Hey Technicians ! Its time to check the fundamentals!

Let me be frank.
I have always believed that fundamental analysis works only in bull markets and that too merely because someone needs to find out a convincing reason to justify the increase in stock prices.

All along the past four years of bull market from 2003 – 2007, corporate fundamentals were surely getting stronger and the Indian growth story was justifying the rise in stock prices. But just reflect. All along, however, the major reason for the stock prices to rise dramatically was the unabated flow of foreign money.

Corporate fundamentals were but a small reason for the increased stock prices. Good fundamentals would have driven the price of, say, Reliance say from Rs 600 levels to say Rs 1500 or even Rs 1800. But it was surely the foreign money chasing stocks, that took the price to the ‘excessive’ Rs 3000 plus levels. May be, in case of other stocks, the blow up was much larger.

It was a clear case of prices overshooting much beyond fundamentals. What we are currently witnessing is then a ‘correction’ of this excessiveness.

Followers , and believers ,of the science of technical analysis, like me, were finding it hard to believe it; while at the same time the growing breed of fundamental analysts came up with equally convincing reasons to actually justify the price excesses!

Even as the technicians saw ‘topping patterns’ like the ‘Head and Shoulder’ pattern on the Sensex , the fundamental analysts continued to believed that achieving a 8% plus GDP growth for the next few years was ‘easy’ and obvious!. These growth rates were even factored in their EPS projections!

Yes, yes, I do sound like a thorough critic of fundamental analysis. But that is only partially true. In fact, as a hard lined follower of the science technical analysis, I believe that it is actually time now to refresh our knowledge of fundamental analysis.

Every bear market sows the seeds of the next bull market and at this current juncture; we need to seriously carry out a ‘techno-fundamental’ analysis which would be able to tell us well in advance about the next Bull Run. We need it in order to tell us the most likely price and time reversal signals, and also the stocks and sectors which will lead the next bull market.

When these things will start, time- as well as price charts - will tell. Right now I am busy carrying out techno fundamental analysis – something I had not done in the past couple of years!!

Friends - Do give your feedback on the articles.

CA Rajiv D Khatlawala
Head of Research - Jhaveri Securities Ltd.