, fundamental analysis tells you why you might be interested in a sector or stock and technical analysis tells you when you might want to buy that stock or ETF.