Fundamental Analysis For Stock Market Booms & Busts

Fundamental Analysis & Indicators/Indexes help us to understand the drivers of financial markets, and in particular the likely direction of the stock and bond markets that we are all invested in.

The fundamentals below are predominantly linked to the US economy and stock market as most global stock market funds are 70% to 75% US weighted.

I have listed these fundamentals below in a general order of importance in terms of checking to see if we are heading for a downturn or a recession. I track these fundamentals for signs of strength or weakness to help make decisions on which assets to be invested in. Alarm bells start going off if we see a weakening across the board for these fundamentals. This is when I would think about selling equities/stocks and re-allocating to bonds or other capital preservation assets.

Before we launch into the main FA Indicators I track it's worth mentioning a free resource that real students of FA will know and use which covers most FA indicators... click here for Ed Yardeni's excellent list of free charts.

Leading Indicators

Recession Risk & Unemployment & Financial Distress Indicators

Global Demand

Central Banks & The Almighty Dollar

The dollar as the worlds global reserve currency is the most important currency to track. It's the most influential in terms of the global economy. A strong dollar is not necessarily good news for global stock markets. Both the SP500 and global funds tend to move in the opposite direction to the almighty US dollar. If the stock market rallies into a strengthening dollar it could be a sign of a 'bull trap' with sellers cashing in at the top creating headwinds for the SP500 and therefore our global stock market funds.

For a deep dive <<< CLICK HERE >>>

INFLATION, Oil/Energy & Yields (Leading Indicators)

One of the main signals of a decline in stocks is a rise in inflation. At the time of writing on 2024/25, we need to keep a close eye on the US CPI inflation. After the Covid inflation spike we are seeing the CPI follow an eerily similar path to the 1970 reflation scenario which saw inflation come back even harder. If we start to see inflation trend up from this point, that would be a huge warning sign for stocks...

For a deep dive <<< CLICK HERE >>>

Stock Market Valuation

Risk-On/Risk-Off & Sentiment

Global Markets & Stock Market Price Action Indicators 

As we know, The US SP500 is our main focus as it will be where most standard funds are invested, but if there is weakness in the global markets and economy then it could start to affect the US so it's something to keep an eye on as part of our fundamental analysis for the overall health of out global stock market fund we are invested in.

Global Blue Chips & Markets

The Global Dow is a 150-stock index of corporations from around the world, created by Dow Jones & Company. Only the largest blue-chip stocks are included in the index. The market cap-weighted global funds that our pensions and investments will be invested in are effectively contained this index so its another clue as to where our global funds are heading...

LIVE CHART...

THE KOSPI
The South Korean stock market (KOSPI) closely reflects the fortunes of the global economy. Everything is represented in the index from autos and shipping to microchips. The KOSPI peaked back in May 2021! That's getting on for 3.5 years and has recently taken a another turn down. This backs up the claim that the global economy is slowing as demand continues to decline... 

Long Term Market Breadth

When the percentage of stocks in the US SP500 above their 150 day MA, is 10 or lower this represents the best time to re-enter a market at the point of maximum pain (or pessimism). Be greedy when others are fearful...

A slightly longer term version of the chart above shows percentage of stocks above their 200 Day MA. If this chart reading hits 20%, the market is extremely oversold. If its at or below 10% then all bets are off and its a case of waiting for the chart to start heading back up before re-entering the that market. 

As can be seen in the GFC 2008/9 the bottom of the chart can maintain a 'ranging' sideways pattern for quite some time. What is likely at the point of max pain is the central banks step in and start printing money again and implementing Quantitative Easing. This is a major green signal and is effectively the only reason we did not see an even worse GFC in 2008 and potentially even more catastrophic fallout from Covid.

DIVERGENCE: Looks for long term divergence on the weekly chart between the percentage of stocks above their 200 day MA...

Long Term Advance Decline Line

Advance Decline lines of stocks moving higher or lower in 2007 was in decline (and also even though its hard to see in the chart below). The Sep 2007 lower high in the ADL was a divergent lower high from the higher high achieved by the SP500 at that same point in time on the black sp500 line… 

… this is not what we are seeing today… (but if we start seeing the lower highs on the ADL then then that should ring loud alarm bells… 

Long Term New Highs vs New Lows

You can see a pretty strong relationship for new highs new lows and the long term direction of the stock market...

Institutional flow

It is well know that, for the US stock market at least, the last hour of trading (3PM to 4PM for the US stock market) is when institutional investors do their buying and selling of stocks for their funds. Now, even though institutional investors have a lot of resources and experience at their disposal, they are not necessarily 'right' all the time (and the same goes for hedge funds), but you can apply some basic TA to a chart and discern important support and resistance levels as in indicator of market direction.

In the last hour (blue line) chart below that level for the US SP500 stock market is currently 530. The red line shows that clear support and resistance level at around 530 with the longer red box coinciding with the big 30% sell-off during 2022. Since that point, time spent above 530 coincides with the subsequent bull market. The smaller red boxes show support and subsequent rebound in the SP500 also...