Playing the Piano with Both Hands
Events that unfolded at Silicon Valley Bank last week reinforced the benefits of our core strategy. We closely follow earnings trends and the market's reaction to the earnings releases and, technically we look at the market conditions, sector strength and lastly individual stocks.
Playing with two hands.
Here’s what has already happened to SIVB stock in the last year. Retrospectively, holders of SIVB were warned of negative trends and had many chances to sell even after analysts’ issued glowing fundamental reports from the bank. The stock gave consecutive bearish sell signals.
Here's the timeline...
March 22nd 2022: SIVB reports earnings well above expectations….a 39.90% positive surprise.
Fundamentals Research “5/4/22 - Argus Research Increases Rating - Bullish Earnings estimates increased; Maintains Price Target”
What is the stock's reaction? Its second major sell signal, a bearish triangle.
July 22nd 2022: SIVB report earnings shortfall, a -27.10% surprise.
Fundamentals Research “Argus Research Maintains Bullish Rating. Decreases Earnings Estimates & Price Target”
What was the stocks’ reaction? Sell signal number 4 since it's all time high of October 2021.
October 25th 2022:
SIVB reports a 3.9% positive surprise.
Fundamentals Research “Argus Research Maintains Bullish Rating. Decreases Earnings estimates , Price Target”
How does the technical chart read? The stock still couldn’t get out of its own way. In fact, the decline accelerated from the $460 range to $200. It did have a dead-cat bounce in August following its fourth sell signal , but was never able to penetrate the bearish resistance line… a tell tale sign.
January 19th 2023: SIVB reports earnings shortfall
Fundamentals Research “Maintains Buy Rating on Innovation Economy Bank”
Chart-wise, the stock ran up close to its previous peak of $340……but could not penetrate the bearish resistance line.
So what do we mean by playing with two hands on the piano?
There are two primary types of stock market analysis: fundamental and technical.
Fundamental analysis consists of the “normal” things you probably think of when considering a stock for purchase: growth rate, industry outlook, price/earnings ratio, etc. We value fundamental analysis – particularly certain elements of it that we consider important.
What most people don’t understand is proper technical analysis, which, when done correctly, provides the clearest view of supply and demand – how buyers and sellers are actually reacting to a stock’s fundamental outcomes.
Those investors who followed the fundamental analysis alone alone (or worse, blindly followed the recommendations of Wall Street’s analysts) got a very nasty surprise. Followers of good technical analysis, however, should have realized something was wrong, heeded one of the many sell signals in SIVB along the way and side-stepped this disaster.
Sometimes, insiders or others who are in-the-know might understand the fundamentals of a stock better than you do. Those clues can only be gleaned by applying technical analysis and by trusting what the price action is saying. If supply and demand drive the price of all goods and services, why would it be any different in the stock market?
Playing the stock market piano with both hands – fundamental and technical hands – gives investors their best chances of both beating the market, and of staying out of harm's way when trouble looms.