Market Analysis

 

Share prices and entire markets go up and down in dollar value. There are a seemingly infinite number of variables that contribute to their movement. Traders generally agree on three broad categories of variables. They are:

  • Fundamental Analysis

  • Technical Analysis

  • Market Sentiment

Fundamental Analysis (Just the stuff you need to know)

The number of academic degrees, professional education, and economics that constitute fundamental analysis would take lifetimes of study to scratch the surface. Fortunately, there’s a small amount of information that is immediately relevant to being effective at fundamental analysis in your trading routine. Here are the essentials.

Companies list some - not all - of their shares on public markets such as NASDAQ and the New York Stock Exchange (NYSE). Some of the shares that companies do not list are held by the company itself and others are distributed in executive compensation.

IPO - Initial Public Offering - is the process that private companies go through to list/sell shares. On the IPO date you'll have the ability to buy shares sometime around noon instead of when the market opens.

Options are usually not available for trading until about 3 weeks after IPO (this amount of time varies).

Shares Outstanding - the total number of shares in existence; meaning the shares listed on public markets and remaining shares that the company/executives hold.

Market capitalization - Market Cap - is the value of every share added together. 

You may hear someone say “Apple is a two trillion dollar company” 

This means that AAPL is trading at $122.12 per share and there are 17,528,000,000 shares outstanding. Multiply share price by shares outstanding and you’ll get market cap.

$122.12 * 17,528,000,000 shares = $2,140,519,360,000

This equation gives us the market cap of Apple Inc. to be $2,140,519,360,000 or 2.14 Trillion Dollars.

S&P 500 - A list of 500 companies that are conventionally assumed to represent the entire economy. These are some of the biggest, most influential companies globally. But you will also see plenty of companies on this list that you have never heard of such as: Hologic (HOLX) and Welltower Inc. (WELL)

I track the S&P 500 because it provides a good relative strength indicator. Being aware of your stock’s movement compared to th S&P can become valuable insight as you for opinions on share price. 

SPY is a security that very closely tracks the S&P 500. Its shares and options are tradable. I usually look at SPY every time that I check the share price for my chosen stock. You can lookup & analyze stock tickers such as SPY in your trading routine on Robinhood and TradingView.

Earnings Report - Publicly traded companies in the US file paperwork every quarter with financial results of the previous quarter. These results are usually announced during extended trading hours and are likely to create volatility and/or significant movements in share price. The dates of these reports are visible on TradingView but if your trading approach uses earnings reports, you should confirm the date and time of the earnings report on the exchange website (NYSE, NASDAQ) for definitive accuracy. You can also register to attend the virtual shareholder meetings here. 

EPS - Earnings Per Share - Many investors and traders look at EPS when earnings are reported. This metric shows how much money a company makes for each share outstanding.. Higher or “Suprise” EPS is likely to send shares up. Lower EPS than other investors expect are likely to push share price down.

Net profit ÷ shares outstanding

P/E Ratio - This figure relates current share price to EPS. 

Share price ÷ EPS 

P/E Ratio is the most hotly contested figure in fundamental analysis. 

Apple has a PE Ratio of 35
Tesla has a PE Ratio of 1,170

These wildly different PE Ratios are supposedly because PE Ratios factor in future growth rates. Future growth rates are quite subjective, because they’re just predictions made by investors and traders like yourself. 

Investors speculate on company growth rates. Earnings Reports confirm or reject investor speculation. This is expressed by movement of share price.

Analysis Paralysis

This is as good a time as any to tell you… don’t over analyze analysis. With as many variables that exist, it is impossible to reliably predict share price. Over-analysis can lead to fear and paralysis in your trading. Rather often, analysts are wildly incorrect in their predictions. Anything can happen but you’ll learn strategies to manage your risk and grow your cash position in the event of a downturn.


Technical Analysis

Technical Analysis (TA) is the study of historical price movements and statistics to indicate future price movements. 

You’ve probably seen the other-worldly charts (hieroglyphics?) on trader’s screens in movies. Don’t worry! 

When you get oriented to what you’re looking at, Technical Analysis will help you make MORE sense of the share prices that you are already watching.

Relevant to our approach, technical analysis will provide helpful insight for the price levels to place your orders. TA will make you money so you’ll learn to love it.

TA is just one of the three broad categories that make share price move. It is not a magical price prediction. It is never certain and it is not reliable if it’s the only factor in your decision making.

Volatility - the up and down price movements in the market.

Bullish (Bull Market)- Price movement that trends Up.

Bearish (Bear Market)- Price movement that trends Down. 

These terms also describe sentiment, for example bearish sentiment means that you feel price will go down.

Market Sentiment

How do people feel about this company? How do they feel about the entire economy? The answers to these questions actually have a measurable impact on share price. 

Companies like Tesla have very positive sentiment/emotion that affect their share price. The extreme positive sentiment of investors for Tesla is one of the reasons that it’s trading at a P/E Ratio that is historically unheard of. Because sentiment/emotion is factored into the share price, there’s more volatility than other stocks. 

Sentiment is a contrarian-indicator

To be a profitable trader, observe sentiment. You will need to strategically position yourself on the other side of market sentiment at times. When investors are overly optimistic, you may need to guard your positions more. When many investors are selling, you may want to look for a buy opportunity. 

You don’t predict share price. Instead you use FA, TA, and Sentiment to form your opinions. Then you use strategy to manage risk while getting into your desired positions. You gain account equity when your shares increase in value AND no matter what happens in the market, you build your cash position. As you progress in this course, you'll see how we accomplish this.