Fundamental vs. Technical

How Small-cap Strategist Uses Technical Indicators


There was a time when the lines were drawn carefully between investors using fundamental data from financial reports to choose stocks and trading strategies and those who relied on technical indicators arising from historic trading in a company’s stock.  Each camp pointed to the other as misguided in making decisions on irrelevant information.  In the view of the Small-cap Strategist, the seemingly myopic views of the two groups suggest that both are very relevant.

Bull-case Bias.  Our investment viewpoint is admittedly biased toward bull-case or long positions.  Stock selections are made using a bottom-up approach by first identifying trends in an industry or sector.  Since our interest is in the small cap sector, we look for sectors that afford opportunity for smaller operations. Then we choose a promising company in the group by measuring growth rates, market share and financial strength.  These fundamental attributes help us decide which companies merit a long-term investment.  We then use various valuation methods to determine if the stock has potential for appreciation or is overvalued.

Timing and Targets.  After using fundamental information to determine a buy or sell point of view, we use technical indicators to help set a trading strategy, including a price target.  Technical indicators also help in timing a good entry and exit point for each position.  We look at trends, short, medium and long-term.  Additional indicators help determine whether historic trading patterns reveal obstacles to achieving the stock price indicated by our fundamental valuation.

Technicals Checklist.  In this blog series we share a few of the many trend, volume and strength indicators in our technical indicator checklist.  We also include a list of “most searched” stocks, a unique trend indicator afforded by the advent of social networking technologies used by financial information platforms.