Fundamental Analysis vs. Technical Analysis

Yes there is an undeclared financial war among fundamental and technical analysts. Pure 'fundamentalists' will enforce the superiority of objectiveness in fundamental analysis systems in relation to the 'correct' price against the market price. Certainly, being 'technical', they rely on the accuracy basing on historical and present data that are already encapsulated in the stock price. Their price or price movement predictions extrapolated from historical price patterns.

In essence, these models distinguished the analysis approach towards the 'value' and 'price' of the stock.

Fundamental Analysis

Fundamental analysis is taking into account the intrinsic value of the stock. Meaning, it considers company, industry and economy values in order to determine the rightful or true value of the stock. So hence, when a stock labelled as a BUY, it means that the intrinsic value is higher than the market price. You HOLD when the intrinsic value is equalled to the market price and you should SELL when the market price is higher than the intrinsic value.

Investors that subscribe to fundamental analysis look at macro financial information such as business model, the industry outlook, governance and government policy. Quantitatively, they look at company financial information such as ratios, financial statement analysis, price/earning to growth (PEG) ratio and return on capital (ROCE).

Technical Analysis

Unlike fundamental analysts, technical analysts believe that the intrinsic value of the stock is already reflected in the price. Therefore, they evaluate the stock based on the historical performance of prices and volumes. Based on these findings, technical analysts use charts to generate patterns and trends. The latter, in fact, is used to determine the future movement of price.

In order to predict the direction of the future price movement, technical analysts use technical indicators such as Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI) and Stochastics. These indicators are derived from the generic movement in the price of a stock. Normally, technical indicators are very helpful in defining your entry and exit point.

So, which one is better? I don't have the answer. In my experience, investors use both analysis to complement their existing stock analysis methods like Capital Asset Pricing Model (CAPM) or efficient market hypothesis (EMH).

Personally, I would use the top-down approach. Like from macro to micro level. For example, using fundamental analysis:

1. narrow down the performing economy, market, sector, industry and companies.
2. assess the fundamental values; ratios, economic cycle
3. choose and create the list of performing sector

Then, choose stocks based on your familiarity with the technical analysis or charts.

In conclusion, the issue of superiority of these two analysis regimes is not a case. The potential of using both to complement existing stock analysis should be highly considered by investors. Many said that fundamental analysis usually for long term investors. Whilst, technical analysis may be suitable for short-term investors. You decide.