Strong trends are driven by future expectations
What is hard to understand for many is that most fundamental metrics themselves are irrelevant. There are stocks with “great fundamentals” that lay flat for decades, while some that have no apparent existing good numbers on the table rally hard and strong on the future expectations of them. Whether those expectations then materialize is another question.
Current “fundamentals” that already exist do not matter all that much to a stock in the now, because they are already known to everyone. Everyone who wanted to act has already acted on them via buying/selling/holding the moment they became known, and no one is left to still act on them. Thus, they are already priced in, or ‘discounted‘.
Even earnings growth that has been reported in the past and the present is not the be-all end-all it is often proclaimed, especially since the dot-com era. Though it can be help to spurn more expectations of the same in the future, by itself it is not enough to find many of the true gems of the market.
The only thing that matters is to find a strong trend that is based on the future expectations of growth, because the smart money expects that other market participants will want to own the stock once the massive profitability growth is being reported at a later date, and thus they want to own it in size by then to be able to sell it to them for a large profit.
If there are expectations of extraordinary future growth, institutional money will very likely flow there. And again, whether that expectation will actually manifest is not relevant to the stock in the now. I’ll teach you later in the course on how to assess this simply.
Of course this is not always the case. Sometimes, institutions overlook a stock, or their research reveals something negative about a company that lays hidden to the rest of us. That is why we need to insist on an existing trend in the technical picture i.e. overwhelming institutional buying demand already being in play. Then, the continuing expectations of growing future profitability will result in the continuing of the demand, i.e. continuing trend.
Two sides of the same coin
Understanding why a stock should prove to be of interest to institutional investors has another important function – it gives us the conviction that is necessary to hold on to a stock through weak spells in the markets, against our own fear impulses to sell in panic. As we’ll explore, a stock’s price trajectory from the Low point to its top will undergo many pullbacks in price, which can be enough to scare people into selling, expecting more dropping prices. Knowing that both the technical behavior of the stock is elite and the growth expectations on the company should give the institutional ownership reason to hold on/support/buy more of the stock, is important. It gives us the more conviction to really sit with a stock and compound the profits through the meaty part of its maturing uptrend.
In the end, both the technical side and the future growth expectations are the two sides of the same coin. They describe and mean the same thing, and so they corroborate each other. Great expectations of high organic growth, sometimes improved on by already reported precedent of high organic growth, show that there could be cause for institutional interest. Price volume action shows you that there is institutional interest. Great reasons to expect more growth on the future give a cause to expect continued future institutional interest and thus a continued demand-induced uptrend. Price-volume action in trends and digestions (this will play a great role and will be discussed later) shows that this is truly the case, and institutions are supporting, buying and marking up the stock, rather than selling and unloading it to the public to take profits. Because when the really big money leaves a stock, or even a market, no one is left to support or push the price higher, hence it can and will not progress substantially further – and eventually will roll over and sell off.
“Fundamental analysis” is not a word I like, and often is assumed to involve heavy research – for example digging deep into balance sheets with a calculator at hand, modelling valuations, listening in on earnings announcement calls, etc. But for a company stock to be of true interest for a speculator looking for the strongest trends in the market, there is really only one thing that matters eventually, and that is – is the company expected to be rapidly growing in the future? The expectation of higher future value of a company (and its associated stock) due to expectation of future growth is what makes institutional players be interested in buying or marking up a stock, or what gives the existing institutional holders a carrot to dangle in front of people to sell to for a profit and mark up prices further.
That means, “fundamental analysis” should actually be very lightweight and simple.
“Fundamentals” alone can mislead
As a heads up, there are a lot of stocks which market positioning should suggest expectations of massive future growth, including massive earnings, that are not in an uptrend. This could be due to the stock not having been discovered by the institutional investor community (unlikely), because there is something wrong with the company that the analysts of institutional buyers will shun, or a handful of other reasons.
Also, a lot of the time, even great stocks that fit our mold for growth expectations can drop consistently due to no fault of their own – often, this can happen solely because of a weak or hostile general market trend and sentiment (e.g. a bear market).
But we need not really concern ourselves with the actual reasons for that, because that’s why we have the technicals, i.e. price-volume action, to rely on – to see whether there really already is buying demand and an uptrend that we can latch on to.
Again, you can see that the technical picture and growth expectations need to corroborate each other.
All together
Summarizing, fundamental company numbers themselves don’t matter much to a stock in the now – only expectations for its future growth do. “Fundamental analysis” for a speculator only comprises a simple test whether expectations of future growth are strong – nothing else.
Whether that growth will eventually materialize is irrelevant for the stock’s trajectory up to that point, as long as the expectations stay intact until then.
The bottom line again is simple: Find the stocks with the strongest trends caused by institutional buying and future expectations for extraordinary growth that will likely lead to more expected price rise and thus more speculation in and marking up of the stock in the near future, leaving the continuation of the up-trend intact.
We will get into the details of what factors cause such strong expectations for future growth later. I will also show you a simple litmus test that will help you pinpoint whether a stock possesses the “secret ingredient” to catalyze massive buying demand by large money interests.