In this post, we’re going to mention one of the older episodes.
Here’s the question from Patricio: What can cause a company to have great fundamentals, but bad technicals? What are some characteristics of a discrepancy between the two?
In episode #14, we talked about technical analysis versus fundamental analysis. And what I always say, if you have a stock with great technicals will probably have great fundamentals in that company.
Or if you have great fundamentals in the company, you’ll probably have great technicals. They usually go hand-in-hand. But my rule of thumb is that typically technicals will be a little ahead or dominate the fundamentals. That’s because when panic and fear sets, people will dump the stock without really looking at the fundamental data.
That’s because fundamentals are for the long term. But when you have emotional dumps happening to sell off the stock: people are just selling and getting rid of it.
The same thing on the buying side. They’re just buying it without overthinking. They assume something great is going to happen. And then things catch up.
When it comes to the discrepancy between the two, they usually go hand-in-hand. But sometimes they don’t align and it often eventually catch up.
But when does that happen?
Well, you need to think about it from a company perspective. Mark Zuckerberg here was dumping Facebook in this timeframe, and that can be a red flag.
Maybe he wanted to do something else with the money, to invest in hospitals, some cure disease, and that’s fine.
But if you have multiple a big picture investors dumping early on, they probably know something. You may think no, they don’t. But yeah, they do. They usually know ahead of time.
That’s because they get inside those books. They look at those books, valued the company, and they talk to people. They know people, and that’s what happens.
You might have these companies start selling off, and then the real public later realizes that.
At this moment, those other employees are now starting to leave. But that’s already 40-50 points or maybe like 15% lower in the stock price. The thing to watch is that insider selling in the company.
General Electric example
You could say the same for GE. Not that I know too much about GE insider buying or selling, but I would imagine that some of those people in GE knew these things before these dumps.
They’re trying to get rid of some shares and granted a lot of the CEOs are compensated based on the stock price and performance for that exact reason.
That means that they can keep pushing the stock price higher for their investors. That’s why a lot of their salaries done that way. Also, it because it’s based on, for tax benefits, helps the company that way.
They can pay them out of the dividends and stuff, but the reality is that these big dogs know what is happening.
Harley Davidson example
Harley-Davidson continues to go up and then get this big selling thing that happened here. That beginning, selloff, when insider people are starting to dump things that could be a huge red flag.
That’s usually when things don’t align. Technicals look pretty good, and the fundamentals they look pretty good as well. But then the technical start to roll over. And as they start to roll over, it’s because of the insiders.
Wells Fargo & Company example
This company has crookedness all over it day in and day out from the previous few years to now. I mean, they keep discovering new problems all the time.
And for big companies like this, it is like take a few billion dollars and take care of the problem. But all they do is they rotate people. They are blaming different people and problem solved. At least that what they think.
But the problem doesn’t get solved.
And they never catch up.
That’s the thing with big companies. They try to figure it all out, and this is what happens. There is nobody to blame.
They can’t find anyone because there are too many fingers all over the place. There’s no big enough consequence for these companies. This is going on for five years. Five years later, they realize they’ve been cooking these books, and all these frauds been happening to push and pressuring people creating fake accounts.
This is a perfect example. Fundamentals are great, technicals look great, and then later bad news — this another thing to watch out for.
These things create issues and problems and the alignment between the technicals and the fundamentals. Look at Wells Fargo look at all of the issues regarding the fundamental data. As a regular person, would you trust them to hold your money? Think about that.
Being Cautious is Crucial
I hope it gives you more insight on when things are not in alignment. You can see, sometimes things are not in alignment, even when they appear to be with fundamentals and technicals.
But the reality most of the time they will be because those insiders will be dumping the stock. You’ll see some of those signs and eventually will catch up.
This is one of the reasons why you should be diversified. Who knows, maybe get one of these Wells Fargo things happening or some other things where people are dumping accounting fraud.
Some companies have problems, and their problems are at the top. Always diversify because you never really know where you might lose your investment capital.
Play it safe, diversify, spread your money around, whatever makes you feel better. And then continue to live your life and enjoy it.
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